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Employee Benefits Law Report

Reporting on recent trends and developments affecting employee benefits

SEC money market reform – ERISA impact

Posted in ERISA Fiduciary Compliance

Our sister blog reported recently that the Securities and Exchange Commission (the “SEC”) published final regulations that reform money market mutual funds (“MMFs”). The regulations provide for two core reforms: (1) “Institutional” MMFs, other than those invested primarily in government securities, are prohibited from using a stable net asset value (“NAV”), and (2) MMFs must impose redemption fees or liquidation gates when the fund’s liquidity falls below certain levels. The specific details of these rules are beyond the scope of this blog. Instead, the message of this blog is that these regulations could affect many ERISA plans because MMFs are an important part of the investment strategy of both defined contribution and defined benefit plans. Unfortunately, the regulations raise several ERISA questions and provide little in the way of answers. The SEC has acknowledged these concerns in the preamble of the regulations and has promised to work with the Department of Labor (the “DOL”) to answer these questions. In the meantime, however, plan sponsors and fiduciaries should consider several issues.

1.  General Fiduciary Responsibilities Prime MMFs.
With respect to the requirement that ERISA plan fiduciaries prudently manage plan assets, the DOL staff advised the SEC staff that a MMF’s liquidity and potential for redemption restrictions is just one of many factors a plan fiduciary would need to consider in evaluating the role of a MMF in a plan’s investment portfolio. This issue is a particular concern to defined benefit plans that invest in prime MMFs. Fiduciaries of defined benefit plans must recognize that prime MMFs under the new rules will have more volatility and less liquidity than MMFs that invest in governmental securities. Fiduciaries should consult the fund strategy and investment policies to determine whether prime MMFs still fit in the investment strategy.

Defined contribution plans generally should not have these concerns because under the “retail” exception, MMFs offered as investment options under these plans may still have a fixed $1 per share value.

2. QDIAs.
The SEC acknowledged in the preamble that the imposition of a liquidity fee or redemption gate within 90 days of a participant’s default investment to a MMF could impair the ability of the MMF to qualify for QDIA relief. The SEC cited DOL Field Assistance Bulletin in 2008-03 and said that to avoid this concern, a plan sponsor or service provider could pay the fee rather than the participant. Alternatively, the plan sponsor or other party in interest could loan the funds for the payment of ordinary expenses of the plan for a purpose incidental to the ordinary operating expenses of the plan to avoid the effects of the fee or gate. The preamble to the regulations state that the DOL and the SEC will work together to provide additional guidance on this issue at a later date.

3. RMDs and Refunds.
With respect to the processing of required minimum distributions and certain distributions of refunds on a timely basis, the SEC was less helpful. It said generally that it seems rare that these types of issues would arise. To the extent that a redemption fee prevented a timely distribution of RMDs, the individual could file a Form 5329 with the IRS to require a waiver from excise taxes. The SEC acknowledged in a footnote that the discretion to grant or waive the excise taxes rests with the IRS. Additionally, if a refund could not be distributed in a timely basis because of a redemption fee or gate, and that raised plan qualification issues, employers should consult with EPCRs.

Where Do We Go From Here?
It is encouraging that the SEC and DOL are aware of these issues and have promised to provide guidance in the future. The potential problem, however, is that the DOL or the IRS could take positions in an audit that put the plan sponsors or fiduciaries on the defensive, despite the lack of guidance. What should plan sponsors and fiduciaries do in the meantime? They should review their MMF fund offerings and determine if they continue to remain appropriate investment options. They also should plan for any redemption fees or gates. Finally, they should document any decisions they make with respect to these issues. Hopefully, the SEC and DOL will provide additional guidance in the future that will make these decisions easier. Until then, the classic fiduciary advice of monitoring investments and documenting the reasons for making decisions is critically important.

DOL updates missing participant guidance

Posted in ERISA Fiduciary Compliance

On Thursday, the Department of Labor issued a Field Assistance Bulletin updating its prior guidance on locating missing participants. As before, the guidance technically only applies in the context of terminating defined contribution plans, though the guidance can be instructive for fiduciaries trying to locate missing or unresponsive participants in other retirement plan contexts as well. A central reason for the update from the Department is that two of the mandatory locator options noted in the now 10-year-old prior guidance are no longer available (the Social Security letter forwarding program ceased in May of this year, and the IRS letter forwarding program became unavailable for retirement plans as of August 2012).

