NEW POTENTIAL PITFALLS REGARDING CASH IN LIEU OF HEALTH BENEFITS

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1 NEW POTENTIAL PITFALLS REGARDING CASH IN LIEU OF HEALTH BENEFITS PRESENTED BY: ELIZABETH TOM ARCE & HEATHER DEBLANC The views and opinions expressed in this presentation are those of the authors and do not necessarily reflect those of CASBO.

2 Agenda The Flores decision Cash in lieu & cash back programs Flores regular rate of pay impacts Bona fide plans & the incidental analysis Next Steps ACA Overview (latest developments) Affordability Impacts (if applicable) Next Steps

3 Flores Holdings re: Cash in Lieu Payments ONE: Cash in lieu of health benefits made to nonexempt employee cannot be excluded from FLSA regular rate of pay used to pay FLSA overtime. TWO: Bona Fide Plan? If the total amount of cash paid in lieu of health benefits is more than 40% of the benefits plan payments as a whole, the plan is not bona fide. If a plan is not bona fide, all cash contributions paid by the employer to the plan, in addition to cash in lieu, must be included in the regular rate. (Flores v. City of San Gabriel (9 th Cir. 2016) 824 F. 3d 890.)

4 What is Cash In Lieu? For Flores Purposes: Cash for opting out of health benefits. Includes unused flex allowance under Section 125 Plan. Note: CalPERS medical participants may use Sec. 125 plans to mitigate equal contribution payments required by PEMHCA.

5 Typical Cash In Lieu / Opt Out Language The Court has implemented a Section 125 qualifying Cafeteria Plan. The Court shall contribute $1300 per month to the Plan per employee. The Court contracts with CalPERS for medical insurance. The $1300 includes the PEMHCA minimum contribution. Employees may use their Cafeteria Plan contributions toward the Court s medical, dental, and vision programs. Any unused Cafeteria Plan allowance shall be payable to the employee as taxable cash back. Employees may opt out of the medical plan by providing evidence of alternative medical insurance coverage. Employees who opt out of Court provided medical coverage are eligible to receive a maximum allowance of $1150 per month.

6 FLORES HOLDING #1: REGULAR RATE IMPACTS

7 Background: Flores v. City of San Gabriel In 2012, a handful of police officers filed suit against their employer, the City of San Gabriel, for violations of the Fair Labor Standards Act (FLSA). The officers alleged the City failed to correctly calculate their overtime rate and thus they were owed overtime. Specifically, the officers argued the City was not treating cash paid to employees in lieu of health benefits in accordance with the FLSA. The case was brought as a collective action. Both parties appealed the district court s rulings. The Ninth Circuit decision was issued June 2, 2016.

8 Flores Holding Number 1 Cash in lieu of health benefits must be included in the regular rate of pay. What does this mean in real life? Non exempt employees, Who receive cash in lieu and, Who work FLSA overtime, Must have the cash in lieu amount incorporated into the overtime rate paid for FLSA overtime hours.

9 Basic Overtime Pay Calculation Chris earns $20/hour and works 44 hours in his 40 hour/7 day work period. How much is Chris owed for the week? $20.00 = hourly base rate/44 hours worked 40 x $20.00 = $ x $20 x 1.5 = $ $920.00

10 Regular Rate of Pay with Additional Type(s) of Pay The FLSA requires most additional types of pay to be included in the regular rate calculation. This requires you to: Know what pay must be included. Calculate the value of the pay on a work week/work period basis. Include the value of the pay in the regular rate calculation.

11 Regular Rate of Pay Calculation with Additional Type of Pay Chris is also paid $100 per month in bilingual pay. 1. Multiply total hours worked times base: 44 x $20 = $ Calculate the work week value of bilingual pay ($23). Add $23 bilingual pay for the week: $880 + $23 = $ Calculate the regular rate by dividing total amount earned by total hours worked: $903/44 hours = $20.52 FLSA Regular Rate of Pay = $20.52 Note: For salaried, non exempt employees, the regular rate calculation may be different. Prior to implementation, evaluate the appropriate calculation method for your employees.

