High Court Agrees Pension Plans Sponsored by Church-Affiliated Hospitals Are ERISA-Exempt and Upholds Decades of IRS, PBGC and DOL Guidance

In a much-anticipated decision, on June 5 the U.S. Supreme Court held that a pension plan sponsored by a religious affiliated nonprofit hospital qualifies as an ERISA-exempt church plan even though the plan was not initially established by a church. In this decision the Court reversed three consolidated decisions by the Third, Seventh and Ninth Circuits holding that defined benefit pension plans initially established and sponsored by church affiliated nonprofit hospitals and healthcare facilities were not ERISA-exempt church plans specifically because they were not initially established by a church.  These courts held that since the church plan exemption did not apply, the plans must comply with ERISA’s funding, participation, vesting, reporting and disclosure rules.  In doing so, the Court affirmed long-standing guidance by the Internal Revenue Service, the Department of Labor, and the Pension Benefit Guaranty Corporation that ERISA’s church-plan exemption applies to plans sponsored and maintained by religious affiliated nonprofit hospitals regardless of whether a church initially established the plans.  Advocate Health Care Network v. Stapleton.

The Court focused on the plain meaning of ERISA’s church plan exemption and noted that while the term “church plan” was initially defined in ERISA to include only those plans “established and maintained . . . for its employees . . . by a church or by a convention or association of churches,” the definition was later amended to include additional plans.  The Court found that Congress specified that “for purposes of the church-plan definition, an ‘employee of a church’ would include an employee of a church-affiliated organization (like the hospitals here)” which the Court referred to as principal-purpose organizations. The Court found that Congress supplemented ERISA’s definition of church plan with the following provision: “A plan established and maintained for its employees . . . by a church or by a convention or association of churches includes a plan maintained by an organization . . . the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits, or both, for the employees of a church or a convention or association of churches, if such organization is controlled by or associated with a church or a convention or association of churches.”  In effect, the Court held, “The church-establishment condition thus drops out of the picture.”

While the benefit plans at issue in this case were defined benefit pension plans, this holding has broad application to all benefit plans that are established by a principal-purpose organization and would otherwise be subject to ERISA’s funding, participation, vesting, reporting and disclosure rules.

For more information about this decision and its impact on your organization and your employee benefit plans, please contact Patrick W. McGovern, Esq., pmcgovern@nullgenovaburns.com or Gina M. Schneider, Esq., gmschneider@nullgenovaburns.com in the Firm’s Employee Benefits Practice Group.

IRS Proposes Restrictions on Employer Opt-Out Payments for ACA Coverage Waivers

In early July the IRS issued proposed regulations addressing the effect that employer payments to employees who waive employer-sponsored health coverage, known as Opt-Out Payments, have on determining whether an ACA-covered employer must pay an ACA penalty known as the Affordability Penalty. Generally, the proposed regulation will apply to Opt-Out Payments adopted after December 16, 2015, but there will be a phase-in period for Opt-Out Payments in labor agreements.

By way of background, ACA-covered employers are subject to a monthly Affordability Penalty for each full-time employee who (1) is required to pay more than 9.66% (indexed for 2016) of the employee’s household income to purchase self-only coverage under the employer’s health plan (“employee premium payment”) and (2) instead purchases individual coverage through an ACA exchange. In determining the amount of the employee premium payment and whether the affordability standard is satisfied, the proposed regulations would allow the employer to exclude the value of any Opt-Out Payment from the employee premium payment, but only where receipt of the Opt-Out Payment is conditioned on the employee’s (1) declining employer-sponsored coverage and (2) providing reasonable evidence that the employee and all other individuals for whom the employee expects to claim a personal exemption deduction have minimum essential coverage (other than coverage in the individual market, whether or not obtained through an ACA exchange).  This example illustrates when the value of an Opt-Out Payment would be excluded in calculating the employee premium payment: Employer offers its employees coverage under a plan that requires Employee to contribute $3,000 for self-only coverage. Employer also makes available to Employee a payment of $500 if Employee (1) declines to enroll in the plan and (2) provides reasonable evidence that Employee and all other members of B’s expected tax family are or will be enrolled in minimum essential coverage through another source (other than coverage in the individual market, whether or not obtained through the Marketplace). The Opt-Out Payment provided by Employer is a conditional Opt-Out Payment as defined under the regulations, and, therefore, Employee’s required contribution for self-only coverage under the plan is $3,000 since the $500 Opt-Out Payment is disregarded.