The new guidance in FAB 2014-01 reiterates that even though a decision to termination a retirement plan may be a settlor decision, any steps a fiduciary takes to implement such a decision will administrative in nature and subject to ERISA’s fiduciary responsibility provisions. In carrying out this responsibility, the Department basically maintains its prior guidance while replacing the now-unavailable letter forwarding service steps with a requirement to free internet search tools (elevating this step from optional in the prior guidance to required in the current guidance). Accordingly, from FAB 2014-01, these are now the required steps:

  1. Use Certified Mail. Certified mail is an easy way to find out, at little cost, whether the participant can be located in order to distribute benefits. The Department provided a model notice that could be used for such mailings as part of a regulatory safe harbor, but its use is not required and other notices could satisfy the safe harbor.
  2. Check Related Plan and Employer Records. While the records of the terminated plan may not contain current address information, it is possible that the employer or another of the employer’s plans, such as a group health plan, may have more up-to-date information. For this reason, plan fiduciaries of the terminated plan must ask both the employer and administrator(s) of related plans to search their records for a more current address for the missing participant. If there are privacy concerns, the plan fiduciary engaged in the search can request that the employer or other plan fiduciary contact or forward a letter for the terminated plan to the missing participant or beneficiary. The letter would request that the missing participant or beneficiary contact the searching plan fiduciary.
  3. Check With Designated Plan Beneficiary. In searching the terminated plan’s records or the records of related plans, plan fiduciaries must try to identify and contact any individual that the missing participant has designated as a beneficiary (e.g., spouse, children, etc.) to find updated contact information for the missing participant. Again, if there are privacy concerns, the plan fiduciary can request that the designated beneficiary contact or forward a letter for the terminated plan to the missing participant or beneficiary.
  4. Use Free Electronic Search Tools. Plan fiduciaries must make reasonable use of Internet search tools that do not charge a fee to search for a missing participant or beneficiary. Such online services include Internet search engines, public record databases (such as those for licenses, mortgages and real estate taxes), obituaries and social media.

If these steps don’t yield any results, the fiduciary must still consider whether additional steps are appropriate considering account balance size for the missing participants, and cost of search. This is where paid search services come into the equation, such as “commercial locator services, credit reporting agencies, information brokers, investigation databases and analogous services that may involve charges.”  On the topic of charges, the DOL maintains its position that it is permissible to charge individual participant accounts for the efforts made to find participants, provided the charges are reasonable.  The reasonability of charges against participant accounts must be assessed not only in the context of actually charging participant accounts for search expenses, but also in weighing between alternative distribution options if a participant cannot be located, such as fees that would apply to a rolled-over IRA or to a deposit account.  The bottom line here is that while it is permissible to charge participant accounts, fiduciaries cannot attempt to liquidate small account balances through fees and charges, if they are keeping with their fiduciary duties.

Similar to the prior guidance, the new FAB also then lays out distribution options for plan fiduciaries where all required and reasonable searches have not located missing participants. An IRA rollover remains the preferred option (following the applicable safe harbor fiduciary rules for automatic rollovers, linked above), with alternative options to open an interest-bearing federally insured bank account in the participant’s name, or to transfer the account to a state unclaimed property fund. The DOL cautions fiduciaries to keep in mind that the latter two alternatives result in tax consequences to the participant, and that this must be taken into account in determining if these options are in fact appropriate in the circumstances. Taking a clearly skeptical view of these two alternatives, the DOL goes farther that it had in previous guidance in saying ” in most cases, a fiduciary would violate ERISA section 404(a)’s obligations of prudence and loyalty by causing such negative consequences rather than making an individual retirement plan rollover distribution.”

Lastly, the DOL also reiterated that a distribution with 100% income tax withholding (effectively transferring the entire account balance to the IRS), is NOT an acceptable option for fiduciaries in its view.

In the end, this update doesn’t provide much additional guidance for fiduciaries that wasn’t likely being utilized in practice already.  If nothing else, the DOL formalized its foray into modern technology by essentially telling plan fiduciaries to “Google it.” Here’s hoping the same happens for the DOL’s electronic disclosure guidance.

Could’ve, would’ve. What should a fiduciary do? Fourth Circuit decision could spell more uncertainty for retirement plan fiduciaries.