12 Impact of Flores Chris also opts out of medical coverage under the agency s Section 125 Flexible Benefit Plan and receives $800/month in Cash in Lieu. oto calculate Chris regular rate of pay, determine the workweek equivalent of the monthly cash in lieu payments: Cash in lieu = $800/month Multiply $800 x 12 months in the year, then divide by 52 (weeks) ($800 * 12)/52 = $184.62/week

13 Regular Rate of Pay Calculation with Cash In Lieu Chris is paid $80 per month in bilingual pay. Chris hourly rate is $20.00 and 44 hours were worked during the workweek. The workweek equivalent of Cash in Lieu (CIL) is $ Multiply total hours worked times base: 44 x $20 = $ Add $23 bilingual pay for the week: $880 + $23 = $ Add CIL workweek equivalent: $903 + $ = $1, Calculate the regular rate by dividing total amount earned by total hours worked: $1,087.62/44 hours = $24.71 FLSA Regular Rate of Pay = $24.71

14 FLORES HOLDING #2: BONA FIDE PLANS

15 Flores Holding Number 2 The second holding in Flores looked at cash in lieu payments relative to an employer s total contributions to the plan. Under the FLSA, total cash back / cash inlieu payments must be incidental to the total plan payments made.

16 Flores Holding No. 2, Cont. Per Flores: If total cash in lieu payments are greater than 40% of the total plan payments, the payments are more than incidental and the plan is not bona fide. This means all payments to the plan must be included in the regular rate.

17 The Bona Fide / Incidental Analysis Step 1: Identify the plan and all plan participants. Step 2: Identify total plan payments. Total plan payments = cash in lieu payments + payments employer made to the plan to cover premiums. Step 3: Calculate cash in lieu payments as a percentage of the total plan payments. Step 4: What is the percentage? Is it over 40%? If less than 40%, how close to 40%? The analysis is plan wide, i.e. in the aggregate, not employee by employee.

18 Example Bona Fide / Incidental Analysis The Court has 350 employees and four bargaining groups. The Court participates in the CalPERS medical program governed by PEMHCA. All employees are provided an allowance under a Section 125 Cafeteria plan of up to $1300 per month to purchase medical, dental, and vision coverage. If an employee provides alternate proof of medical coverage, the employee can opt out of medical and receive $1150.

19 Example Bona Fide / Incidental Analysis: Relevant Data Enrollment Level # of EE s Employer Paid Medical Premiums Employer Paid Dental & Vision Premiums Employer Paid Opt Out Payments Employee Paid Premiums for all 3 plans EE Only 40 $22,406 $2,082 $0 $0 EE $76,468 $4,732 $0 $10,477 Family 136 $176,800 $0 $0 $20,601 Opt Out 110 $0 $6,364* $126,500 $0 Total 350 $275,674 $13,178 $126,500 $31,078 *Employees could only opt out of medical, so the Agency still paid vision/dental for opt outs.

20 Example Bona Fide / Incidental Analysis, Cont. Step 1: Identify the plan and who is covered. All 350 employees are covered by the Court s Sec. 125 plan. Step 2: Identify total plan payments. $275,674 + $13,178 + $126,500 = $415,352 Employee contributions are excluded from this analysis. Step 3: Calculate cash in lieu as a % of the total. $126,500/$415,352 = Step 4: What is the percentage? Cash in lieu is 31% of the total plan payments. Is 31% incidental?

21 OTHER KEY ISSUES

22 Flores Third Holding: Willfulness FLSA violations have a two year statute of limitations unless the employer s violation was willful. If willful, a three year statute of limitations applies. We advise agencies to take and document specific FLSA compliance efforts, such as reliance on DOL administrator letters or advice from legal counsel, to avoid a finding of willfulness. Violators can be penalized with liquidated damages. Liquidated damages = amount owed in back wages. Good faith defense? Prevailing employees are also entitled to reasonable attorney s fees from the losing defendant.

23 Status of Appeal Process The Ninth Circuit denied the City s petition for rehearing on August 23, The City will seek review by the U.S. Supreme Court. The deadline is November 21, If the Supreme Court denies the petition, the Ninth Circuit decision stands. If the petition is granted, the Supreme Court could affirm, reverse or issue its own decision.

