EDITOR'S OVERVIEW
This month we focus on the EEOC's proposed rules concerning wellness programs. As our colleague, Amy Covert, discusses, a recent change of position by the EEOC provides employers with opportunities to use financial incentives to maximize employee participation in their wellness programs without the risk of running afoul of the ADA. While the rules are not "final rules", the EEOC has stated that compliance with the proposed rules would be considered compliance with the ADA pending final regulations.
As always, please don't forget to review this month's rulings, filings, and settlements of interest. We highlight the First Circuit's ruling on the standard of review applicable to top hat plans, a district court ruling finding that lenders to hedge funds are not liable as ERISA fiduciaries, and settlements on mental health parity claims, excessive fee claims and employer stock fund claims. We also review several pieces of significant guidance over the past several weeks, including new California paid sick leave requirements, IRS correction requirements for elective deferral failures under EPCRS, and USDOL proposed rules defining fiduciary investment advice.
TIPS FOR DESIGNING EMPLOYEE WELLNESS PROGRAMS TO INCENTIVIZE PARTICIPATION WITHOUT VIOLATING THE AMERICANS WITH DISABILITIES ACT*
By Amy Covert**
Introduction
Many companies that provide their employees with health insurance couple those plans with wellness programs that are designed to encourage employees to lead healthier lifestyles. Wellness programs are supposed to be a win-win proposition for both employers and employees—employees become healthier and enjoy a better quality of life, while employers get lower claim costs, lower rates of absenteeism and greater productivity. For that reason, employers have tried to create financial incentives for employees to participate in wellness programs.
A recent change of position by the Equal Employment Opportunity Commission (EEOC), may help to facilitate these efforts. Until recently, the agency had expressed hostility to many wellness plan designs that incorporated financial incentives for participation, claiming that these incentives unlawfully violated the Americans with Disabilities Act (ADA), over which it has jurisdiction. It even went so far as to sue three different employers over their wellness programs in 2014. The EEOC has now reversed course, however, and proposed rules that would provide employers with significant opportunities to use financial incentives to maximize employee participation in their wellness programs—without the risk of running afoul of the ADA.
Background
Among large employers, wellness programs often take the form of health risk assessments or biometric screenings,1 which are designed to identify potential non-genetic health risk factors—such as body mass index, high cholesterol, blood pressure or glucose levels—so that employees can take steps to lessen the risks of preventable, and often catastrophic, health outcomes like diabetes, heart attack and stroke. Because of the perceived health and cost benefits associated with wellness programs, a high percentage of large employers provide financial incentives to encourage employee participation. The EEOC has for some time taken the position that Subchapter I of the ADA prohibits employers from requiring employees to undergo medical examinations unless they are "job-related and consistent with business necessity." In other words, the EEOC's position has been that health risk assessments are medical examinations that are generally prohibited under the ADA unless they are voluntary.
The EEOC previously took the position that almost any financial distinction between employees who took the health risk assessment and those who did not transformed the medical examination into an involuntary program in violation of the ADA—even though both the Health Insurance Portability and Accountability Act (HIPAA) and the Affordable Care Act (ACA) specifically permit such financial incentives.2 The agency brought three lawsuits (all in 2014) challenging employer wellness programs on the basis that each program either provided financial incentives for, or conditioned eligibility for medical benefits on, participation in the program, thus rendering them involuntary programs that violated the ADA.
The EEOC's position was opposed by Congress and the business community. The agency was criticized for taking positions in these litigations that were fundamentally inconsistent with the ACA, which encourages employers to utilize wellness programs to promote employee health and lower health care spending. Congress reacted with legislative initiatives. On March 2, 2015, Senator Lamar Alexander (R–Tenn) and Representative John Kline (R–Minn), together with a number of Republican co-sponsors, introduced the Preserving Employee Wellness Programs Act (H.R. 1189, S. 620). That Bill generally provides that wellness programs that otherwise comply with the wellness program provisions of HIPAA and the ACA will be deemed not to violate the ADA.