Posted in Benefits Issues Related to Mergers and Acquisitions, ERISA Fiduciary Compliance, ERISA Litigation, Retirement Plans

Coming on the heels of the U.S. Supreme Court’s Dudenhoeffer decision, which eliminated a pro-fiduciary presumption with respect to company stock holdings in qualified retirement plans, the 4th Circuit issued a decision last week that could cause even more unrest for plan fiduciaries. The case, Tatum v. RJR Pension Investment Committee, et al., represents a potential elevation of the standard “prudent fiduciary” rule as it had been widely understood it to govern ERISA retirement plans.

In short, the 4th Circuit in this case purports to require a fiduciary to determine whether a prudent fiduciary more likely than not would make the same decision, rather than simply asking whether a prudent fiduciary could make the questioned decision, which had been a generally accepted interpretation of ERISA’s fiduciary prudence rules, at least in some circuits. While this may seem like a merely semantic difference on first read, the impact is that the 4th Circuit requires not just an objective determination of whether a prudent fiduciary might have also made this decision, but a determination that in light of all circumstances known to the plan fiduciaries, the decision is one that more prudent fiduciaries than not would also make. Stated another way, the decision potentially requires a deeper analysis of a spectrum of prudent fiduciary actions, and could require a fiduciary to prove that it acted as a majority of prudent fiduciaries or the most prudent fiduciary would have acted – a standard that demands greater analysis, and certainly some speculation, from plan fiduciaries.

The decision is also notable because it is a “reverse stock drop” case in which the decision to remove a stock fund from a plan was alleged to be imprudent when the stock price subsequently surged. At its worst, the decision in Tatum, particularly as framed in the amicus brief submitted in support of the plan fiduciary, is significant because it has the potential to push plan sponsors and fiduciaries toward a Catch-22 position when it comes to taking action on retaining or eliminating company stock funds.

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The Obamacare see-saw — an opposing decision on subsidies

Posted in Health Care Reform

Some days are just more fun that others!

Just hours after the D.C. Circuit Court of Appeals issued its opinion in Halbig v. Burwell, which held that tax subsidies made available under the Affordable Care Act (“ACA”) to lower income individuals to help defray the cost of health care coverage may not be extended to individuals who reside in states that have elected not to establish their own health care exchanges, the 4th Circuit Court of Appeals today issued a unanimous decision today in King v. Burwell that upholds entitlement to tax subsidies available under the ACA for all eligible lower income individuals—whether or not they reside in a state that has established its own health care exchanges under the ACA (see http://www.ca4.uscourts.gov/Opinions/Published/141158.P.pdf). As in Halbig, the plaintiffs in King argued that Congress intended that the subsidies only be available in states that set up their own exchanges.  In essence, the plaintiffs were challenging the interpretation of the ACA made by the Internal Revenue Service (the “IRS”) that authorized the IRS to grant subsidies to individuals who purchase health care coverage both through state-sponsored exchanges and through the federally-run exchange.  Like the plaintiffs in Halbig, the plaintiffs in King argued that the IRS’s interpretation was contrary to the language in the ACA. The Fourth Circuit panel viewed the issue quite differently, and upheld the system of federal subsidies now available under the ACA.

In affirming the decision of the District Court judge in King, the panel acknowledged that the language in the ACA on this question was ambiguous. The panel decided it was appropriate to extend deference to the interpretation of the IRS, and thus upheld the interpretation that subsidies were available no matter whether a state had established its own exchange.

We are early in this game, but with today’s dueling decisions coming down on opposite sides of this issue, one has to assume that it is increasingly likely (perhaps virtually certain) that this issue is headed to the United States Supreme Court for resolution. Here we go again.

Obamacare takes an unexpected hit!

Posted in Health Care Reform

A federal Court of Appeals panel in Washington, D.C. today released a decision that, if upheld, would strike down one of the main pillars of the Affordable Care Act (“ACA”) and in the minds of many observers lead to unpredictable consequences. In a 2-1 decision in Halbig v. Burwell, the three-judge federal appeals panel reversed a decision by a lower District Court judge and held that tax subsidies made available under the ACA (often referred to as Obamacare, with or without derision) to lower income individuals–generally individuals making less than $46,075 annually–to help defray the cost of health care coverage may not be extended to such individuals who reside in states that have elected not to establish their own health care exchanges under the ACA.  The plaintiffs in the case argued that Congress intended that the subsidies only be available in states that set up their own exchanges. This panel embraced that argument (although this decision may find its way to the United States Supreme Court).  Until now, the court decisions on this issue have favored the federal government, so this decision properly can be characterized as at least a mild surprise.