24 Next Steps for Your Agency 1. Focus preliminary efforts on coming into compliance with Flores going forward. Is plan bona fide? Is regular rate calculation is correct? Minimize overtime liability (offsets/work periods) prior to incorporating cash in lieu into your regular rate. 2. Update payroll system to separately calculate MOU overtime obligations and FLSA obligations each workweek? 3. Get into compliance, then evaluate possible back liability.

25 Other Issues to Consider How to respond to inquiries re: Flores. Lawsuits have been filed some not served. Should you sign a tolling agreement? Union reps may want to negotiate Flores impacts, but you may not need to bargain how you implement Flores to come into compliance with the FLSA.

26 Affordable Care Act What s Happening & Does Cash in Lieu Matter?

27 ACA Current Status Employer Mandate? ACA Reporting? 27

28 January 20, 2017 Trump Executive Order Directs the Secretary of Health and Human Services and agency heads to: o Exercise legally conferred authority to grant waivers, deferrals, and exemptions to the ACA, and o Delay implementation of ACA provisions that would have the effect of imposing fiscal burdens on states, individuals, families, healthcare providers, insurers, patients, recipients of health care services, and manufacturers of medical products. 28

29 Memo to Department Heads ojanuary 20, 2017 oregulatory Freeze opublished Regulations not yet effective (postponed 60 days) oaca Regulations Effective January 1, 2017 or earlier 29

30 1/30/17 Executive Order ofor this fiscal year. owhen a federal department or agency (e.g. Dept. of Treasury) proposes a new regulation. oit generally must identify at least two existing regulations to be repealed. 30

31 American Health Care Act Individual Mandate $0 Starting 2016 Employer Mandate $0 Starting 2016 Repeals Tax on OTC Meds for HRA s and Starting 2018 Health FSAs Repeals Tax Increase on HSAs Starting 2018 Health FSAs Eliminates limits on Starting 2018 Employer Contributions No Premium Tax Credit Starting 2020 Cadillac Tax No tax through 2024

32 Breaking News The Latest Developments:

33 Large Employer Mandate Applicable Large Employers. Trigger: FT employee purchases subsidized coverage in Covered California. (Penalty A) Employer does not offer minimum essential coverage to substantially all FT employees & dependents; or (Penalty B) Coverage offered is unaffordable or doesn t provide minimum value. 33

34 Employer Mandate Penalties Penalty A $2,260/year ($188.33/month)* multiplied by # of ACA FT employees less 30. Penalty B $3,390/year ($282.50/month)* multiplied by # of ACA FT employees who obtain subsidized coverage through Covered California. *2017 amounts above increase annually. 34

35 Affordability Safe Harbors Employee s Required Contribution toward premium for the lowest cost self only coverage does NOT exceed 9.69% (2017) of: The employee s Form W 2 wages reported in Box 1 (Form W 2 Safe Harbor). The lowest hourly rate x 130 or monthly salary) (Rate of Pay Safe Harbor); or The monthly Federal Poverty Line (in effect 6 mo. prior to start plan year) (FPL Safe Harbor). 35

36 Affordability Total Premium of Lowest Cost Plan Less Employer Contribution that qualifies as a Health Flex Contribution Plus Cash in lieu (other than Eligible Opt Out Arrangement ) Employee s Required Contribution = 36

37 Does Contribution Reduce Premium? oexamine Employer Contribution. ocan it be cashed out? OR ocan the employee direct it to nonhealth benefits? 37

38 Health Flex Contributions Employer Contributions Only Reduce the Employee Premium if: They cannot be cashed out; & They cannot be applied to non health benefits. Employer Contribution that meets this definition is called a Health Flex Contribution. 38

39 Case Study Mary The City offers Mary $1000 in flex credits under a Section 125 Plan that he can use toward health benefits, dependent care, or take in cash. Can the employer contribution be applied to reduce Mary s premium? NO 39