On the other hand, the value of an unconditional Opt-Out Payment (i.e., Opt-Out Payments conditioned only on waiving coverage) must be included in the calculation of the employee premium payment in determining affordability.  Therefore, any unconditional Opt-Out Payment will increase the employee premium payment, and make it less likely that the premium payment will come below the 9.66% household income percentage limit. Under the same facts as in the example above, except that eligibility for the Opt-Out Payment is unconditional, the $500 Opt-Out Payment increases the employee premium payment from $3,000 to $3,500, regardless of whether the employee accepts or declines the employer’s offer of coverage.

The proposed regulations are subject to public comment and our firm will continue to monitor and report on any developments. In the meantime, we recommend that ACA-covered employers review their current and planned Opt-Out Payment arrangements to determine how these payments will be treated under the proposed regulations and what adjustments must be made to avoid ACA penalties.  If you have any questions or for more information regarding the impact of the proposed regulations or ACA requirements generally on your organization, please contact Patrick W. McGovern, Esq., pmcgovern@nullgenovaburns.com or Gina M. Schneider, Esq., gmschneider@nullgenovaburns.com in the Firm’s Employee Benefits Practice Group.

NJ Federal Court Rules Pension Plan Established by Church-Controlled Hospital Not an ERISA-Exempt Church Plan

On March 31, 2014 the U.S. District Court in New Jersey held that a defined benefit pension plan established by St. Peter’s Healthcare System was not a church plan exempt under ERISA despite the fact that St. Peter’s is controlled by and associated with the Roman Catholic Church and its employees are considered employees of the Roman Catholic Church. Kaplan v. St. Peter’s Healthcare Sys., 2014 U.S. Dist. LEXIS 44963.

The suit arose from a claim by a former St. Peter’s employee that the pension plan was under-funded to the tune of $70 million. St. Peter’s moved to dismiss the complaint on the grounds of lack of subject matter jurisdiction claiming that the pension plan is an ERISA-exempt church plan. The Court denied St. Peter’s motion and found that the plan did not qualify as an ERISA-exempt church plan.

The Court focused its analysis on the plain meaning of ERISA’s church plan exemption and held that “Congress has explicitly provided two ways to fall within the church plan exemption: (1) a plan established and maintained by a church, or (2) a plan established by a church and maintained by a tax-exempt organization, the principal purpose or function of which is the administration or funding of the plan, that is either controlled by or associated with the church.” The Court held that St. Peter’s satisfied neither of these requirements because, while St. Peter’s sponsored the plan and is controlled by and associated with the Roman Catholic Church, the plan was not established by the Church in the first instance and therefore is not an ERISA-exempt church plan. Judge Shipp relied on a recent decision by a federal court in California which found that ERISA “requires that a church establish a church plan …[defendant’s] effort to expand the scope of the church plan exemption to any organization maintained by a church-associated organization stretches the statutory text beyond its logical ends.” The Court declined to defer to an IRS Ruling that St. Peter’s plan was an ERISA-exempt church plan.

Sponsors of defined benefit pension plans, especially those plans that converted to church plan status, should review the status of these plans to confirm that they comply with ERISA and the “established by a church” requirement. If you have any questions or for more information about this decision or ERISA and its impact on your organization or your employees’ benefit plans, please contact Patrick W. McGovern, Esq., pmcgovern@nullgenovaburns.com or Gina M. Schneider, Esq., gmschneider@nullgenovaburns.com in the Firm’s Employee Benefits Practice Group.