In apparent recognition of the criticisms and legislative developments, the EEOC has now changed course. On April 16, 2015, it released a long awaited proposed rule that provides guidance on "voluntary" employee wellness programs
Overview of the EEOC's Proposed Rule3
The EEOC's proposed rule sets forth safe harbor limits on the levels of financial incentives an employer can provide to encourage (but not coerce) participation in health risk assessments and other wellness program offerings. Other provisions of the rule define what constitutes a bona fide "wellness" program, describes specific notice requirements to participants about the medical information requested, and addresses how the confidentiality of medical information will be protected.
Under the proposed rule, a wellness program is considered an employee health program under the ADA when it is "reasonably designed to promote health or prevent disease." The program must not be overly burdensome, a subterfuge for violating the ADA or other laws prohibiting employment discrimination, or highly suspect in the method chosen to promote health or prevent disease.
Under the safe harbor, the proposed rule permits employers to offer incentives of up to 30% of the total cost of an employee-only health plan (including both the employer's and the employee's contributions) for participation in a wellness program. The additional cost for participant and spouse or family coverage may not be taken into account, even if the wellness incentives are offered to spouses and/or dependents. In addition, the incentive can either be styled as a "reward" or a "penalty."
Tips for Designing Wellness Programs
As a result of the EEOC's proposed rule, employers now have significant leeway to design their wellness programs to bolster employee participation without fear of running afoul of the ADA. When reviewing the design of their wellness programs, employers should consider revising their plans to utilize penalties rather than rewards as incentives to boost employee participation rates, especially if reward-based programs have only resulted in lukewarm levels of participation. The social science around human behavior is very compelling that people, in general, are far more responsive to sticks than they are to carrots. Previously, because of the EEOC's apparent greater hostility to penalties or surcharges than to rewards (even though there is no economic difference), most employers structured their wellness program incentives as rewards. Given the EEOC's newly adopted acknowledgment that rewards and penalties are opposite sides of the same economic coin, employers should be able to significantly increase the level of employee participation in their wellness programs—without changing the fundamental economics of such plans—simply by recasting the incentives as penalties.
Employers can also drive up participation rates by increasing the amount of the incentive. Given the EEOC's previous position that almost any financial penalty rendered a wellness program involuntary, many employers were cautious about setting the incentive level at more than a de minimis amount. Now that the EEOC has provided safe harbor guidance for a 30% cap on incentives, employers should consider increasing their incentives to the maximum threshold. Clearly, the greater the reward or penalty for compliance/noncompliance, the more likely it is to grab an employee's attention and thereby drive greater participation in the wellness program. Employers should be cognizant that the 30% cap applies to the employee-only cost and applies to all of an employer's wellness programs combined. Additionally, employers should ensure that the aggregate penalty would not cause the coverage under the plan to exceed the 9.5% "affordability" threshold under the ACA.
Employers should also be sure that their wellness program is a part of a group health plan. The safe harbor proposed rule applies only to group health plans and by tying it to the health plan, state laws such as "smokers' rights laws" can be preempted by ERISA.
In designing the program, employers must ensure that reasonable accommodations are provided to allow sufficient participation in the program for individuals with disabilities. For example, there should be an alternative to a biometric screen that requires a blood draw for hemophiliacs.
To ensure that the program is voluntary under the proposed rule, employers may not (i) require participation in the wellness program, (ii) deny or limit health coverage for employees who choose not to participate, or (iii) take any adverse employment action or retaliate against, interfere with, coerce, intimidate or threaten employees who do not participate or fail to achieve desired health outcomes.
Employers should also be sure to comply with the notice and confidentiality requirements. With respect to the notice requirement, employers should review all plan communications, including the summary plan description and open enrollment materials, for compliance with the proposed rule. The rule requires that the notice to employees clearly set forth what medical information will be obtained; how the medical information will be used; who will receive the medical information; the restrictions on its disclosure; and the methods the employer uses to prevent improper disclosure of medical information. To further protect employee privacy and ensure confidentiality of medical information, the proposed rule requires that any medical information collected through an employee wellness program be provided to an employer only in aggregate terms that do not disclose the identity of specific individuals taking part in the program. Employers should likewise make sure they have their HIPAA firewalls in place to maintain the confidentiality of personal health information.