If this decision stands, a large number of individuals could be affected. Twenty-seven states (most of which are controlled by Republicans) opted not to create their own exchanges. Nine other states essentially have elected to partner with the federal government, and so presumably they too would be affected by today’s decision. Only 14 states (plus Washington, D.C.) are sponsoring their own exchanges, and thus would be unaffected.

The subsidies available under the ACA can be crucial to ensure affordable coverage. According to a recent report issued by the Department of Health and Human Service, individuals who purchased plans with subsidies have a net premium cost that is on average 76 percent less than the full premium, which reduces their average premium from $346 to $82 per month. These individuals would be confronted with a significant increase in the cost of coverage. It is worth noting that this decision does not affect the obligation imposed under the ACA on these individuals to purchase coverage or face a penalty (although the option to obtain coverage may become less appealing for individuals, many of whom likely would be younger, who think they are healthy and thus perceive themselves as less in need of coverage). Approximately 5.4 million individuals signed up for coverage on the federally-run exchange early this year, and approximately 87 percent of those individuals are expected to receive subsidies. The system created by the ACA, including cost control initiatives, could face considerable pressure if as a result of this decision a high percentage of covered individuals are older and sicker.  The stakes are high.

While Congress could fix this problem legislatively, any thoughts of congressional action seem fanciful. Once again, this issue will have to play out in the courts, and we all get to watch.

ESOP boundaries: plan design versus fiduciary function

Posted in ESOPs

Greeting from Northeast Ohio. We have LeBron James coming home, the Republican National Convention, and something almost as exciting: thoughts about ESOPs!

As I mentioned in a prior blog, in Coulter v. Morgan Stanley & Co. the Second Circuit held that the decision to contribute employer stock rather than cash to a benefit plan was a settlor function, not a fiduciary function. This settlor/fiduciary distinction is critical to the foundation of ERISA and the future of employer-sponsored plans.

The United States Supreme Court’s Dudenhoeffer decision shortly after that surprised me because the Supreme Court has repeatedly made this point about the distinction between settlor and fiduciary functions. As explained in more detail in a prior blog, it seems like the decision to establish an ESOP to invest primarily in employer securities is a settlor function: plan design. But the Court treated the investment in employer securities as a fiduciary function.

ERISA fiduciary functions are important, in the right context. But when we fail to establish boundaries between settlor and fiduciary functions, we create untenable situations fraught with conflicts of interest. How can I design a plan to be invested primarily in employer securities if I also have to consider every day whether to blow it up? Did Congress really intend for an ESOP to be just another investment option, or was it intending to make an ESOP a matter of plan design?

Congress, there are a lot of employee-owned businesses out there and we need some help on this one. We just need a few words to clarify that holding employer stock in an ESOP is a settlor function: plan design. Yes, this would kill off a lot of litigation, which means it is probably not in my own best interests to advocate for this. But it would allow businesses and their employees to get back to work. Privately held companies could keep giving their employees ownership without worrying every day about whether they have to sell themselves and watch their folks get laid off in the process. Publicly held companies could stop worrying about whether they have to panic the market and drive down stock prices by selling off their own stock. And an employee of a publicly held employer could make her own decisions about whether or not to invest in her employer’s stock. It almost seems too easy.

The first progeny of the Hobby Lobby decision

Posted in ERISA Fiduciary Compliance, Health Care Reform

As we noted in a previous blog entry, the United States Supreme Court recently ruled in two companion cases, Sebelius v. Hobby Lobby Stores and Conestoga Wood Specialties v. Sebelius (referred to hereafter as Hobby Lobby) , that regulations issued under the Affordable Care Act (the “ACA”) that compel closely held corporations to provide contraception coverage for their employees violated the Religious Freedom Restoration Act of 1993.  The Court concluded that closely held corporations cannot be required to provide contraceptive coverage if doing so would be contrary to sincerely held religious beliefs of the corporation’s owners.  The dispute over contraception coverage in Hobby Lobby arose from a provision in the ACA that requires heath care plans to offer free preventive care.  Under regulations issued by the Obama administration, the term preventive care was interpreted to include all contraception and sterilization measures approved by the United States Food And Drug Administration (the “FDA”).  The owners of Hobby Lobby, and Conestoga Wood Specialties challenged the ACA requirement that health care plans cover certain contraceptives.

