Benefits News April 2018 The Hot Potato: Who is Responsible for COBRA Coverage in an M&A Transaction? In This Issue: The Hot Potato: Who is Responsible for COBRA Coverage in an M&A Transaction? Much Ado About Wellness Programs 1 3 Kathleen Bass There are a lot of moving parts in an M&A transaction. An issue that frequently comes up in the benefits area of the transaction is who is going to be responsible for the seller s employees and other qualified beneficiaries who are eligible for health continuation coverage under the Consolidated Omnibus Budget Reconciliation Act ( COBRA ) as a result of the transaction? And what about qualified beneficiaries who are already receiving COBRA coverage under the seller s health plan at the time of the transaction? The parties can always provide in the purchase agreement which party has agreed to take on the responsibility for this group of qualified beneficiaries (called M&A Qualified Beneficiaries ). COBRA coverage can be undesirable for employers and insurers due to the potential for higher claims and administration costs, so it is important to understand who bears the responsibility under COBRA and its regulations, in case the issue is not addressed in the purchase agreement, or to inform any negotiations regarding a transfer of responsibility to be included in the agreement. The General Rule Building Blocks of ERISA: Code Section 410(b) Transition Period Following a M&A Transaction Firm News & Events 5 Boutwell Fay LLP Attorneys at Law Employee Benefits & ERISA 1401 Dove Street, Suite 540 Newport Beach, CA 92660 Telephone: 949-660-0481 www.boutwellfay.com 5 The general rule is that the seller is responsible for providing COBRA coverage to M&A Qualified Beneficiaries to the extent that the seller maintains a group health plan. That includes such plan maintained by any entities that are in the same controlled group with the seller (the Seller Group ). If the Seller Group ceases to maintain any group health plans, then the responsible party depends upon the type of transaction into which the parties are entering: a stock purchase or an asset purchase.
Boutwell Fay Benefits News April 2018 Page 2 The Stock Purchase Rule In a stock purchase, if the Seller Group ceases to maintain any group health plan after the sale, the buyer, including any entities that are in the same controlled group with the buyer (the Buyer Group ), is responsible for the COBRA coverage of the M&A Qualified Beneficiaries. The Asset Purchase Rule In an asset purchase, if the Seller Group ceases to maintain any group health plan after the sale, no one is responsible for providing COBRA coverage, and COBRA will cease for those on COBRA at the time of termination of the group health plan, and those who lose group health coverage as a result of the transaction will not be offered COBRA. However, there is an exception to this rule if the purchaser of the assets is a successor employer, then the Buyer Group will be responsible for providing COBRA coverage. The purchaser is a successor employer if the termination of the seller s group health plan was (i) in connection with the transaction and (ii) the buyer continues the business operations associated with the assets purchase without interruption or substantial change. Also note that the obligation of the successor employer to provide COBRA coverage can be triggered after the sale has closed. The obligation begins on the later of (1) the date that the Seller Group ceases to provide any group health plan to any employee, or (2) the date of the asset sale. So if the Seller Group terminates its group health plan months after the transaction, but still in connection with the transaction, and the buyer otherwise meets the qualifications of a successor employer, then the obligation could spring back to the Buyer Group. Prepare Attention to COBRA obligations in an M&A transaction is very important, as uninsured medical costs can be significant, and an employer who is not prepared for these COBRA obligations may find themselves responsible for some potentially very expensive pay outs. Once a buyer or seller determine that they will be responsible for COBRA coverage for M&A Qualified Beneficiaries, the following actions should be taken to prepare: For fully-insured benefits, work with the insurer to make sure that the M&A Qualified Beneficiaries can be covered under the existing policy, and determine how it may effect the existing policy. For self-insured benefits, review and amend plan documents, services and physician network agreements to ensure that coverage for the M&A Qualified Beneficiaries can be offered. If coverage cannot be offered under existing policies or networks, explore other options such as new policies or self-insured coverage. In the event of potential springing liability in an asset purchase, make preliminary inquiries so you are prepared for that eventuality. This article is a general, high-level discussion of the COBRA rules in an M&A transaction, and the specific circumstances may complicate the outcome in a given situation. Legal counsel should be consulted to determine COBRA responsibility in an M&A transaction, and to discuss the required course of action and any options available.