Employers must be sure to comply with the feedback requirement of the proposed rule. Under the proposed rule, a wellness program must be "reasonably designed to promote health or prevent disease" – that is, designed with an eye toward improving employee health rather than to shift costs of health care from the employer to targeted employees based on their health status. Conducting a health risk assessment or a biometric screening for the purpose of alerting employees of health risks of which they may not be aware would meet the rule's standard. If, on the other hand, the employer does not provide any follow-up information or advice to employees, the wellness program would not be reasonably designed to promote health or prevent disease because the employee would never have received the feedback necessary to take corrective action.
Finally, employers should ensure that their wellness program does not impose an overly burdensome time commitment, require unreasonably intrusive procedures or place significant costs for medical examinations on employees. For example, if an employee had to take a biometric screening at one particular location that was a 6 hour drive from an employee's work location, the EEOC would likely view that requirement as overly burdensome and not within the proposed regulations' safe harbor.
View from Proskauer
The EEOC has stated that compliance with the proposed rule would be considered compliance with the ADA pending final regulations. Accordingly, wellness programs that comply with the proposed rule should have safe harbor protection from challenge by the EEOC, at least until the rules are finalized. Therefore, employers currently designing their wellness programs for the 2016 open enrollment period would be well advised to adhere to these guidelines unless and until further guidance is forthcoming. While the proposed rules are not perfect, they are a vast improvement over the EEOC's prior position and offer employers plenty of opportunity to make effective use of incentives going forward.
RULINGS, FILINGS, AND SETTLEMENTS OF INTEREST
First Circuit Reviews Top Hat Plan Benefits Denial for Abuse of Discretion
By Lindsey Chopin
The First Circuit recently applied an abuse of discretion standard of review to a claim for top hat plan benefits. Plaintiff Robert Niebauer, a former executive of Crane, brought a claim for executive severance plan benefits and a claim under ERISA section 510 for interference with his rights to benefits. The district court granted summary judgment in favor of Crane on both claims, finding that the denial was not arbitrary or capricious, and there was no adverse employment action to support his interference claim. On appeal, Niebauer argued that the district court erred and that it should have followed decisions from the Third and Eighth Circuits holding that top hat plans are unilateral contracts subject to ordinary contract principles and that determinations made under such plans should be reviewed de novo. The First Circuit declined to consider whether such a categorical rule for top hat plans should apply. Instead, it ruled that the distinction between top hat and other plans has no meaning where, as here, the plan grants discretion to the plan administrator. According to the Court, the grant of discretion, even under ordinary contract principles, confers a reasonableness standard equivalent to the deferential review standard ordinarily applied under ERISA. The Court also refused to find a conflict-of-interest based on Crane's alleged desire to retaliate against Niebauer, ruling that such retaliatory intent is properly treated under ERISA section 510. The Court thus affirmed the lower court's finding that the decision was supported by substantial evidence and therefore was not an abuse of discretion. However, the Court vacated the district's dismissal of Niebauer's section 510 claim because it found that the district court improperly applied an abuse of discretion standard of review to that claim. The case is Niebauer v. Crane & Co., 2015 WL 1787931 (1st Cir. Apr. 21, 2015).
Court Finds Lenders to Hedge Fund Not Liable as ERISA Fiduciaries
By Adam Scoll
A federal court recently dismissed ERISA breach of fiduciary
duty claims asserted by Delphi Beta Fund, LLC, a hedge fund,
against two of its bank lenders, because there was no precedent for
applying ERISA's fiduciary duties to a third party lender to a
hedge fund. See Delphi Beta Fund, LLC v. Univest Bank
and Trust Co., 2015 BL 89360 (E.D. Pa. Mar. 27, 2015).