The Obama administration has taken its first official action in response to the Hobby Lobby decision. In the form of a Frequently Asked Question (FAQ) regarding implementation of the ACA prepared by the Departments of Labor, Health and Human Services and the Treasury (available at http://www.dol.gov/ebsa/healthreform/), the agencies announced that any closely held corporations that intend to amend health care plans that are subject to ERISA to eliminate some or all of the forms of birth control approved by the FDA must inform their employees of that decision. The new FAQ, issued July 17, 2014, notes that Department of Labor regulations provide that a plan’s summary plan description must include a description of the extent to which preventive services (which as noted above includes contraceptive services) are covered.  It thus follows that if an ERISA-covered plan excludes some or all of the approved contraceptive services from coverage, then the plan’s summary plan description must describe the extent of that exclusion. For plans that reduce or eliminate coverage of contraceptive services after having provided such coverage, the disclosure requirements for material reductions in covered services apply. These disclosure requirements generally require disclosure not later than 60 days after the date of adoption of a plan amendment that affects the reduction or elimination. As an aside, the FAQ warns that other disclosure requirements may apply, including disclosure requirements under applicable state laws to the extent not preempted by ERISA.

This move by the Obama administration, which was not unexpected, comes as Congress appears deadlocked on proposed legislation that would override the Hobby Lobby decision. Of course, a deadlocked Congress hardly is news these days. Just this week, an effort by Democrats in the Senate to pass a bill to override the Court’s decision lost a procedural vote to precede (although prospects for passage in the House seemed extremely dim anyway). That vote fell 4 votes short of the 60 votes needed to move forward. Only three Republican senators (Sens. Susan Collins, Lisa Murkowski and Mark Kirk) voted in support of the bill, while all Democrats supported the bill (excluding Senate Majority Leader Harry Reid, who voted no for procedural purposes so that he could bring the bill up again for consideration sometime in the future). It seems like this issue in effect has moved from a legislative battleground to a political one—with all the usual in-fighting and grandstanding (both as common as deadlock in Washington, D.C. these days).

The health care reform shared responsibility excise tax missing link: employer rights

Posted in Health Care Reform, Tax Issues

Back in 2011, I mentioned a missing link in the health care reform Section 4980H shared responsibility employer excise tax scheme. 42 U.S.C. Section 18081 requires the establishment of an appeals and redeterminations process for penalty assessments, and acknowledges a problem with the provision itself. It requires the Secretary of Health and Human Services to consult with the Secretary of Treasury, study administration of employer responsibility, and provide a report to certain Congressional committees by January 1, 2013. This report was to address the procedures and/or legislative changes necessary to ensure the following rights are protected:

(A) The rights of employees to preserve their right to confidentiality of their taxpayer return information and their right to enroll in a qualified health plan through an Exchange if an employer does not provide affordable coverage.

(B) The rights of employers to adequate due process and access to information necessary to accurately determine any payment assessed on employers.

How does an employer have access to information necessary to accurately determine any payment assessed, when the statute prohibits the agencies from sharing any taxpayer return information with the employer, except “whether or not the employee’s income is above or below the threshold by which the affordability of the employer’s health insurance coverage is measured?” The statute provides that whether or not the coverage is affordable is determined based upon household Modified Adjusted Gross Income, and I am not entirely sure what “the threshold” means.

There seems to be a presumption that the IRS is going to start assessing Section 4980H excise taxes against employers in mid-2016. But the Fifth Amendment to the Constitution prohibits the federal government from depriving persons of property without due process of law, and as the United States Supreme Court just reminded us in Hobby Lobby, employers are persons, too.  Is it even possible to craft procedures that will protect employers’ rights in accordance with the Constitution and the provisions of the statute? I don’t think so.  If the Secretary’s report was ever provided to the committees, that has not been publicized. And IRS Q&As (#27 and 28) gave us a peak at penalty assessment, but noticeably absent is any explanation about how the IRS is going protect employers’ rights. It appears the IRS may literally need an act of Congress before it can collect these excise taxes.

The illusion of an available job for the disabled: The Sixth Circuit’s decision in Kennard v. Means Industries, Inc. addresses long-term disability determinations

Posted in ERISA Litigation, Fringe Benefits

Many thanks to our summer clerk, Ryan Graham, for his significant contribution to this blog.

