The Patient Protection and Affordable Care Act, ERISA § 510 and the Next Generation of Benefits Litigation Concerns
"Sometimes the best map will not guide you; You can't see what's round the bend."
Bruce Cockburn, "Pacin the Cage" (1995)
Living and operating in an uncertain regulatory world is nothing new to the employee benefits community or employers in general. Ambiguity and nuance are one thing. Being compelled to sort out what a vast statutory arrangement means, requires or permits in "real time" is quite another. However, just because we prefer not to be out in this particular storm that does not mean we can pretend it does not exist. It is in a semi-speculative spirit that these musings on future litigation under The Patient Protection and Affordable Care Act (PPACA) are offered.
Assessing where we are going requires some common understanding of where we are. The Court has declared that it is not its role to protect the people from the consequences of their political choices. National Federation of Independent Business v. Sebelius, 567 U.S. 1, 132 S.Ct. 2566, 2579 (2012). Thus, most of PPACA was found to be constitutional. Roughly six months later, the electorate vindicated both Chief Justice Roberts and H.L. Mencken1 by choosing not to make the changes that would have been required at the ballot box to prevent PPACA from becoming fully effective in 2014. Onward we go into this new compliance world.
A structurally intriguing aspect of PPACA is that for all the complex new rules and mandates, it adds but one section to ERISA, specifically Section 715. Congress added that one all-important section to Part I of the statute. 29 U.S.C. § 1185(d). Thus, PPACA is part of ERISA by incorporation. Among the consequences of that incorporation is that PPACA violations may also be ERISA violations, resulting in claims under ERISA Sections 502(a)(1), (2) or (3), and perhaps Section 510 assuming a plaintiff with proper standing and an ERISA enforcement sub-section providing the desired remedy. PPACA does not contain provisions through which efforts at PPACA compliance provide immunity from other federal laws. That is the legal landscape, such as it is.
One more data point may be significant. Reports of the U.S. Department of Labor's Bureau of Labor Statistics (BLS) reflect that at the time of enactment, the number of people involuntarily working part-time for economic reasons was approximately 8.5 million people (seasonally adjusted). That number hovered at around 7.6 million people as of the most recent report issued prior to the time this article went to press. At that same time, roughly 14.8 million people were officially2 unemployed, again seasonally adjusted, and more recently that number has officially decreased somewhat to 12 million people unemployed. However, the drop in the unemployment numbers may well be largely explained by the shrinkage of the civilian workforce at large (i.e., people giving up) because the labor participation rate has declined from 65.1 percent the month after PPACA was enacted to 63.2 percent.3 There are multiple other measurements that could be considered, but for benchmarking purposes and with the exception of those on COBRA or on an employed spouse's plan, there are a significant number of people who are not in an employer provided benefit model. The employment picture may matter because, as discussed below, the liability opportunities may be different depending on whether the affected individual is an existing full-time employee, a part-time employee, or an applicant.
The Mandates and Cost of Employer Coverage in Context
This brings us to the mandate described in 26 U.S.C. § 4980H as applicable to large employers (defined as those who employed an average of 50 or more full-time employees during the preceding calendar year). Full-time for this purpose is 30 hours or more per week.4 Added to the total of full-time employees are the Full-Time Equivalents (FTE) calculated by dividing the aggregated hours worked by all non-full-time employees during a given month by 120. The FTE calculation is at present purely for purposes of calculating employer size.
Employers face two possible assessments for employees who are not provided health insurance. First, any PPACA employer that does not offer the opportunity for its full-time employees to enroll in a minimal essential coverage plan is assessed a $2,000 per employee annualized payment if even one employee obtains coverage through the exchange and is allowed a PPACA premium tax credit to purchase his or her own coverage. For simplicity, this is referred to henceforth as the "no coverage" assessment. Second, if the employer permits enrollment in a plan but the cost of coverage is such that employees are eligible for the tax credit because the coverage is not "affordable," then the employer is assessed $3,000 for each employee eligible for the tax credit. Again for simplicity, this is referred to as the "unaffordable coverage" assessment. A distinction between the two assessments is that while the no coverage assessment would apply to all employees if it applies to any, the inadequate coverage assessment is more nuanced and linked to affordability which, in turn, is linked to individual employee household income.