40 Case Study Mary Lowest cost plan $466/month. The City offers Mary $1000 in flex credits under a Section 125 Plan that she can use toward health benefits, dependent care, or take in cash. But: NONE of flex credits may be applied to Mary s premium. Result: Mary s Required Contribution = $

41 When Do Health Flex Rules Start? 41

42 2016 Plan Year Except: If Arrangement was in place as of December 16, AND Amount has not substantially increased. Then, can use non health flex $$ to reduce Required Contribution in January 1, 2017 No Relief. 42

43 Cash in Lieu $$$ if Opt Out 43

44 Cash in Lieu Affordability General Rule: Cash amount is ADDED to employees Required Contribution. Exception: Eligible Opt Out Arrangement. 44

45 Impact of Cash in Lieu Lowest cost plan is $500. City offers Jim $400 toward health coverage. (health flex contribution) City offers $350 as cash in lieu for opting out of coverage. Jim s Required Contribution = $450. (500 premium less 400 health flex plus 350 cash in lieu amount). 45

46 Eligible Opt Out Arrangement Employee & Tax Family (individuals employee expects to claim personal exemption deduction); Proof of alternative minimum essential coverage (not individual coverage; not individual coverage from Covered California); Employee must provide reasonable evidence (attestation) each plan year; Evidence/attestation provided during open enrollment (or just after); and Arrangement must provide Cash payment cannot be made if employer knows or has reason to know that employee or Tax Family doesn t have such coverage. 46

47 Impact of Eligible Opt Out Lowest cost plan is $500. City offers Jim $400 toward health coverage. (health flex contribution) City offers $350 as cash in lieu for opting out under an eligible opt out arrangement. Jim s Required Contribution = $100. (500 premium less 400 health flex). 47

48 When does Cash in Lieu rule apply? January 1, 2017, as long as the employer maintained the arrangement prior to December 16, Any relief? 48

49 Opt Out Under Collective Bargaining Agreements Employers with CBAs + opt out payments that aren t eligible opt out arrangements. Not required to increase the amount of EE's required premium contribution by amount of opt out payments until later of: (1) first plan year after the CBA in effect before 12/16/15 (disregarding extensions on or after 12/16/15) expires, or (2) January 1,

50 Constructive Receipt Income made available to you. Option to use part of salary toward health coverage premiums. Option to take taxable cash or pre tax health benefit. Not constructive receipt? Employer Pays Entire Benefit (no salary reduction election by employee). 50

51 Purpose of Cafeteria Plan Avoids constructive receipt doctrine. No Cafeteria Plan? Employee who elects to enroll in health benefits will be in constructive receipt of the cash they could have elected, Taxed like other W 2 wages, & Employer subject to wage withholding and employment taxes on cash amount. 51

52 Cafeteria Plan Document Internal Revenue Code Section 125 Written plan document required description of available benefits; participation rules; election procedures; manner of contributions; maximum amount of contributions; the plan year; Other information depending on plan. 52

53 Note: Section 125 Plan Are you offering health insurance pre tax, but the employee may take taxable cash? If yes, must have Section 125 Cafeteria Plan to avoid constructive receipt doctrine. If no Section 125 plan, employee who elects to enroll in health benefits will be in constructive receipt of the cash they could have elected. Taxed like other W 2 wages, & Employer subject to wage withholding and employment taxes on cash amount.

54 Cafeteria Plan Benefit Options Health Insurance/Premiums Health FSAs Dependent Care FSA (DCAP) Health Savings Account Accidental death or dismemberment coverage Short/long term disability 54

55 Benefit allowed Section 125 Health Reimbursement Arrangements Deferred Compensation (457b) Long Term Care Spousal/Dependent Care Life Insurance Fringe Benefits Meals & Lodging Educational Assistance Program Scholarships 55

56 What s Next? Should you make changes to your Health Benefit Arrangement? Health Benefits are a mandatory subject of bargaining Section 125 PEMHCA ACA/AHCA

57 Thank You Elizabeth Tom Arce Partner Los Angeles Office people/elizabeth arce Heather DeBlanc Partner Los Angeles Office people/heather deblanc