Hospital’s State Law Claims against Health Plan Held Preempted by ERISA, Rules NJ Appellate Division

Last month a NJ Appellate Division panel held in three consolidated appeals that a NJ hospital’s state law claims that a health care plan must pay full price for medical services the hospital provided to plan participants are preempted by the Employee Retirement Income Security Act (“ERISA”). St. Peter’s University Hospital v. New Jersey Building Laborers Statewide Welfare Fund et al.; St. Peter’s University Hospital v. Local 594 — Building Laborers Welfare Fund et al.; and St. Peter’s University Hospital v. Local 94 Health and Welfare Fund.

St. Peter’s Hospital agreed to provide medical services at reduced rates to a PPO’s members, one of which was the N.J. Building Laborers Statewide Welfare Fund (“Fund”), provided that the Hospital’s bill was paid within 30 days, but otherwise the Hospital would charge its customary rates.  The Fund is an ERISA employee welfare benefit plan, was a defendant in the consolidated cases, and entered into subscriber agreements with the PPO that included similar rate-reduction terms.

When the Fund failed to pay the Hospital’s reduced rate within 30 days, the Hospital sued the Fund for breach of contract and unjust enrichment in state court, to recover the difference between the discounted rates and the customary rates. The trial court granted summary judgment against the Hospital holding that the claims were preempted by ERISA Section 514(a) which preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan . . .”

The Appellate Division affirmed and determined that the Hospital’s state law claims were preempted. The Court reasoned that the Hospital’s claims would not have existed but for the presence of an ERISA plan that provided coverage to the members and the Court was “required to examine and consult the terms of the ERISA plan to determine whether the Fund was liable under either state law cause of action.”

If you have any questions or for more information about the Appellate Division’s decision or ERISA and its impact on your organization or your employees’ benefit plans, please contact Patrick W. McGovern, Esq., pmcgovern@nullgenovaburns.com, Gina M. Schneider, Esq., gmschneider@nullgenovaburns.com, or Phillip M. Rofsky, Esq., profsky@nullgenovaburns.com in the Firm’s Labor Practice Group.

 

High Court Holds Equitable Defenses Do Not Trump ERISA Plan’s Clear Reimbursement Language

The Supreme Court’s April decision in U.S. Airways, Inc. v. McCutchen resolves a circuit split on the issue of a medical plan’s right to reimbursement of medical expenses from a plan participant who recovers on a personal injury claim. In a unanimous decision, the Supreme Court adopted the approach taken by the Fifth, Seventh, Eighth, Eleventh, and District of Columbia Circuits and rejected the approach taken by the Third and Ninth Circuits, and held that equitable defenses, such as unjust enrichment, do not trump clear plan language.  The Supreme Court enforced the plan provision that required the participant to reimburse the plan to the extent he recovered his post-accident medical expenses from the third party. 

In McCutchen the plan participant suffered injuries in an auto accident caused by third parties.  The plan paid $66,866 in resulting medical expenses the participant incurred. The participant separately recovered $110,000 from one third party and her insurance carrier. After deducting $44,000 for attorneys’ fees and litigation costs, the net recovery by the participant was less than $66,000.  The plan sought full reimbursement of the $66,866 the plan paid in accordance with plan subrogation, reimbursement and collateral source provisions.

The participant refused to reimburse the plan and the plan sponsor sued in federal court pursuant to ERISA §502(a)(3) seeking appropriate equitable relief to enforce the plan’s reimbursement provision.  The District Court granted summary judgment to the plan finding that the plan document clearly required reimbursement of the monies recovered and rejecting the participant’s argument that application of the equitable common-fund and make whole doctrines required an offset of attorney’s fees against any plan reimbursement. On appeal, the Third Circuit vacated the District Court’s decision and held that equitable defenses could override the express reimbursement and subrogation provisions of a plan.

