The Audit Trilogy Part II: Preparing for and Surviving a Health and Welfare Audit April 19 th, 2016 Sponsored by the ABA Joint Committee on Employee Benefits and the American College of Employee Benefits Counsel Moderator: Sally Doubet King, McGuireWoods LLP, Chicago, IL Panelists: Christine M. Poth, Vorys, Sater, Seymour and Pease LLP, Columbus, OH Patricia A. Moran, Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC, Boston, MA Mark L. Stember, Kilpatrick Townsend & Stockton LLP, Washington, DC
Today s Presentation Why is the DOL Auditing? What Are the Steps of a DOL Audit? How to Prepare Client for DOL Audit? 2
HOW DID WE GET HERE? THE EVOLUTION OF HEALTH AND WELFARE LAWS AND ENFORCEMENT
A Brief History of Health & Welfare Plans Pre-ACA Employer Responsibilities ERISA (1974) SPD/Plan document requirements 5500 requirement Fiduciary rules Geared towards retirement plans, but covers health and welfare Nondiscrimination rules geared towards self-insured plans (1981) COBRA (1985) HIPAA Privacy (1996) HIPAA Portability (1996) Limitations on pre-existing conditions Special enrollment rights Health factor discrimination/wellness exception 4
A Brief History of Health & Welfare Plans Pre-ACA Employer Responsibilities (continued) HITECH (2009) Additional health care laws 1996-2009 Mothers and Newborns (1998) Post-mastectomy reconstructive surgery (1998) Mental health parity (1998) Michelle's law (2008) GINA (2009) 5
A Brief History of Health & Welfare Plans ACA Employer Responsibilities New Insurance Reforms, rolling into effect beginning in 2010, including: Young adult/age 26 coverage Ban on lifetime and annual limits Ban on rescissions (retroactive cancellation) of coverage Ban on pre-existing condition exclusions Enhanced claims procedures Waiting periods limited to 90 days Dollar-one coverage of preventive services Patient protections Nondiscrimination rules geared towards insured plans (to come) 6
A Brief History of Health & Welfare Plans Disclosures to individuals Notice of grandfathered status (2011) Patient protection notices (2011) Summary of benefits and coverage (2012) Exchange notices (2013) W-2 reporting (2012) Code 6055/6056 (2016) Employer Shared Responsibility (pay or play) (2015) New Wellness Rules (2014) Taxes and fees PCORI (2012-2018) ($2 per covered life) Transitional reinsurance fee (2014-2016) ($63 per covered life) Cadillac tax (2020) 7
THE DOL AUDIT BEGINS
Steps of a DOL Audit Phone call/letter from DOL Collection of requested documents On-site visit and interviews Follow-up questions and additional document/ information requests Letter of findings Plan s response to letter of findings Closing letter 9
Why Are They Here? Common DOL Audit Triggers Reports filed with DOL (e.g., Form 5500) Participant complaints DOL audit initiatives Random audits Referrals from other agencies Media news stories Audit of service provider Court cases 10
DOL Authority to Audit ERISA 504(a) The Secretary shall have the power, in order to determine whether any person has violated or is about to violate any provision of this title or any regulation or order thereunder 1) To make an investigation, and in connection therewith to require the submission of reports, books, and records, and the filing of data in support of any information required to be filed with the Secretary under this title, and 2) To enter such places, inspect such books and records and question such persons as he may deem necessary to enable him to determine the facts relative to each investigation, if he has reasonable cause to believe there may exist a violation of this title or any rule or regulation issued thereunder or if the entry is pursuant to an agreement with the plan. 11
Authority to Request Documents DOL has broad power to request documents and interview individuals in connection with an investigation DOL can enforce document request or interview through use of subpoena Consider requesting administrative subpoenas Consider challenging overbroad subpoenas DOL cannot ask you to create documents that do not exist (e.g. spreadsheets, affidavits) 12
Requirement to Provide Documents ERISA 104(a)(6) The administrator of any employee benefit plan subject to this part shall furnish to the Secretary, upon request, any documents relating to the employee benefit plan, including but not limited to, the latest summary plan description (including summaries of plan changes not contained in the summary plan description), and the bargaining agreement, trust agreement, contract or other instrument under which the plan is established or operated. 13
What is the DOL Looking For? Failure to Comply with: Promise to provide health benefits Plan document requirements Notice requirements Reporting requirements Breach of fiduciary duty Improper payment of expenses out of plan assets Criminal violations, including several specifically geared towards health plans 18 U.S.C. 669 Theft or embezzlement in connection with health care 18 U.S.C. 1035 False statements relating to health care matters 18 U.S.C. 1347 Health care fraud 18 U.S.C. 1518 Obstruction of criminal investigations of health care offenses 14