Although the assessments are not insubstantial, neither is the cost of providing even single employee coverage. As of the most recent BLS report available, the average flat monthly premium employers paid for single employee coverage (with no employee contribution) was $458.71, and if the employee paid $107.78 per month (the average employee contribution), the average monthly employer paid premium was $334.52. Thus, even with the employee contributing, the employer cost for the coverage is double the no-coverage assessment and more than $1,000 per year more than the unaffordable coverage assessment. Recent guidance suggests that affordability will be determined based on safe harbors as an alternative to household income. But the fact remains that if one assumes BLS was measuring the cost of plans that equal (or more likely exceeded) the minimum PPACA adequate coverage, the average cost of that coverage materially exceeded either assessment. Moreover, the cost of coverage has increased significantly since the March 2012 BLS report. There are of course many other non-economic factors to consider and there are indications that employers are considering them. Among the litigation questions is whether the act of consideration is itself a potential liability generator when applied to work force structuring, and which actions based on the conclusions reached are lawful.
The PPACA employer need not count the first 30 full-time employees for purposes of the "no coverage" assessment. That can lead to complacency, which in turn yields potential liability. Some employers have incorrectly concluded that they need not worry about PPACA until crossing the 80 employee threshold because employees 50-79 do not count. Instead, the assessments may not have a monetary impact until that 80 employee threshold is crossed, but the coverage requirements for both grandfathered and non-grandfathered plans apply; exposing a relatively small "large employer" to liability even if not subject to the assessments. Moreover, even a borderline/small class action can be disruptive.
This issue will surface among employers and plans in a few different scenarios. One may be the employer as Professional Employer Organization client participating in what may be a self-funded Multiple Employer Welfare Arrangement or association plan. Another scenario may arise among employers who made the initial effort to achieve grandfathered status but have since either drifted out of grandfathered status by virtue of changes in the market or cost structures.
ERISA § 510 and Work Force Rightsizing
The analysis of ERISA Section 5105 in the context of PPACA begins with its text, but the language does not yield obvious answers. For purposes of this article, we focus on the duty to refrain from "interfering with the attainment of any right to which a participant may become entitled under the plan."
Most plans have, or very soon will have, been amended to conform to the 30 hour definition of full-time employee. Similarly, most plans limit participation to full-time employees. It is at this point when the employment statistics become a factor in the liability analysis.
Applicants and new part-time hires do not seem to fit the definition of "participant," although some may argue otherwise. Thus, decisions on how to grow or allocate work to meet increasing production demands via the hiring process do not appear to be subject to ERISA §510 scrutiny in the ordinary case of individuals hired part time who remain so. Similarly, a decision to allocate overtime to full-time employees rather than increase part-time employee hours, add more part-time employees, or promote part-time employees to full-time status, does not appear to implicate ERISA Section 510 because the affected individual is not a plan participant.
A full-time employee demoted to part-time status or laid off may present a different risk picture. For example, a restructuring that reduces workers from full-time to less than 30 hours and results in overtime to the remaining employees could be problematic. Exactly how problematic the program would be turns on the intent, the variable employment look-back period the employer adopts, if any, and contemporaneous documents.6 Similarly, a restructuring resulting in an employer (that offers no coverage) remaining consistently and coincidentally below either the 50 FTE employee threshold or below the 80 employee assessment trigger point may also be challenging. In that scenario, the question is whether that management decision is impermissible "interference" or legitimate management of methods of operation to manage applicable taxes and costs.
It is far from clear whether the same analysis applies to employer decisions on workforce expansion as would apply to decisions on contraction. The outcome to the affected worker (no coverage or no job) may be the same. For example, expansion would rarely impact an existing participant yet the later contraction may well do so. The timing on PPACA enactment, coming as it did near an unemployment high-water mark, may create some unusual situations. Employers were focused on benefit costs and were making operating adjustments years before PPACA. The difference was that pre-PPACA, the connection to headcount or employee hours worked was not as dramatic or specific. After PPACA, employers have had four additional years to refine flexible workforce expansion and contraction methods. Whether those methods are subject to ERISA Section 510 attack in a post-PPACA environment is one open issue. Those directly affected by business decisions to limit headcount growth or FTE expansion via part-time employment are inevitably and disproportionately found among the unemployed and underemployed, and hence are concentrated among non-plan participants who may have no standing to bring an ERISA claim.
Other issues arise as to existing employees impacted by various decisions related to sub-contracting and outsourcing aspects of the business. Assume for example, an otherwise PPACA covered large employer outsources a function (e.g., janitorial, security, warehouse/logistics or emergency room services) to a non-PPACA covered small employer. Does that employment decision (if it would affect a participant's coverage or large employer status) bring the decision making within the scope of ERISA Section 510 if health care cost or the duty to pay an assessment are a factor? If so, how much of a factor must it be before liability attaches?
Employment Classification Issues
Another ERISA Section 502(a)/510 issue is the perennial difficulty in addressing independent contractor, successor employer, single employer, and joint employer obligations. This legal status analysis issue affecting outsourcing and non-traditional master/servant service provider relationships is not unique to PPACA, but is complicated by it. The consequences of miscalculation are enhanced and the enforcement agency incentives to be increasingly aggressive in scrutinizing such relationships are greater.