Beta Fund is a hedge fund that consists partly of ERISA-covered
pension plans as investors, and allegedly was holding ERISA
"plan assets" by virtue of the ERISA plan assets
regulation's "Look-Through Rule" (meaning, here,
generally that "benefit plan investors" owned 25% or more
of the equity interests in the fund). Beta Fund's deceased
former manager, William Spiropoulos, allegedly engaged in certain
troublesome loan transactions with the Defendant banks, Univest
Bank and Trust Co. and MileStone Bank, in connection with certain
loans granted to Pheasant Run Hotel, LLC, a portfolio company of
Beta Fund. Beta Fund asserted that, by virtue of the Look-Through
Rule, Beta Fund was over the "ERISA 25% limit" and
holding ERISA "plan assets." Accordingly, Beta Fund
contended that it was an ERISA fiduciary to ERISA-covered plans
invested therein and had standing to assert ERISA breach of
fiduciary duty and prohibited transaction claims against Univest
and MileStone arising out of the Spiropoulos loan
transactions.
The court ruled that the defendant banks were not ERISA fiduciaries
and did not engage in non-exempt "prohibited
transactions." In so ruling, the court found that Beta Fund
failed to provide any precedent for applying ERISA's fiduciary
duties to a third party lender to a hedge fund, and stated that if
it accepted Beta Fund's argument, "virtually anyone
dealing with Beta Fund could be charged with ERISA's fiduciary
duties." In the court's view, neither bank had any
"control" over Beta Fund, nor did the banks do anything
other than enter into a typical loan with Spiropoulos regarding
construction of a hotel project and then act in accord with its
contractual remedies.
The court accordingly held that, since neither bank was acting as
an ERISA fiduciary to Beta Fund, they could not have breached any
ERISA fiduciary duty to Beta Fund, nor could they have engaged in a
non-exempt "prohibited transaction" under Section 406(b)
of ERISA (which prohibited transaction rules are only applicable to
ERISA fiduciaries). Beta Fund's claim that the banks assisted
in a "prohibited transaction" under Section 406(a) of
ERISA (which may be applicable to non-fiduciaries) also failed
because such a claim requires "knowing participation" by
the banks, which was not sufficiently alleged in the pleadings.
MHPA Class Action Settlement
By Madeline Chimento Rea
A federal district court in Washington recently granted preliminary approval to a $6 million settlement of a mental health parity class action suit against Regence Blueshield. Plaintiffs claimed that defendants routinely excluded and limited coverage of the essential therapies to treat children with developmental disabilities. A fairness hearing is scheduled for September 11, 2015. The case is K.M. v. Regence Blueshield, No. 13-1214 (W.D. Wash. Apr. 22, 2015).
Ameriprise Agrees to Pay $27.5 Million to Settle Fiduciary Breach and Prohibited Transaction Claims
By Joseph Clark
Defendants Ameriprise Financial, Inc., the fiduciary committees
of the Ameriprise 401(k) plan, and individual committee members
agreed to settle a lawsuit brought by a class of participants in
the Ameriprise 401(k) plan for $27.5 million. In the lawsuit,
plaintiffs alleged: (i) fiduciary breaches associated with (a)
using an affiliate as a recordkeeper and failing to ensure
recordkeeping fees and expenses were reasonable and (b) including
proprietary and high cost investments in the 401(k) plan; and (ii)
prohibited transactions associated with Ameriprise's receipt of
compensation from the 401(k) plan as a result of these fiduciary
breaches.
In addition to the payment of $27.5 million, the settlement
agreement calls for a three-year settlement period during which
defendants will conduct a competitive RFP bidding process for
recordkeeping and investment consulting services. Among other
things, defendants also agreed that during the settlement period
they will refrain from receiving compensation for administrative
services provided to the 401(k) plan other than reimbursement of
direct expenses as permitted by ERISA. Defendants also agreed to
pay fees to the plan recordkeeper on a flat fee or fee per
participant basis only.