Health Benefits Security Project Comprehensive national health enforcement project, combining EBSA s established health plan enforcement initiatives with new protections provided under ACA Involves a broad range of investigations: Examinations of Part 7 of ERISA and ACA Civil and criminal investigations of MEWAs Investigations of insurance companies and claims administrators to ensure that promised benefits are actually provided Criminal investigations of fraudulent medical providers Focuses on plans and claims administrators failure to provide promised benefits through lack of disclosure or through misapplication in substance or in procedure of the plan s terms 15
RESPONDING TO THE AUDIT REQUEST
Documents Requested Signed plan documents, adoption agreements, trust agreements, wrap documents, benefit booklets, and amendments to date Summary plan description Signed Form 5500s (last 3 years) Summary annual reports (last 3 years) Audited financial statements (if applicable) 17
Documents Requested Employee handbooks which discuss employee benefits Meeting minutes Listing of all officers of plan sponsor and tenure Listing of all plan trustees and fiduciaries and tenure If TPA, claims administrator, PBM, etc.: list of clients 18
Documents Requested Financial records: Trust reports Bank and brokerage account statements Account ledgers, journals Invoices/records relating to expenses and fees from plan assets Checkbook registry, canceled checks, and deposit slips Fidelity bond, including riders and endorsements Fidelity liability insurance 19
Documents Requested Document showing employee and employer costs Employee enrollment application (open enrollment and new hire) Service provider contracts and letters of engagements, including brokers, consultants, third party administrators, record-keepers, and claims processors. If self-funded, all contracts for claims processing, administrative insurance and reinsurance If fully-insured, all health insurance contracts and policies, including amendments and riders 20
Documents Requested Compliance with various notices: HIPAA special enrollment rights Women s Health and Cancer Rights Act Newborn s Act (minimum hospital stay) Michelle s Law Notice: Copy of notice, log, description of procedures for distributions 21
Documents Requested Compliance with COBRA: Notices provided to participants and beneficiaries List/logs of notices issued Compliance with GINA: All documents relating to use or collection of genetic information, for any reason, with respect to the plan Compliance with Summary of Benefits and Coverage Requirements: Copy of SBC Copy of Uniform Glossary 22
Documents Requested Compliance with HIPAA nondiscrimination rules that prohibit discrimination in individual premiums based on health factor: Health insurance billing invoices Premium schedules EE and ER contribution schedules Payroll records of withholdings Compliance with HIPAA wellness regulations: Materials describing program Disclosure statement (if standards-based program) Description of any reward offered and any alternative means of participating in such program 23
Documents Requested Compliance with Affordable Care Act: If Grandfathered: Copy of disclosure statement Records documenting terms of group health plan in effect on March 23, 2010 Any changes to terms of cost sharing Changes to contribution rate Cost of any tier of coverage Annual and lifetime limits Any contract with health insurance issuer Any applicable testing completed to ensure grandfathered status 24
Documents Requested Compliance with Affordable Care Act: If Not Grandfathered: Copy of provider notice (right to designate primary care provider, pediatrician, OB-GYN) and list of participants who received notice Documents relating to the provision of emergency services for each year on or after 9/23/10 Documents relating to provision of preventive services for each plan year after 9/23/10 Copy of internal claims and appeals and external review processes Copies of notice of adverse benefit determination, notice of final internal adverse determination notice, and notice of final external review decision Any contract or agreement with any independent review organization or third party administrator providing external review 25
Documents Requested Compliance with Affordable Care Act: Regardless if Grandfathered: Sample written notice describing enrollment opportunities relating to dependent coverage to age 26 List of participants/beneficiaries whose coverage has been rescinded, reason for rescission and copy of notice of rescission Documents showing lifetime limit imposed at any point since 9/23/10 and notice to individuals affected by limit Documents indicating any waiting periods imposed, if applicable, before coverage is effective 26
Documents Requested Information regarding rebates (including medical loss ratio rebates, experience-related contract rebates, and any other rebate from an insurer) received by the plan or plan sponsor including: Documents detailing amount, receipt date, source and handling of each rebate Sample notice to participants about rebates (if applicable) Documents demonstrating allocated of rebated amounts to employer and/or employees Correspondence regarding how rebates are used or allocated 27
Documents Requested If MEWA: Form 5500: Information to determine if single or multiple plans Plan asset information: Documentation that employee contributions are timely deposited Policies for how controlling expenses Documentation supporting reasonable of fees paid from trust assets 28