A farmer was having a tough time understanding why his chickens were producing less eggs than in previous years. He wrote a letter to the local university, asking for guidance on increasing his chickens’ egg production. The university handed the project off to its top theoretical physicist. The physicist quickly returned to the farmer and said “I have a solution to increase the production of your eggs, but it only works for spherical chickens in a vacuum.”

Some solutions are illusory, or at least that is what the Sixth Circuit determined in Kennard v. Means Industries, Inc., its recent decision concerning the denial of an ERISA claim for disability benefits based on the administrator’s determination that “employment” was available.


Kennard began work at Means Industries in 1983. In 1990, he inhaled toxic fumes from a batch of synthetic oil and permanently damaged his lungs. Following the accident, Kennard required a ‘clean air environment,’ meaning he could not be around perfumes, dust mites, mold, and many other common airborne irritants found in office spaces.

Means Industries accommodated Kennard and provided him with a clerical position in a fume-free area. The company also warned other employees in Kennard’s area not to wear perfumes, burn candles, or perform any other activity that might aggravate Kennard’s condition. Despite these accommodations, irritants continued to shorten Kennard’s breath, causing him to frequently leave work early.

Kennard stopped working in 2006 and filed a claim to receive Social Security benefits. The Social Security Administration (the “SSA”) provided a written report finding “there are no jobs in the national economy that [he] could perform.” Applying the SSA’s standard for disability, the administrative judge found that Kennard was unable to “engage in any substantial gainful activity.” After receiving his approval for Social Security benefits, Kennard applied for disability benefits under Mean Industries’ long-term disability (the “Plan”).

Under the Plan, a participant is “permanently disabled” “(a) if he has been totally disabled by bodily injury or disease so as to be prevented thereby from engaging in any occupation or employment for remuneration or profit, and which condition constitutes total disability under the federal Social Security Act; and (b) after such total disability shall have continued for a period of six consecutive months, and, in the opinion of a qualified physician chosen by the committee. . . it will be permanent and continuous during the remainder of his life.”  The Plan required that Kennard undergo two physical examinations from independent doctors to assist with the determination.

The key issue that emerged was whether Kennard was able to engage in any occupation or employment.  The examining doctors determined that Kennard could work, but he would have to work in a clean air environment and limit his time spent sitting or standing.  Specifically, one of the examining doctors stated that he “would recommend no prolonged sitting or standing.”  And the other doctor indicated that “[Kennard was] employable as long as he could be guaranteed that we would be placed in an absolute clean air environment with absolutely no noxious fumes or inhalants . . . .”  According to the second doctor, if this type of environment was available, Kennard could be employable in a clerical position; if not, then he would be considered disabled.  Ultimately, the Plan administrator denied Kennard’s claim for disability benefits, citing solely to these portions of the doctors’ medical reports that stated that he was capable of work under certain specific, and substantially limited conditions.

Kennard appealed the Plan administrator’s denial to the federal district court, claiming that the administrator’s denial was arbitrary and capricious because the SSA had already found that there were no available jobs. The trial court disagreed with Kennard and affirmed the decision of the administrator, relying on the independent doctors’ reports. Kennard then appealed to the Sixth Circuit.

The Court’s Decision

On appeal, the Sixth Circuit reversed the trial court and ruled that Kennard was “disabled” as defined under the Plan and, consequently, was entitled to Plan benefits.

The Sixth Circuit determined that there was inadequate support for the Plan administrator’s conclusion that Kennard could engage in any occupation or employment.  The Court held that a valid denial of benefits based on a determination that Kennard could engage in any occupation or employment would need to include evidence of the “existence of the absolute-clean-air jobs available to Kennard.” While the Plan administrator need not rely on the SSA’s legal standard for disability, the Court concluded the decision must be grounded on a reasoned explanation.  According to the Court, to deny the claim based on allegations of “a job that exists only in theory, that interpretation is in error.” The Court also quipped that an available job would have to be gainful employment, which excluded nominal employment or hypothetical employment.

In Kennard, the Sixth Circuit appears to have instituted a two-part review of plan administrators’ decisions to deny disability benefits based on a finding that the participant can engage in any occupation or employment.  First, plan administrators must ground their decision on a reasonable, principled basis supported by evidence.  To meet this requirement, plan administrators’ decisions must offer specificity. Simply attaching a prefabricated denial letter to medical reports which does not clearly evidence employability will not meet the Sixth Circuit’s standard, especially when the medical reports include phrases such as “may be able to return to work on a limited basis” or “could return to work with some restrictions.” Second, the administrator must articulate in his or her denial that a workable job exists in reality, and the job must be gainful employment, as opposed to “selling peanuts or pencils.”