Boutwell Fay Benefits News April 2018 Page 3 Venessa Blanco Much Ado About Wellness Programs It seems like everywhere you turn, benefits professionals are talking about ways to improve the individual health and financial wellness of employees. Wellness programs are nothing new, but in recent years many programs in the market tout wellness programs as a vehicle used to promote healthy lifestyles and prevent disease. The thinking is that healthier employees bring down the overall cost of health insurance coverage, ultimately creating cost savings for the employer. However, structuring programs that tie in to the company s group health plan can lead to unwanted compliance issues, and oversight by government agencies including the Internal Revenue Service (IRS), Department of Labor (DOL), Health and Human Services (HHS) (tri-agencies) and the Equal Employment Opportunity Commission (EEOC). So, what s the big deal? Because wellness programs come in many forms, from a compliance perspective, things can get tricky. Depending on how the program is structured, it can be subject to a veritable minefield of legal landmines under ERISA, HIPAA, ACA, the Internal Revenue Code (Code), the Genetic Information Non-Discrimination Act (GINA), and the Americans with Disabilities Act (ADA). 1 While there are various types of wellness structures, there are two types that generally come under scrutiny by the tri-agencies. These are (1) participatory programs, and (2) health contingent wellness programs (including activity only, and outcome-based programs). Wellness programs designs may or may not tie to a group health plan. If a wellness program is tied to a group health plan, or if participation in a program leads to a reward tied to a health-based outcome (i.e. a smoking cessation program), then employers must take additional steps to ensure compliance with HIPAA. HIPAA Compliance Issues HIPAA requires that wellness benefits be offered on a non-discriminatory basis, i.e. distinctions among groups of similarly situated participants in a health plan must be based on bona fide employment-based classifications consistent with the employer s usual business practice. 2 A health-contingent wellness program that is an outcome- based wellness program is compliant where it meets a five-factor test 3 : The program provides individuals with the opportunity to qualify for the reward under the program at least once per year; The reward of the program must not exceed certain percentages described in the regulation; 4 The program must be reasonably designed to promote health or prevent disease; 1 Whether all or some of these rules apply is determined by the structure of the wellness plan. Clients should work with counsel to determine which type of program they run to determine the depth and complexity of compliance. 2 Incentives for Nondiscriminatory Wellness Programs in Group Health Plans, 78 Fed. Reg. 33157 (June 3, 2013). 3 29 C.F.R. 2590.702(f)(3). 4 For employee only coverage, the reward may not exceed 30% of the total cost of coverage; for dependent coverage, the reward may not exceed 30% of the total cost of coverage for the employee plus dependents, and the reward may not exceed 50% for tobacco cessation programs.
Boutwell Fay Benefits News April 2018 Page 4 The plan must provide uniform availability and reasonable alternative standards to meet the requirements, i.e. the full reward under the outcome-based wellness program must be available to all similarly situated individuals; and The plan or issuer must disclose the terms of the program and rewards, as well we the availability a reasonable alternative standard to qualify for the reward. 5 During health plan investigations, the DOL reviews wellness programs to determine compliance with the HIPAA portability rules. Efforts by the DOL to ensure wellness plan compliance go beyond investigations. In late 2017, the DOL filed a complaint in federal court against Macy s, alleging that its tobacco surcharge wellness program was not in compliance with the five-factor approach prescribed in the HIPAA regulations. 6 According to the complaint, Macy s program included a tobacco surcharge for employees enrolled in company-sponsored medical coverage who have used tobacco products within the last consecutive six months or have participating dependents who have used tobacco products within the last consecutive six months. 7 The surcharge ranged from $35 to $45 per month, and according to plan documents, the tobacco surcharge funds that are collected will be deposited into the Macy s, Inc. Welfare Benefits Plan Trust and [were] used to pay medical claims and plan administrative expenses. 8 The complaint further alleges that employees continued to receive the tobacco surcharge even if they provided evidence of completion of a tobacco cessation program. The DOL complaint further alleges that the program failed to offer individuals a reasonable alternative standard, and also failed to provide a notice describing the reasonable alternative standard. The DOL argues that this violation amounted to a breach of fiduciary duty (for failure to act solely in the interest of participants and beneficiaries in accordance with ERISA 404(a)(1)(D)), and a prohibited transaction (alleging that use of the surcharge monies to pay claims and expenses constituted a direct or indirect transfer to, or use by, a party in interest, of assets in a health plan in violation of ERISA 406(a)(1)(D)). This lawsuit is significant in that the first of its kind from the DOL. Many are watching to determine the outcome of this pending litigation. ADA, GINA and Tax Compliance Issues Separately, certain wellness programs may be required to meet additional requirements under the ADA and GINA. 9 Generally, the ADA prohibits an employer discriminating against an employee on the basis of a disability, as well as prohibits an employer from denying an employee access to a wellness program on the basis of a disability. 10 GINA prohibits employers from discriminating against an employee on the basis of genetic information. Genetic information obtained through a wellness program will not violate GINA s provisions where certain requirements are met. In early 2016, the EEOC released final regulations regarding wellness program compliance under the ADA and GINA. While the requirements set forth in those regulations were very similar to HIPAA s five-factor test, the EEOC regulations capped the reward incentive at 30% of employee only coverage. 11 The 5 29 C.F.R. 2590.702(f)(3). 6 Acosta v. Macy s, Inc., et al. S.D. Ohio, No. 1:17-cv-00541, complaint filed 08/16/17, amended complaint filed 08/29/17. 7 Id. 8 Id. 9 ADA and GINA requirements govern wellness programs that include either disability related inquiries or medical examinations. 10 https://www.eeoc.gov/laws/regulations/qanda-ada-wellness-final-rule.cfm 11 Regulations Under the Americans With Disabilities Act, 81 Fed. Reg. 31125 (July 18, 2016).
