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Group Health Plan Fiduciary Litigation on the Rise

June 18, 2024

Enforcement of the strict standards of fiduciary conduct set forth in the Employee Retirement Income Security Act (ERISA) has traditionally been reserved for retirement plan sponsors. However, a new class action lawsuit highlights the importance of employers’ adherence to their fiduciary duties when managing their group health plans.

The lawsuit, filed against Johnson & Johnson (J&J), alleges the company violated its ERISA fiduciary duties by mismanaging its prescription drug benefit, which cost the health plan and participants millions of dollars. It serves as a reminder to employers that they must prudently select and monitor plan service providers, such as pharmacy benefit managers (PBMs).

Although it is the first case of its kind, more fiduciary litigation involving the management of prescription drug benefits is expected as the PBM industry faces increasing scrutiny and new transparency laws provide employees with more information regarding health care costs. This Compliance Overview includes tips to help employers understand the basic fiduciary responsibilities applicable to group health plans under ERISA to mitigate liability.

Fiduciary Responsibilities

ERISA requires fiduciaries to discharge their duties regarding employee benefit plans:

  • Solely in the interest of plan participants and beneficiaries;

  • For the exclusive purpose of providing plan benefits or for defraying reasonable expenses of plan administration; and

  • With the care, skill, prudence and diligence that a prudent person in similar circumstances would use.

The duty to act prudently is one of a fiduciary’s central responsibilities.

Health Plan Transparency

  • Group health plans and issuers are subject  to new requirements designed to increase health care price transparency, which come from final rules issued in 2020 and the Consolidated Appropriations Act of 2021.

  • Most employers rely on their issuers, TPAs and other service providers to satisfy many of these requirements.

  • Employers should confirm that written agreements with their issuers, TPAs or other service providers are updated to address this compliance responsibility.

Overview of Fiduciary Responsibilities

ERISA includes standards of conduct for those who manage employee benefit plans and their assets, who are called fiduciaries. Thus, understanding fiduciary responsibilities is essential for a group health plan’s security and compliance with the law. ERISA requires fiduciaries to discharge their duties with respect to employee benefit plans:
 

  • Solely in the interest of plan participants and their beneficiaries;

  • For the exclusive purpose of providing plan benefits or for defraying reasonable expenses of plan administration;

  • With the care, skill, prudence and diligence that a prudent person in similar circumstances would use;

  • By diversifying the plan’s investments to minimize the risk of large losses; and

  • In accordance with the plan’s documents (unless inconsistent with ERISA).
     

The duty to act prudently is one of a fiduciary’s central responsibilities. As highlighted in the J&J lawsuit, ERISA requires fiduciaries to prudently select and monitor plan service providers while considering various factors, including the service provider’s fees and expenses.

Employer Compliance Tips

In light of health plan price transparency laws and increased scrutiny of the PBM industry, it is necessary for group health plan fiduciaries to reevaluate their fiduciary compliance to limit their liability. One way fiduciaries can demonstrate that they have carried out their responsibilities properly is by documenting the processes used to carry out their fiduciary responsibilities. The following tips can be used to ensure compliance:

  1. Identify plan fiduciaries and consider forming a fiduciary committee. Have you identified your plan fiduciaries in the plan document, and are they clear about the extent of their responsibilities?

  2. Schedule routine training and meetings. Have you established ongoing training to ensure plan fiduciaries understand their obligations? Do plan fiduciaries meet regularly? Is there a process for recording meeting minutes?

  3. Evaluate third-party service providers. If you are hiring third-party service providers, have you looked at several providers, given each potential provider the same information, and examined whether the fees are reasonable for the services provided? Have you explored market alternatives?

  4. Revisit existing third-party agreements. Have you documented the hiring process of third-party service providers and detailed the plan fees that may apply? Have you enumerated contractual obligations regarding compliance with health plan transparency provisions?

  5. Monitor service providers. Are you prepared to monitor your plan’s service providers?

  6. Establish and document claims procedures. Does your plan have a reasonable claims procedure that plan fiduciaries follow? Are you prepared to support any decisions made regarding entitlement to plan benefits?

  7. Review plan documents. Have you reviewed your plan document in light of current plan operations and made necessary updates? After amending the plan, have you provided participants with an updated summary plan description or summary of material modifications?