It is unnecessary to descend into the rhetorical abattoir of whether such re-classification efforts are merely "leveling the playing field" or "fundamentally interfering with the right to contract." It is enough to appreciate that the existence of the no coverage/inadequate coverage assessments increases the opportunity for high stakes litigation over employee status. For example, if the 20-employee otherwise independent service provider is alleged to be a joint or single employer with the 100-employee service recipient, the PPACA coverage and assessment liability issues are joined. Similarly, each consultant contract, independent contractor contract or arrangement and any other outsourcing arrangement carries the risk that the relationship will be re-classified as an employment relationship either because of actions taken by the service provider or a third-party agency with the consequence being that a "no coverage assessment" or a springing duty to honor health care claims (that may or may not be covered under the provider contract) will be added to the payroll tax and failure to withhold penalties, among other liabilities.
Employment Discrimination--29 C.F.R. § 1604.9 and Affordability
Many of the "moving parts" within PPACA revolve around the notion of affordability which, in turn, is represented in the statute as whether the employee cost of coverage is greater than 9.5% of household income. That concept is easy enough to state as a rule but unless both spouses work for the same employer, it is not the easiest concept for the employer to measure. IRS has issued guidance7 and a notice of proposed rulemaking8 on this point, but whether these offerings are consistent with the statute is debatable.
The guidance notes three affordability safe harbors. The one of interest here involves measuring the 9.5% against reported W-2 employee income. Setting aside for the moment that this method expressly ignores the statutory requirement to measure affordability across the entire household, this safe harbor is subject to potential gender and other demographic issues (disparate impact) depending on the composition of the workforce and compensation rates.
Another interesting aspect is that affordable coverage will require including dependent coverage even though actual affordability under PPACA final regulations is measured based on the "employee only" premium.9 However, managing affordability not as IRS defines it, but in the more common sense use of the term on the employer side (i.e., is the plan too expensive?) may lead to compliance challenges and gender discrimination issues. The proposed regulations provide that a dependent does not include the employee's spouse. Thus, the implication is that eliminating coverage for dependent spouses could be a permissible employer mechanism to achieve compliance and make the plan less expensive to operate. However, 29 C.F.R. §1604.9(b) provides that it is unlawful to discriminate between men and women with regard to fringe benefits. 29 C.F.R. §1604.9(c) expressly finds that a head of household exclusion is a prima facie violation because of the disproportionate impact on female employees. Thus, an effort to mitigate the impact of dropping spousal coverage for all employees, by continuing it for employees who are the sole or primary wage earners may truly become "no good deed goes unpunished" amendments.
Questions can also surface as to whether a plan exclusion of spousal coverage has a disproportionate gender impact. It may be that the IRS proposal to exclude spouses from the definition of dependent for affordability purposes envisioned addressing the data collection problem as to household income and assumed that spouses would be employed and participate in another employer's plan. With the BLS reported labor participation rate down to 63.2 percent, that assumption is not beyond challenge. Moreover, an employer implementing that approach may wish to consider the impact of that change across various demographic groups within its workforce.
There will, inevitably, be other litigation issues that surface and the author does not purport to provide an encyclopedic risk assessment. Likewise, projecting how the issues will sort themselves out is a fool's errand. That acknowledged, the pace with which regulatory guidance is issued, and the velocity at which the first year of full PPACA effectiveness approaches, counsels in favor of a broad spectrum evaluation of implementation measures across the entire ERISA and employment regulation structure.
James M. Nelson, Greenberg Traurig, LLP
1H. Mencken, "A Little Book in C Major" (New York, John Lane Co.1916) ("Democracy is the theory that the common people know what they want, and deserve to get it good and hard.").
2There are, as we know, a number of people not counted in the official number and again according to BLS, roughly 90 million people over the age of 16 are not in the labor force for one reason or another.
3These numbers are offered for comparison purposes only.
4The process provided by various pieces of regulatory guidance for figuring out who, and at any one point in time, fits that definition in a variable hours work employment setting is beyond the scope of this article.
529 U.S.C. §1140.
6See McClendon v. Continental Can Company, 908 F.3d 1171 (3d Cir. 1990) (the now famous BELL program was found to be a reverse acronym for a program that was "Let's Limit Employee Benefits" and such acronyms are rarely helpful).
7I.R.S. Notices 2011-36 & -73 and 2012-17 & -58.
8Available at https://www.federalregister.gov/articles/2013/01/02/2012-31269/shared-responsibility-for-employers-regarding-health-coverage
9See 26 C.F.R. § 1.B-2(c)(3)(v)(A)(2).