The Supreme Court reversed the Third Circuit and held that in a reimbursement action under ERISA Section 502(a)(3), equitable doctrines do not trump plan terms.  However, on the issue of attorney’s fees, the Court held that when a plan is silent or ambiguous as to whether equitable defenses are available, equitable principles may apply to help the court interpret the plan or fill in gaps. In this case, the relevant plan language did not specifically require reimbursement without reduction for attorneys’ fees. The Court explained that if the plan sponsor did not want the common-fund doctrine to apply, it must state so in the plan.   Accordingly, the Supreme Court remanded the case back to the District Court to determine the appropriate adjustment to the plan’s reimbursement to account for attorneys’ fees under common-fund principles.

This decision highlights the benefit to plan sponsors of drafting clear and comprehensive plan language to control employee benefit plan costs and avoid the judicial application of equitable rules to fill gaps in plan terms where the plan is silent or plan terms are ambiguous.  In view of the McCutchen decision, plan sponsors should review their plans’ subrogation, reimbursement and collateral source provisions to ensure they, primarily, are clear and unambiguous and, secondarily, address the issue whether the plan’s rights to subrogation and reimbursement extend to the attorneys’ fees portion of the participant’s recovery from a third party.

For more information or assistance with drafting enforceable subrogation, reimbursement and collateral source provisions for your organization’s employee welfare benefit plans and other ERISA plan provisions, please contact Patrick W. McGovern, Esq., pmcgovern@nullgenovaburns.com, or Gina M. Schneider, Esq., gmschneider@nullgenovaburns.com, in the Firm’s Labor Practice Group.

High Court Overrules USDOL and Approves Overtime Exemption For Outside Pharma Sales Reps

This week the U.S. Supreme Court ruled in a 5-4 decision that outside pharmaceutical sales representatives may qualify for an overtime exemption under the FLSA even though they do not personally make sales of prescription drugs. In Christopher v. SmithKline Beecham Corp., the Court resolved a circuit split on this issue and spared the pharmaceutical industry potentially billions of dollars in retroactive and prospective overtime pay for its approximately 90,000 sales representatives nationwide. In doing so, the Court refused to defer to the U.S. Department of Labor’s enforcement position that pharmaceutical salespersons do not qualify for the outside sales overtime exemption because their work does not involve the transfer of title to goods.

Historically, drug industry employers have classified their outside sales representatives as exempt from overtime.  This 75-year old practice was not challenged by the DOL until recently when in a series of amicus briefs it filed in the courts, it argued that the current generation of pharmaceutical sales representatives do not “make sales” because they do not transfer title to or physically sell drugs to physicians and therefore are not covered by the FLSA’s outside sales exemption.

First, the Court held that the courts need not defer to, and are not bound by the DOL’s new interpretation of the outside sales exemption because deferring would cause “unfair surprise” to the pharmaceutical industry which “had little reason to suspect that its longstanding practice” of treating sales representatives as exempt violated the FLSA.  The Court held that “[t]o defer to the agency’s interpretation in this circumstance would seriously undermine the principle that agencies should provide regulated parties fair warning of the conduct [a regulation] prohibits or requires.”  The Court found that “where, as here, an agency’s announcement of its interpretation is preceded by a lengthy period of conspicuous inaction, the potential for unfair surprise is acute.”

The Court then engaged in statutory construction of the FLSA and relevant regulations and reviewed the legislative history behind the outside sales exemption. The Court described the sales reps’ activities as “obtaining a non-binding commitment from a  physician to prescribe one of [SmithKline’s] drugs.” From this the Court concluded that their work is “tantamount, in [this] particular industry, to a paradigmatic sale of a commodity” and as a result SmithKline’s outside sales representatives qualify for the overtime exemption.

Certainly a landmark case in the pharmaceutical industry, this decision may also have implications for employers in other industries that employ outside salespersons who, like pharmaceutical sales reps, perform tasks to facilitate or support sales but do not personally obtain binding sales commitments or transfer title to goods.  The Court’s ruling also provides employers with solid grounds for challenging future DOL policy pronouncements where the agency side steps formal rulemaking.

If you have any questions about the Court’s decision or overtime pay requirements generally, contact Patrick McGovern, Esq. or John Vreeland, Esq. in our Labor Law Practice Group.