Documents Requested Information regarding claims including: Claims lag report which details amount of time from claim filing to claim payment Listing or report identifying all claims denied, paid, or paid-in-part for the plan over $500 for the most recent six-month period Listing or report identifying all requests for prior or pre-authorization of services denied for the plan for the most recent six-month period Listing or report identifying all claims grievances or claims appeal(s) for the plan for the most recent six-month period Listing or report of all dental reason codes and their related definitions as currently used in the plan s claims adjudication process 29
Interview Who is interviewed? Usually interview employee at company most familiar with day-to-day operations of group health plan If funded, will request interview of person processing participant contributions and distributions from trust Prepare employees for interview: Review scope and nature of questions Employee will be asked to supply Social Security Number Instruct to only answer questions asked Instruct employee not to guess and it is okay to answer I don t know 30
OUTCOMES, PENALTIES AND (HOPEFULLY) CLOSURE
Findings Letter Explains any violations found by the DOL Generally have 10 days to respond to findings letter Extensions of time of usually granted Response letter should: Include proposed correction if agree with violation cited in letter Detail position and supply additional information if disagree with violation cited in letter Use to request conference with supervisors or national office personnel 32
Common Issues Raised by DOL Inadequate EOBs Auto-adjudication software still using grandfathered plan design after group health plan loses grandfathered status Definition of emergency services does not use prudent layperson status Delivery method for SPD and notices does not satisfy the ERISA delivery requirements Employer cannot show proof that distributed SPDs or notices to participants 33
Common Issues Raised by DOL Insurance certificates do not satisfy ERISA requirements for SPDs Mental health parity act violations Blanket pre-authorizations for all mental health/substance abuse benefits Specialists co-pays for mental health/substance abuse visits Hidden pre-existing conditions Emergency dental provisions Noncompliant wellness programs 34
What is Typical Outcome? If no violations are found, DOL will issue closing letter If violations are found: DOL will issue closing letter once violations are corrected DOL may assess penalty DOL may refer to IRS if prohibited transaction discovered DOL will refer matter if criminal conduct uncovered 35
What is Typical Outcome? Voluntary compliance to correct violations Voluntary compliance efforts are not successful, DOL can commence litigation through Solicitor of Labor Penalties may be assessed 36
DOL Enforcement Penalties ERISA 502(c)(9): $100/day ERISA 502(c)(10): $100/day ERISA 502(i): 15% of amount involved in transaction ERISA 502(l): 20% of applicable recovery amount ERISA Penalties Failure to comply with CHIP Failure to comply with GINA Prohibited transaction Breach of fiduciary duty 37
Referral to IRS? Excise Tax under IRC 4980B, 4980D, 4980E, and 4980G Must self-report violations on Form 8928 38
IRS Excise Tax Payment Penalty amount depends on violation: $100/day for each qualifying event connected to one or more COBRA failures Amount increases to $200/day if two or more qualified beneficiaries are involved Basic HIPAA violations and other GHP mandate violations: $100/day for each person to whom the failure applied Archer MSA comparable contribution failure: 35% of the total amount the employer contributed to the Archer MSAs within the calendar year HSA comparable contribution failure: 35% of the total amount the employer contributed to the HSAs within the calendar year 39
IRS Excise Tax Payment If failure not corrected before notice of examination by IRS: Excise tax amount increased to $2,500/person If failure(s) determined to be more than de minimus increased to $15,000/person Limit on Penalty: 4980B & 4980D: single employer plans capped at lesser of $500,000 or 10% of the cost the employer GHP incurred in the preceding tax year 40
IRS Excise Tax Payment Due Date: 4980B & 4980D: due on or before due date for filing federal income tax return 4980E & 4980G: due on or before the 15th day of the 4th month following the calendar year in which non-comparable contributions were made 41
IRS Excise Tax Payment Exceptions: No tax due if: No one liable for the penalty knew or exercising reasonable diligence would have known, that the failure occurred Failure was due to reasonable cause and not due to willful neglect and failure was corrected during the 30-day period beginning on the 1st date anyone liable for the tax knew, or exercising reasonable diligence should have known, that the failure existed 42
IRS Excise Tax Payment Correction principles: Must correct failure retroactively if possible Individual affected must be placed in a financial position that is as good as it would have been had the failure not occurred 43
IRS Excise Tax Payment Notice violations (initial and qualifying event) Premium failures (i.e., charging more than 102%) IRC 4980B Excise Taxes: COBRA violations Failure to offer proper coverage Failure to acknowledge special enrollment rights Failure to offer open enrollment to COBRA qualified beneficiaries 44