The case is Krueger v. Ameriprise Financial, Inc., D.
Minn. Case No. 11-cv-02781.
Settlement Reached in Stock-Drop Case
By Joseph Clark
A class of former LandAmerica Financial Group employees agreed
to a $5 million settlement of stock-drop claims arising from
LandAmerica's 2008 bankruptcy, and have submitted the agreement
for court approval. LandAmerica filed for bankruptcy following the
2008 collapse of its title insurance subsidiary. The complaint
alleged that certain LandAmerica directors and officers breached
their fiduciary duties by, among other things, (i) imprudently
investing in LandAmerica stock even though they knew that its title
insurance subsidiary was backed by inherently risky subprime
mortgage loans, and (ii) concealing the truth about
LandAmerica's deteriorating condition. The value of LandAmerica
stock in the company's 401(k) plan fell from just over $28
million to $76,552.
The case is Borboa v. Chandler, E.D. Va Case No.
13-cv-00844.
New California Paid Sick Leave Requirements Effective July 1, 2015
By Mary Bresnan
Beginning July 1, 2015, California employers will be required to
grant paid sick leave to nearly all California employees in
compliance with California's new paid sick leave law, the
Healthy Workplaces, Healthy Families Act of 2014. The law
applies to all employers who employ at least one employee who works
in California for at least 30 days in a given year, and covers any
such employee, including part-time, temporary, and/or seasonal
employees. The law includes rules regarding accrual rates,
carryover of unused time, usage, payment (including amounts and
timing), notices to employees, workplace posters, recordkeeping and
retaliation.
For more information on the requirements of the new California law,
please refer to our California Employment Law Blog.
You may also learn more about the law and how to manage
implementation in our upcoming webinar on April 29, 2015.
IRS Relaxes Correction Requirements for Elective Deferral (But Not After-Tax Contribution) Failures under EPCRS
By Damian A. Myers
Less than a week after issuing significant modifications to the
Employee Plans Compliance Resolution System (EPCRS) (as described
in our March 31, 2015
blog), the Internal Revenue Service (IRS) further modified
EPCRS through the release of Revenue Procedure 2015-28. The new guidance
provides welcome relief (provided certain requirements are met)
from the current standard (or safe harbor) EPCRS correction method
for elective deferral failures, which has been widely viewed as
providing affected participants with a windfall. Also, in an effort
to facilitate the adoption of automatic contribution arrangements
and prompt correction of failures, the IRS has established
favorable safe harbor correction methods for elective deferral
failures.
The most recent restatement of EPCRS, Revenue Procedure 2013-12, provides a standard
correction method for elective deferral failures under 401(k) and
403(b) plans. An elective deferral failure occurs when the plan
administrator fails to correctly implement a participant deferral
election or automatic deferral. The current standard correction
method for elective deferral failures requires a plan sponsor to
make a qualified nonelective contribution (QNEC) to the plan on
behalf of affected participants to compensate the participants for
their missed deferral opportunity. In general, this QNEC is equal
to the sum of 50% of the amount the affected participant would have
deferred from pay had the elective deferrals been properly
implemented (40% in the case of a failure to implement an after-tax
election), plus 100% of the matching contributions the affected
participant would have received, plus earnings.
Although the mantra of EPCRS is to put affected participants in the
same position they would have been in had a failure not occurred,
the current standard correction method is generally considered to
provide a windfall in the sense that participants benefit from a
"free" allocation of elective deferrals (albeit 50% of
what they elected) without having to actually reduce their salary.
Recognizing that the standard correction is often costly for plan
sponsors, Rev. Proc. 2015-28 provides for new, relaxed safe harbor
correction methods for elective deferral failures.
Interestingly, the new correction methods described in Rev. Proc.