Boutwell Fay Benefits News April 2018 Page 5 regulations became effective January 1, 2017, but were subsequently partially vacated effective January 1, 2019 by a 5th Circuit ruling, requiring the EEOC to revisit its reasoning behind the 30% rewards cap. 12 If that wasn t enough, wellness rewards, that are not defined as medical care under Code Section 213(d) (such as gift-cards), may be taxable to employees. What was once thought to be a tool to promote health is now seen as a large headache for many employers. It is easy to see why compliance for these plans has become so complex. If you have any questions as to whether your plan is compliant, please contact one of our attorneys for assistance. Code Section 410(b) Transition Period Following a M&A Transaction This month s Building Block provides basic information about a "410(b) Transition Period." Click here to view this month s Building Blocks of ERISA Firm News & Events: Boutwell Fay LLP Welcomes Ruel Pile We are pleased to announce that Ruel Pile has joined the firm as an attorney in our Newport Beach, California office. Ruel has more than 24 years of legal experience in the area of employee benefits. He has worked as in-house ERISA counsel for Fortune 500 companies, and for the U.S. Department of Labor (DOL), within the national office of EBSA Office of Regulations and Interpretations. Please join us in welcoming Ruel to the firm! Sherrie Boutwell and Venessa Blanco's Article Published in the Journal of Pension Benefits The article, The (ACA) Tax Man Cometh: Disputing Proposed Employer Mandate Penalties under the ACA, was published in the Journal of Pension Benefits, Volume 25, Number 3, Spring 2018. 12 AARP v. EEOC, 267 F. Supp. 3d 14 (D.C. Cir. 2017).
Boutwell Fay Benefits News April 2018 Page 6 Evan Giller to Speak on NBOA Webinar On Thursday, May 3 at 4PM ET Evan will be speaking on the National Business Officers Association (NBOA) webinar, Correcting Operational Errors in Your School's Retirement Plan. Click here to read more about this webinar. Come Join Us at the 2018 NIPA Annual Forum & Expo (NAFE) Boutwell Fay is a sponsor at the 2018 NIPA Annual Forum & Expo on May 21-23 in Las Vegas. Drop by our booth and say hello. Ruel Pile and Alison Fay will be presenting on Health and Welfare Hot Topics, and Sherrie Boutwell will be participating as a panelist on the Retirement Plans Ask the Experts panel. For further information about NAFE, go to the NIPA website www.nipa.org and click on Conferences. The Boutwell Fay Benefits Newsletter is published periodically and may be considered attorney advertising. This newsletter is available in this full PDF format as well as in an abbreviated email format. If you would like to receive the newsletter via email, please subscribe using the Contact Us page on www.boutwellfay.com. Boutwell Fay LLP will not sell, rent or share our mailing list with anyone. If you change your mind and wish to unsubscribe in the future, please use the unsubscribe link at the bottom of each email newsletter. Important: This newsletter is for informational purposes only and does not constitute legal or tax advice. Transmission of this information is not intended to create, and receipt does not constitute, an attorney-client relationship. Anyone viewing this newsletter should not act upon this information without seeking professional counsel. The information contained herein is valid as of the date of this email, and should not be relied upon after this date. While you are welcome to contact us, we will not represent you until we have specifically agreed to do so and have taken appropriate steps to determine that doing so will not create a conflict of interest. Unsolicited emails from non-clients containing confidential or secret information cannot be protected from disclosure. Accordingly, please do not send us any confidential or secret information until we have agreed to represent you. Merely contacting us by email or through our website will not establish an attorney-client relationship. In order to engage us you will need to speak directly to one of our lawyers and sign an engagement letter.