There are four notable takeaways from the Sixth Circuit’s Kennard decision.

First, plan administrators should continue to monitor this issue to see how it develops. The limits of Kennard remain unclear. The Sixth Circuit may rely on Kennard to narrow the ‘arbitrary and capricious’ review standard by requiring more specific reasoning from plan administrators.  Or it may distinguish Kennard from future cases because of Kennard’s unusual facts (namely, the lack of any no real practical evidence in either the medical reports or the claim denial evidencing Kennard’s employability). This is an open question, but the safest approach for plan administrators is to (1) become familiar with the terms of their plans before denying disability benefits, especially when the denial is based on a finding of employability; and (2) consult with counsel to ensure that the decision is supported by the plan document and, if the claim is denied, that the supporting rationale will withstand judicial scrutiny.

Second, consideration should be given on how to define the term “disability” in the formal plan document.  If the Plan incorporates the SSA’s definition, plan administrators should take note of the SSA determination, as this is clearly persuasive upon judicial review (especially where the SSA determination directly contradicts the claim determination).  And, if the definition incorporates an employability standard, plan administrators need to take this standard seriously and fully examine this issue when making claims determinations.

Third, plan administrators must articulate grounded reasons for denying benefits. This requires an understanding of the plan terms and clear reasoning in any claim denial. The Sixth Circuit will not accept conjecture, theoretical possibilities, or speculation.  In short, the Sixth Circuit does not want to hear about spherical chickens in a vacuum tube.  This is clearly true when denying claims based on employability.  While plan administrators do not need to go out and find the claimant a job to support a finding of employability, simply denying a claim based on vague medical reports that do not clearly state that an individual is employable will not suffice.  Rather, administrators should set forth reasoned, practical support for any denial.

Fourth, administrators that apply a strict interpretation of plan provisions may receive more scrutiny from courts. In Kennard, the plan administrator and the district court both relied heavily on the plan provision that required a person be unable to work in any occupation or employment. The Sixth Circuit rejected this “hyper-literal” interpretation of the benefit provision, stating that not every form of earning money constituted an occupation or employment. Therefore, if a plan incorporates an employability standard, and a plan administrator opts to deny a claim based on this standard, plan administrators should have some reasonable idea of the working climate that will support the administrator’s decision.

It is a little too early to gauge the breadth of the Sixth Circuit’s decision in Kennard. However, there are steps you can take to provide a workable definition of “disability” in your plan and to ensure any reviews of disability claims comply with the standards set forth in this decision.

Corporations get religion — and maybe lose contraception coverage

Posted in Health Care Reform

The United States Supreme Court held in a 5-4 decision issued on Monday that regulations issued under the Affordable Care Act (the “ACA”) that compel closely held corporations to provide contraception coverage for their employees violated the Religious Freedom Restoration Act of 1993 (the “RFRA”). Two cases actually are involved in this opinion, including Sebelius v. Hobby Lobby Stores and Conestoga Wood Specialties v. Sebelius (referred to hereafter simply as Hobby Lobby). In an opinion written by Justice Samuel Alito, the court’s conservative block (all five of the so-called conservative justices appointed by Republican presidents) concluded that closely held corporations such as Hobby Lobby Stores Inc. and Conestoga Wood Specialties Corp. cannot be required to provide contraceptive coverage if doing so would be contrary to sincerely held religious beliefs of the corporation’s owners. For the first time, the Court has ruled that the RFRA covers corporations–or at least certain corporations. In yet another example of the partisan divide on the Court, the four so-called liberal justices (three of whom are women, and all of whom were appointed by Democratic presidents) did not support the majority opinion and, in doing so, warned of future efforts to use religious beliefs to trump the application of laws and regulations that are perceived to be undesirable. Presumably as an expression of her angst with the majority opinion, Justice Ruth Bader Ginsburg read a portion of the dissent that she authored from the bench when the decision was announced on Monday.