  8. Establish a process for participant contributions. Are you aware of the schedule for depositing participant contributions and payments by participants to the plan and forwarding them to the insurance company? Have you made sure it complies with the law?

  9. Secure fiduciary liability insurance. Have you purchased fiduciary liability insurance, and have you determined the scope of coverage? Does it extend to health plan activities? Is the policy carefully reviewed prior to renewal? 

  10. Ensure appropriate bonding arrangements. Are plan fiduciaries and others handling plan funds properly bonded to protect the plan against loss due to fraud or dishonesty? ERISA requires every person, including fiduciaries and third-party service providers, who handles plan funds or other plan property to be covered by a fidelity bond with limited exceptions. This is different from fiduciary liability insurance because it is required by ERISA and protects the plan rather than the fiduciaries.

  11. Satisfy disclosure requirements. Have you filed required reports, such as Form 5500, with the government in a timely manner?

  12. Consult with ERISA counsel. Have you consulted with experienced ERISA counsel to ensure full compliance with your fiduciary obligations, considering new transparency laws? 
     

Possible Consequences of a Fiduciary Breach

A person who is an ERISA fiduciary can be liable for a breach of fiduciary duty. Fiduciaries who do not follow the basic standards of conduct may be personally liable to restore any losses to the plan or any profits made through improper use of the plan’s assets resulting from their actions. A fiduciary’s liability for a breach may also include a 20% penalty assessed by the DOL, removal from their fiduciary position, and in extreme cases, criminal penalties.

Note that the DOL maintains a voluntary correction program for fiduciary breaches. The Voluntary Fiduciary Correction Program allows plan officials who have identified certain violations of ERISA to take corrective action to remedy the breaches and voluntarily report the violations to the DOL without becoming the subject of an enforcement action.

This Compliance Overview is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice. ©2019 2020, 2022-2024 Zywave, Inc. All rights reserved.

Upcoming 5500 Filing Deadline

April 23, 2024

Employers that are subject to ERISA must file an annual report (Form 5500) with the Department of Labor (DOL) for their employee benefit plans. The Form 5500 must be filed by the last day of the seventh month following the end of the plan year, unless the employer requests an extension or may be exempt.


Small welfare benefit plans that are unfunded or fully insured (or a combination of unfunded and insured) are exempt from the Form 5500 filing requirement. A small welfare benefit plan is one that has fewer than 100 participants at the beginning of the plan year.


A welfare benefit plan is unfunded if benefits are paid as needed directly from the general assets of the employer. Plans that use a trust or separately maintained fund to pay benefits are not considered unfunded. A plan is insured if benefits are paid through insurance policies. If premiums are paid by employees, the employer must forward the employee contributions no later than three months after receipt.

Links & Resources

Form 5500 Basics

Each year, employers must file an annual report with the DOL for their ERISA-covered employee benefit plans, unless a filing exemption applies. The annual reporting obligation is generally satisfied by filing the Form 5500 “Annual Return/Report of
Employee Benefit Plan,”
including all required schedules and attachments.


The Form 5500 must be filed by the last day of the seventh month following the end of the plan year, unless an extension applies. For calendar year plans, the deadline is normally July 31 of the following year. If the filing due date falls on a Saturday, Sunday or federal holiday, the Form 5500 may be filed on the next day that is not a Saturday, Sunday or federal holiday. An employer may request a one-time extension of two and one-half months by filing IRS Form 5558 by the normal due date of the Form 5500. If the Form 5558 is filed on or before the normal due date of the Form 5500 or 5500-SF, the extension is automatically granted.


The DOL may assess penalties of up to $2,670 per day for each day an employer fails or refuses to file a complete Form 5500. The DOL has a correction program that allows employers to voluntarily file overdue Forms 5500 and pay reduced penalties.

Form 5500 Exemption

Small welfare benefit plans are exempt from the Form 5500 filing requirement if they are unfunded or insured (or a combination of unfunded and insured). Welfare benefit plans include, for example, group medical plans, group dental and vision plans, health flexible spending accounts (FSAs), health reimbursement arrangements (HRAs), group life insurance benefits and disability benefits.


Requirements for Exemption:

  • Must be a small welfare benefit plan (fewer than 100 covered participants at beginning of plan year) Must be unfunded, insured or a combination of unfunded and insured

  • In addition, welfare benefit plans that are subject to the Form M-1 filing requirement for multiple employer welfare arrangements (MEWAs) are not eligible for this exemption.