2015-28 do not apply to failures to implement deferrals of
after-tax employee contributions. For purposes of EPCRS,
"elective deferrals" means pre-tax elective deferrals and
separate rules are provided in Appendix A for after-tax employee
contribution deferrals (although the original standard correction
method is the same except for the QNEC required (50% versus 40%)
for the missed contributions). The modifications to Appendix A in
Rev. Proc. 2015-28 do not mention after-tax employee contributions.
Perhaps future guidance will expand the new correction methods to
include after-tax employee contribution failures.
The new correction methods, and the conditions that must be met to
use them, are described below.
- Elective Deferral Failures for Plans
with Automatic Contribution Features. If a plan administrator fails
to implement automatic contributions when there is no election
otherwise (including automatic escalation of elective deferral
contributions), or fails to implement an affirmative election to
contribute more than the automatic contribution rate, no QNEC equal
to 50% of missed elective deferrals is required if the following
conditions are met:
- The failure does not extend beyond 9-1/2 months after the end of the plan year in which the failure first occurred.
- Elective deferrals at the correct rate begin no later than the first payroll date following the period described above, or, if earlier, the first payroll date following the end of the month after the plan administrator receives notice of the failure from an affected participant.
- The plan administrator sends a notice to affected participants within 45 days after the correction. This notice must include an explanation of the error and how it was corrected, a statement that a contribution has been made to compensate for missed matching contributions, a statement that the participant is able to increase his or her election to make up for missed deferrals, and contact information in the event the participant has questions.
- A QNEC for missed matching contributions, plus earnings, is made no later than the end of the second plan year following the year in which the failure first occurred. If no affirmative investment election has been made, earnings may be determined based on the default investment option, provided that any losses cannot offset the QNEC.
This new correction method is available for eligible elective deferral failures occurring on or before December 31, 2020. The IRS will consider whether the correction method should be extended at a later date. - Elective Deferral Failures Unrelated
to Automatic Contributions. The new guidance provides for two
relaxed safe harbor correction methods for elective deferral
failures unrelated to automatic contributions. Where the elective
deferral failure persists for three or fewer months, no QNEC for
the missed elective deferrals is needed provided the plan
administrator timely corrects the failure and meets notice
requirements similar to that described above. Although this
correction method is more favorable than the standard correction,
plan administrators should be aware that the new guidance did not
make any modifications to Appendix B of Rev. Proc. 2013-12, which
contains a special rule for brief elective deferral failures. Under
that special rule, if the elective deferral failure only occurs
during the first three months of a plan year, no QNEC for the
missed elective deferrals is necessary (a QNEC for missed matching
contributions, plus earnings, is still required). The special rule
does not include a notice requirement.
Where the elective deferral failure extends beyond three months, but not beyond the end of the second plan year following the plan year in which the error occurred, the failure may be corrected by making QNEC equal to 25% of the missed deferral (plus any missed matching contributions and earnings). This correction method is available if the correction is timely implemented and the plan administrator meets the notice requirements described above.
By reducing the QNEC required for the correction, the IRS is making it easier for plan sponsors to implement corrections and, thereby, incentivizing employers to adopt automatic contribution arrangements and to promptly correct elective deferral failures as they occur. The timing and notice conditions do not appear to be onerous, so overall, these modifications are certainly welcome. Rev. Proc. 2015-28 does not supersede Rev. Proc. 2013-12, so plan administrators should ensure compliance with Rev. Proc. 2013-12, subject to the modifications described above and in Revenue Procedure 2015-27, when implementing any correction.
EEOC's Proposed Wellness Regulations Add Burdensome Notice Requirement; Still Prohibit Mandatory HRAs
By Stacy Barrow, Emily Erstling and Damian A. Myers
On April 16, 2015, the Equal Employment Opportunity Commission (EEOC) released proposed regulations covering wellness programs that involve disability-related inquiries or medical examinations. The release of the proposed regulations follows months of EEOC enforcement actions against employers alleging that wellness programs sponsored by the employers violated the Americans with Disabilities Act (ADA) despite compliance with 2013 regulations jointly issued by the Department of Labor (DOL), the Department of the Treasury (Treasury) and the Department of Health and Human Services (HHS) that permitted such programs under ERISA and the Affordable Care Act (ACA). With a few notable exceptions (described below), the proposed regulations are somewhat consistent with the existing DOL guidance on employer-sponsored wellness programs. However, the EEOC has requested comments on multiple topics that could significantly alter the regulatory requirements.
