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.

IRS Postpones Some W-2 Reporting Requirements Mandated by the Patient Protection and Affordable Care Act

For 2012 the IRS has granted additional transitional relief to certain small employers from the W-2 reporting requirements under the Patient Protection and Affordable Care Act (“PPACA”). PPACA added a new W-2 reporting requirement that took effect January 1, 2011 and requires covered employers to report the aggregate cost of employer-sponsored coverage under any group health plan on the W-2 Form, in Box 12. This reporting requirement applies to all employers that provide employer-sponsored coverage, including federal, state and local government entities, churches and other religious organizations, and even employers not subject to COBRA continuation coverage requirements. The new reporting requirement is for information purposes only and will not cause group health plan coverage that is otherwise excluded from gross income to become taxable.

While larger employers must begin complying with the new W-2 reporting requirements in January 2013 (on W-2 forms to be issued to employees for tax year 2012), the IRS has provided transitional relief to employers that were required to file fewer than 250 Forms W-2 for the 2011 tax year. These employers need not comply with PPACA W-2 reporting requirements until at least January 2014. See IRS Notices 2011-28 [http://www.irs.gov/pub/irs-drop/n-11-28.pdf] and 2012-9 [http://www.irs.gov/pub/irs-drop/n-12-09.pdf]. IRS Notice 2012-9 also provides transitional relief from 2012 tax year W-2 reporting of contributions to multiemployer plans, HRA’s, certain dental and vision plans, self-insured plans not subject to COBRA continuation coverage, and coverage provided under EAPs, wellness programs and on-site medical clinics. Reporting of these costs is also deferred until at least January 2014.

Employers that benefit from this 2012 transitional relief must prepare for the inevitable reporting requirements that will apply to them effective with the 2013 tax year and January 2014 W-2 Forms. If you need help determining which group health plan costs must be reported and which benefits in your benefits program are covered by this requirement, feel free to contact Patrick McGovern, Esq. or Gina Schneider, Esq. in our Labor Law 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.