Small Welfare Benefit Plans

For purposes of the Form 5500 exemption, small plans are those with fewer than 100 covered participants at the beginning of the plan year.
 
Counting Participants
To determine whether the small plan exemption applies, employers should count the number of employees participating in the plan as of the beginning of the plan year. “Participant” includes only employees and former employees (for example, COBRA beneficiaries) who are participating in the plan. Covered dependents (for example, spouses, domestic partners and children) are NOT counted as participants when determining whether a plan qualifies for the small plan exemption.

 

Number of Plans
Employers will need to determine how many separate ERISA plans they maintain to accurately count the number of participants in each plan.


A common practice for employers is to combine more than one type of ERISA welfare benefit (for example, group medical insurance, life insurance, dental and vision insurance and a health FSA) into a single plan, often using a wrap plan document to achieve this. According to the DOL’s instructions to the Form 5500, an employer must “review the governing documents and actual operations to determine whether welfare benefits are being provided under a single plan or separate plans.”
 

COMPLIANCE TIP

Employers should consider the impact on the Form5500 filing requirement when deciding whether to combine different ERISA benefits under one plan or maintain separate plans. An advantage to having a single plan for all benefits is that the employer is required to file only one Form 5500 for the plan (assuming the plan has 100 or more participants). However, combining benefits together under one plan may also trigger the Form 5500 filing obligation for benefits that would not be subject to the Form 5500 if they were maintained in separate plans (because of the benefits, on their own, have fewer than 100 participants).

Fluctuating Plan Participant Numbers
A small welfare benefit plan that has fewer than 100 participants at the beginning of the plan year will qualify for the exemption even if the number of participants increases during the plan year to 100 or more. However, the plan will be subject to the Form 5500 requirement for the next plan year if it continues to have 100 or more participants at the beginning of that plan year.


Similarly, a welfare plan that has 100 or more participants at the beginning of the plan year will not qualify for the Form 5500 exemption for that plan year, even if the number of participants decreases during the plan year to fewer than 100. This plan, however, may qualify for the exemption for the next plan year, if it continues to have fewer than 100 participants at the beginning of that plan year.

There are special Form 5500 reporting codes for welfare benefit plans that qualify for the small plan exemption for some plan years, but not all plan years, based on fluctuating participant numbers.

  • Plans that are filing for the current year but will be exempt for the next plan year should enter “4R” on line 8b of the Form 5500.

  • Plans that were exempt for the previous year, but are no longer exempt and must resume filing, should enter “4S” on line 8b of the Form 5500.

EXAMPLE

A fully insured group medical plan has 75 participants at the beginning of the plan year and 105 participants at the end of the plan year. The Form 5500 exemption for small plans applies, even though the plan has more than 100 participants by the end of the plan year, becasue it had fewer than 100 participants at the beginning of the plan yaer and otherwise satisfied the conditions of the exemption.

ENTER AR on Line 8b

Welfare benefit plans that will not file a Form 5500 for the next plan year pursuant to the exemption for small welfare benefit plans.

ENTER 4S on Line 8b

Welfare benefit plans that stopped filing Form 5500 in an earlier plan year due to the exemption for small welfare benefit plans, but no longer qualify for the exemption.

Unfunded and Insured Plans

Unfunded Plans

Unfunded plans are those whose benefits are paid as needed directly from the general assets of the employer that maintains the plan. Plans that are NOT unfunded include those plans that used a trust or separately maintained fund to hold plan assets or act as a conduit for the transfer of plan assets during the year.

COMPLIANCE TIP

Employers with self-funded plans that use a separate fund or account for paying benefits (such as level-funded plans) should consult with their legal advisors (and level-funded plan providers, as applicable) to determine whether their plans are considered unfunded for the Form 5500 exemption.

In addition, a plan will not be considered unfunded if it received employee contributions during the plan year. However, based on a DOL non-enforcement policy, if employee contributions are made through a Section 125 cafeteria plan, the welfare benefit plan may be treated for annual reporting purposes as unfunded (assuming its benefits are paid from the employer’s general assets, and not from a trust or separately maintained fund). This non-enforcement policy also extends to COBRA contributions and other after-tax participant contributions (for example, retiree contributions) received in connection with a Section 125 cafeteria plan.