Background
ERISA prohibits group health plans and group health insurance
issuers from discriminating against covered individuals based on a
health factor. An exception to the nondiscrimination rule allows
premium discounts or other rewards (including avoidance of a
penalty) in return for participation in wellness programs. The DOL,
Treasury and HHS jointly issued regulations related to the wellness
program exception to the nondiscrimination rule in 2006, and these
regulations were updated in 2013 following the passage of the ACA
(the 2013 regulations are referred to as the "DOL
regulations" in this blog post).
The DOL regulations describe two types of wellness programs –
participatory programs and health-contingent wellness programs
(which are further divided into activity-only and outcome-based
programs). Participatory programs are those programs that either do
not provide a reward or do not require that a participant complete
an activity or satisfy a condition related to a health factor in
order to receive an award. Because participatory programs are not
based on a health factor, they do not implicate HIPAA's
nondiscrimination rule as long as they are available to all
similarly situated individuals regardless of health status.
Examples of participatory programs include: reimbursement of gym
membership; reimbursement of cost of smoking cessation programs
without regard to whether employees quit; reward for attending a
monthly health education seminar; and completion of a health risk
assessment (HRA) without any further action (educational or
otherwise) required by employees as a result of issues identified
by the questionnaire.
Health-contingent wellness programs require individuals to complete
an activity or satisfy a standard related to a health factor in
order to receive an award. These programs must satisfy four
requirements to be nondiscriminatory under ERISA: (i) eligible
individuals must be able to qualify once per year; (ii) the maximum
incentive amount is 30% of the self-only cost of coverage (taking
into account both the employee and employer share of the cost), or
if covered dependents can also participate, 30% of the cost of the
coverage the employee is enrolled in; (iii) the program is
reasonably designed to promote health or prevent disease and (iv)
the program is available to all similarly situated individuals. DOL
regulations provide more detail on each of these
requirements.
Since their release, the DOL regulations have served as a guide for
employers establishing wellness programs. However, during a meeting
in May 2013, the EEOC stated that wellness programs could violate
regulations under the ADA and recognized that guidance regarding
the interplay between the ADA and wellness programs was needed.
However, before issuing regulations or other guidance under the
ADA, the EEOC initiated a number of enforcement actions against
employers. Some of these actions were brought against employers
that established programs that were in compliance with existing DOL
regulations. Due to the apparent conflict between the EEOC's
position on wellness programs and the DOL regulations, employers
and other stakeholders advocated for specific EEOC guidance.
EEOC's Proposed Regulation
The ADA requires employers to provide reasonable accommodations
to enable disabled individuals to have equal access to fringe
benefits and prohibits employers from requiring medical
examinations or requesting medical information for the purpose of
making disability-related inquiries. However, the ADA provides an
exception to this rule allowing voluntary medical exams (or
requesting voluntary medical histories) which are part of an
employee health program, including wellness programs. The
EEOC's proposed regulations focus on the ADA exception for
voluntary programs that involve disability-related inquiries or
medical exams.
The EEOC's apparent concern is that incentives or rewards under
wellness programs may be so valuable that eligible individuals are
economically coerced into participating, thereby violating the ADA
requirement that the program be voluntary. Therefore, the proposed
regulations provide that a wellness program will be considered to
be voluntary if it meets the following requirements:
- It does not require employees to participate;
- It does not condition coverage under a group health plan on participation in the program;
- It does not penalize non-participation (other than the failure to receive the reward); and
- When it is part of a group health plan, employees receive a notice that describes the medical information that will be obtained and the purposes for which it will be used and explains the restrictions on disclosure of the information.