IRS Excise Tax Payment HIPAA pre-existing condition Special enrollment rights IRC 4980D Excise Taxes: violations of HIPAA nondiscrimination rules Mental health parity Eligibility, benefits and premiums Compliance with wellness program rules Minimum hospital stays for mothers and newborns Michelle s Law 45
IRS Excise Tax Payment Cover adult children up to age 26 Remove lifetime dollar limits IRC 4980D Excise Taxes:violations of Affordable Care Act provisions Remove annual dollar limits on essential benefits Remove pre-existing condition participants up to age 19 Remove pre-existing condition for all participants effective for plan years beginning on or after 1/1/14 No rescission of coverage 46
IRS Excise Tax Payment New claims, appeal and external review requirements Satisfy SBC requirements IRC 4980D Excise Taxes: Affordable Care Act provisions Cover preventive care services at no-cost Rules on designating primary care providers Rules regarding emergency room coverage 105(h) non-discrimination rules applicable to insured plans 47
IRS Excise Tax Payment IRC 4980E Excise Taxes: Failure to make comparable contributions to Archer MSA IRC 4980G Excise Taxes: Failure to make comparable contributions to Health Savings Account (HSA) 48
How Long Does Audit Take? Response to Document Request: Some items requested pre-visit Usually have 2-4 weeks to gather documents (but can ask for extension) On-site investigation: Agents usually onsite 2-4 days per employee benefit plan Interviews usually last 1-2 hours Closing Depends on findings, can take anywhere from 6 months to a few years 49
HOW CAN WE HELP?
How To Prepare Client for DOL Audit Assist client with gathering correct documents Review documents to ensure compliance Assist with correction of any discovered or known issues Assist with organization of documents Hard copies vs. electronic Reserve space for DOL investigator when on-site Designate contact person to handle communications with DOL investigator Prepare employees for interview with DOL investigator Attend interview Analyze and respond to findings 51
Troubleshooting Electronic communications and recordkeeping Internal audit to make sure that plans contain all necessary disclosures, and that notices are timely and complete May be able to fix items discovered before audit Timely file 5500s/use DFVCP program if filings are late Respond to any internal employee complaints promptly 52
Questions and Answers?
Christine M. Poth Partner, Vorys, Sater, Seymour and Pease LLP, Columbus, OH 614.464.5612 cmpoth@vorys.com JD, The Ohio State University BA, University of Cincinnati Christine s practice focuses on employee benefits and related tax matters. She has experience in the design, implementation and administration of qualified retirement plans, health and welfare plans, insurance benefits, fringe benefits, deferred compensation, and incentive bonus programs. She has significant experience in working with the Internal Revenue Service (IRS) and Department of Labor (DOL) on compliance issues, including Department of Labor audits. She also counsels clients on the Affordable Care Act (ACA), wellness programs, and reporting and disclosure requirements for retirement and health and welfare plans. 54
Patricia A. Moran Of Counsel, Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC, Boston, MA 617.348.3085 PAMoran@mintz.com JD, Syracuse University MPH, Harvard University BA, University of Notre Dame Patricia counsels clients on a variety of employee benefits matters. Notably, Patricia represents clients in a board variety of health and welfare plan matters, including the Affordable Care Act s employer and insurance mandates, COBRA, HIPAA, wellness, and mental health parity. Patricia has represented clients in multiple audits and examinations initiated by government agencies with respect to health and welfare plan matters, including the Massachusetts Department of Unemployment Assistance (relating to Massachusetts health care reform). Patricia works with clients in a variety of sectors, including restaurant, hospitality, consulting, finance, technology, education and staffing. 55
Mark L. Stember Partner, Kilpatrick Townsend & Stockton LLP, Washington, DC 202.508.5802 Mstember@kilpatricktownsend.com JD, Hamline University School of Law LLM, University of Missouri BS, St. Cloud State University Mark Stember concentrates his practice on counseling clients on the tax and related aspects of health and welfare benefits, flexible compensation, fringe benefits, executive compensation, and qualified retirement plans. Mr. Stember has counseled both private and public clients regarding health and welfare plans, cafeteria plans, fringe benefit plans, such as adoption assistance and tuition reimbursement, nonqualified deferred compensation plans, executive split dollar life insurance plans and section 401(k) and pension plans.
Disclaimer Any US tax advice contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. These slides are for educational purposes only and are not intended, and should not be relied upon, as tax or legal advice. Recipients of this document should seek advice based on their particular circumstances from an independent tax advisor or legal counsel.