HIGH COURT POISED TO RESOLVE FLSA OVERTIME EXEMPT STATUS OF PHARMACEUTICAL SALES REPRESENTATIVES

The scene is set for the U.S. Supreme Court to decide whether pharmaceutical sales representatives qualify for the FLSA’s outside sales overtime exemption. This month the Court heard oral argument in Christopher v. SmithKline Beecham Corp. (on appeal from the 9th Circuit) and ultimately must determine whether sales representatives who personally do not close any actual product sales can qualify for this overtime exemption. The Court will also likely decide how much deference the courts should give to the U.S. Department of Labor’s interpretation of its regulations, and in particular to policy pronouncements in DOL amicus briefs, as opposed to formal rule-making.  The Court’s decision will resolve a split in the circuits. The 2nd Circuit recently deferred to the DOL’s interpretation and held that pharmaceutical sales representatives are entitled to overtime compensation whey they work more than 40 hours in a workweek, while the 9th Circuit rejected the DOL’s position and found the sales representatives exempt from overtime.

Historically, drug industry employers have classified their sales representatives as exempt outside salespersons.  This 75-year old practice was not challenged by the DOL until recently when it opined that the current generation of pharmaceutical sales representatives do not “make sales” because they do not transfer title to or physically sell drugs to patients.

The Justices appeared divided on whether a sale must include a binding commitment or transfer of title, and how to apply the concept of a sale to the drug industry where the sales representative cannot consummate a sale in the traditional sense because of the special nature of the product. On the issue of the weight to be given DOL policy pronouncements expressed in amicus briefs, several Justices expressed concerns with the DOL’s failure to engage in formal rulemaking, and others struggled with DOL’s failure for 70 years to take action against the industry practice of treating its sales representatives as exempt.

The Court’s decision is expected by late June. If the Court defers to the DOL’s interpretation, pharmaceutical companies stand to pay potentially billions of dollars in retroactive overtime pay to the industry’s approximately 90,000 sales representatives and will be forced to reevaluate their sales representatives’ level of autonomy and determine how to track their hours going forward.  The decision may have repercussions in other industries that employ salespersons who perform tasks in furtherance of sales but do not make binding sales commitments or transfer title to goods.

If you have any questions about overtime pay requirements, contact Patrick McGovern, Esq. or John Vreeland, Esq. in our Labor Law Practice Group.

IRS Reduces the Scope of its Retirement Plan Determination Letter Program

During the next three months, until May 21, 2012, the IRS will phase in changes to its determination letter program which eliminate testing for participation, coverage and nondiscrimination and make the process unavailable to certain master and prototype plans and volume submitter plans. The IRS has indicated that the changes, effective Feb. 1, 2012 (May 1, 2012, for terminating and preapproved plans) are intended to eliminate certain burdensome features of the determination letter program which are of limited utility to plan sponsors. The IRS predicts that these changes will reduce the time the IRS spends processing determination letter applications.

The determination letter program enables a plan sponsor to submit its retirement plan for review by the IRS at regular intervals and request an official determination regarding the plan’s qualified status under Section 401(a) of the Internal Revenue Code. If a favorable determination letter is issued, the plan sponsor may rely on this letter to establish that the plan, at least in form, meets the technical requirements for tax qualified status as of the date of the IRS’s favorable determination.

Revenue Procedure 2012-6 includes several changes to the determination letter program, and we believe two are key. First, the IRS eliminates a plan sponsor’s option to request a determination relating to minimum participation, coverage, and nondiscrimination requirements of the Internal Revenue Code (Schedule Q to Form 5300). Second, effective May 1, 2012, the IRS will no longer accept determination letter applications that are filed on Form 5307 (a simplified form of the application) for master or prototype plans and it will no longer accept applications on this form for volume submitter plans unless the modifications are relatively minor (i.e. the modifications are not significant enough to cause the plan to be considered an individually designed plan). If you have questions as to the effect of the new IRS program on any of your organization’s retirement plans, feel free to contact Patrick McGovern, Esq. or Gina Schneider, Esq. in our Labor Law Group.