In addition to the EEOC's voluntary requirement, the EEOC
proposed regulations diverge from the DOL regulations in important
respects. First, in contrast to the DOL regulations, which do not
restrict the size of reward under a participatory wellness program,
the proposed EEOC guidance seeks to extend the 30% maximum award to
participatory wellness programs that require employees to answer a
health questionnaire with disability-related inquiries or take
medical examinations. This would mean, for example, that the reward
for participating in a biometric screening program (that does not
base the reward on the result of the screening) would be capped at
30% even though there is no maximum under the DOL regulations. The
EEOC's rationale for this proposal is that, in the EEOC's
estimation, participatory programs rarely offer incentives in
excess of 30%. However, this rule prohibits employers from
requiring employees to complete an HRA in order to be eligible to
participate in the plan, a practice that is permitted under DOL
rules as long as the results of the HRA are not used to determine
eligibility.
A second difference relates to how the proposed regulations apply
the 30% limit in general. The EEOC proposed regulations set the
maximum reward at 30% of the self-only cost of coverage (taking
into account both the employee and employer share of the cost). The
DOL regulations allow a reward to be a maximum of 30% of the cost
of family coverage if the wellness program is extended to covered
dependents. Additionally, the ACA allows the DOL to increase the
30% limit to 50%, and the DOL has done so by expanding the 30%
limit by an additional 20% to the extent that the additional
percentage is in connection with a program designed to prevent or
reduce tobacco use. The EEOC regulations do not contain similar
flexibility. Nevertheless, the DOL-approved limit of 50% for
tobacco-based programs remains acceptable as long as the program
does not involve a medical exam or disability-based inquiry.
Finally, when the wellness program is part of a group health plan,
the EEOC regulations require that employers provide a detailed
notice to participants separate from other notices already required
under the HIPAA. The notice must explain what medical information
will be obtained, who will receive the information, how the
information will be used, the restrictions on disclosure of the
information and the methods the covered entity will employ to
prevent improper disclosure of the medical information. The DOL
regulations do not contain similar notification requirements. The
EEOC's proposed notice requirement will likely be a burden on
employers, as the notice requires more detail than standard HIPAA
notices and must be tailored for each wellness program.
Although the proposed regulations are a step in the right direction
toward existing DOL regulations, the EEOC has requested comments on
a number of topics that could significantly alter the regulations.
For example, the EEOC has requested comments on whether additional
protections are needed for low-income individuals. This would
include placing restrictions on programs that could result in
unaffordable coverage if a reward is not obtained. For this
purpose, affordability would be based on the standard established
under the ACA. Additionally, the EEOC has requested comments
regarding the definition of "voluntary", including
whether changes are necessary to reconcile the proposed regulations
with DOL regulations.
Overall, the EEOC's release of proposed regulations is a
welcome development for employers sponsoring wellness programs,
particularly given the EEOC's recent practice of bringing
enforcement actions in the absence of guidance. Given the
wide-range of comments requested, the final regulations could be
significantly different than the proposed regulations. Employers
should review their current programs in light of the EEOC guidance
and consider summiting comment letters if the proposed EEOC
requirement could require significant changes.
To read this Newsletter in full, please click here.
Footnotes
* Originally published in Bloomberg, BNA. Reprinted with permission.
** Amy Covert is a partner in the New York office of Proskauer Rose LLP, where she defends plan sponsors and fiduciaries in all types of ERISA litigation.
[1] A health risk assessment is typically a questionnaire that employees complete on their own, while biometric screenings typically take the form of third party administered tests, such as a blood draw, that elicit the desired health information. For purposes of this article, I will refer to both as "health risk assessments."
[2] HIPAA prohibits discrimination on the basis of health status. Following changes made by the ACA, the Department of Health and Human Services, the Department of Labor, and the Department of the Treasury released final regulations on nondiscriminatory wellness programs under HIPAA.
[3] This article assumes that the reader is already familiar with the proposed rule and is not intended to provide a detailed summary of its provisions.
The ERISA Litigation Newsletter - May 2015
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