The dispute over contraception coverage in Hobby Lobby arose from a provision in the ACA that requires heath care plans to offer free preventive care. While means of contraception are not specifically referenced in the ACA, under regulations issued by the Obama administration the term preventive care was interpreted to include all contraception and sterilization measures approved by the United States Food And Drug Administration, including birth-control pills, intrauterine devices and the morning-after pill.

The owners of Hobby Lobby, an Oklahoma-based arts-and-crafts chain owned by founder David Green, an evangelical Christian, and other family members and the Mennonite owners of Conestoga Wood Specialties, a Pennsylvania-based cabinetmaker, brought actions to challenge the ACA requirement that health care plans cover certain contraceptives. Although not entirely clear, it appears that Hobby Lobby and Conestoga Wood Specialties did not object to all required contraception methods, but specifically rejected morning-after pills and intrauterine devices–that objection was the basis for their law suits. Notwithstanding this more narrow concern, the Court’s opinion (while limited in certain respects) seems broad enough to apply to other forms of contraception as well.

In Monday’s decision, closely held profit-making corporations were found to have a legal right under the RFRA not to be forced to include contraception coverage under their plans if doing so would be contrary to sincerely held religious beliefs of the corporations’ owners. Justice Alito tried to emphasize that this decision was limited in its breadth, and that it did not necessarily open the door to other challenges based on religious convictions. Moreover, the majority explained that the opinion only applied to closely held corporations. In a short concurring opinion, Justice Anthony Kennedy tried to reinforce the limited nature of this opinion. As a means to alleviate a resulting lack of contraception coverage, Justice Alito suggested in the majority opinion that the Obama administration offer to for-profit companies the same accommodation previously extended by the administration to religiously affiliated non-profits that also objected to contraception coverage in their plans. Under this accommodation (which applies to both insured and self-insured plans, although in different ways) insurers or third party administrators are required to provide contraceptive coverage without charging premiums to employers or copayments to covered individuals. Alternatively, the court stated that the federal government simply could pay for contraceptive coverage with a subsidy (although it is unclear whether that approach would be possible without enabling legislation). Surely the Obama administration already has begun consideration of alternatives to ensure contraception coverage. New White House Press Secretary Josh Earnest stated on Monday that the White House is reviewing the decision and determining its options, including pursing a legislative fix (although the legislative route seem quite unlikely in this tumultuous partisan place called Washington).

Leaving aside political intrigue (which the majority of Americans would be only too happy to do), the practical implications of the Hobby Lobby decision are uncertain. While it is not entirely clear how the Court would define a closely held corporation, based on recent studies a sizable percentage of small businesses are not even subject to the ACA mandates (including contraception coverage) because they have fewer than 50 full-time employees. Moreover, according to a study prepared by Mercer Human Resources Group, approximately 90 percent of all employers in the United States (regardless of size) already offered contraception coverage. Wholesale changes in the prevalence of contraception coverage even after this decision may well be unlikely.

It must be noted that employers also will have to review the possible application of any state laws that might require contraception coverage despite the holding in Hobby Lobby. Many states have enacted laws that require employers that offer prescription drug coverage to cover certain contraceptives as well. Since the Court’s decision in Hobby Lobby was based on the application of the RFRA, it does not invalidate those state laws (although employers that sponsor self-funded plans may be able to evade such state laws under ERISA’s preemption doctrine).

The Hobby Lobby decision certainly ended the Supreme Court’s term with a bang (and was announced as protestors on both sides of the issues demonstrated in front of the Supreme Court building in Washington, D.C.). Coming just two years after the Supreme Court held that the ACA was constitutional, even though the Court at that time invalidated the mandatory expansion of Medicaid, some will view this decision as both a legal and a political defeat for President Obama. Others will view the decision as a setback for women’s rights, even though the majority opinion (as well as Justice Kennedy’s concurring opinion) tried to frame this case as a matter of religious freedom and even then as a decision with a very narrow application. To no one’s surprise, the decision has set off a frenzied partisan debate that seems likely to play out through the November congressional elections and into the future over religious and reproductive rights. Both parties have launched fundraising initiatives based on the decision.

Perhaps the more significant but as yet unknowable legacy of the Hobby Lobby opinion will be its possible extension to other laws and regulations that might be considered to clash with religious beliefs held by owners of closely corporations–and whether these principles get extended to other forms of corporations. In her dissent, Justice Ruth Bader Ginsburg stated that she believed the Court inadvertently “ventured into a minefield.” Only time will tell if she is correct.