Insured Plans
Insured plans are those whose benefits are paid solely through insurance contracts or policies. The insurance contracts or policies must be issued by an insurance company or similar organization that is qualified to do business in any state. Premiums must be paid directly to the insurance carrier by the employer from its general assets. Alternatively, premiums may be paid partly from an employer’s general assets and partly by employee contributions, if the employer forwards the employee contributions no later than three months after receipt.


In addition, to qualify for the exemption, insurance refunds to which plan participants are entitled must be returned to them within three months of receipt by the employer. Participants must also be informed when they start participating in the plan about the plan’s provisions for allocating insurance refunds. This explanation is often included in the plan’s summary plan description (SPD).

COMBINATION UNFUNDED / INSURED PLANS

A small welfare benefit plan may qualify for the Form 5500 exemption if it has a combination of unfunded and insured benefits. A combination unfunded/insured welfare benefit plan has its benefits provided partially as an unfunded plan and partially as a fully insured plan. For example, a welfare benefit plan may have an unfunede medical benefit and an insured life insurance benefit.

Form 5500-SF​

Small plans that do not qualify for a filing exemption may be able to use a simplified form (Form 5500-SF “Short Form Annual Return/Report of Small Employee Benefit Plan”) for the annual reporting requirement. To be eligible to use the Form 5500-SF, the plan must:

  • Be a small plan (that is, generally have fewer than 100 participants at the beginning of the plan year);

  • Meet the conditions for being exempt from the requirement that the plan’s books and records be audited by an independent qualified public accountant;

  • Have 100% of its assets invested in certain secure investments with a readily determinable fair value; Hold no employer securities; and

  • Not be a multiemployer plan and not be required to file a Form M-1 for the plan year.

 

This Compliance Overview is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice. ©2019-2020, 2022-2024 Zywave, Inc. All rights reserved.
 

Employers Must File ACA Returns Electronically by April 1, 2024

March 12, 2024

The Affordable Care Act (ACA) created reporting requirements under Internal Revenue Code (Code) Sections 6055 and 6056. Under these rules, certain employers must provide information to the IRS about the health plan coverage they offer (or do not offer) to their employees. 


Under the original rules, any reporting entity that was required to file at least 250 individual statements under Sections 6055 or 6056 had to file electronically. However, on Feb. 23, 2023, the IRS released a final rule implementing a law change by the Taxpayer First Act of 2019, which lowers the 250-return threshold for mandatory electronic reporting to 10 returns. This means most reporting entities will be required to complete their ACA reporting electronically starting in 2024.


This ACA Compliance Bulletin describes the process for reporting electronically under Sections 6055 and 6056.

Action Steps

Employers that have not requested an extension or an electronic filing waiver, and that are subject to the ACA reporting rules should be exploring options for filing ACA reporting returns electronically to ensure filing is completed by the April 1, 2024, deadline. For example, they may be able to work with a third-party vendor to complete the electronic filing. 


Reporting entities that may be in a position to perform their own electronic reporting can review the IRS’ ACA Information Returns (AIR) Program main page for more information on the reporting standards for composing and successfully transmitting compliant submissions to the IRS.


The IRS has designated the AIR Help Desk as the first point of contact for electronic filing issues (1-866-937-4130).

Mandatory Electric Filing

Original Threshold
Under the original reporting rules, any reporting entity that was required to file at least 250 individual statements under Sections 6055 or 6056 had to file electronically.

 

New, Expanded Threshold
Reporting entities that file at least 10 returns during the calendar year must file their ACA returns electronically beginning in 2024.

 

Important Dates

March 1, 2024
The deadline for individual statements to be furnished. (An alternative method of furnishing Form 1095-B is available.)


April 1, 2024
The deadline for filing 2023 returns with the IRS electronically.

Electronic Reporting Process
The following steps must be completed by entities that submit electronic returns through the AIR Program:

  • Step One: Register to use IRS e-Services tools and apply for the ACA Application for Transmitter Control Code (TCC). Reporting entities that are using third-party vendors—and are not transmitting information returns directly to the IRS—should not apply for a TCC.

  • Step Two: Pass all applicable test scenarios. Software developers are required to annually pass ACA Assurance Testing System (AATS) testing to transmit information returns to the IRS, and those who passed testing for any tax year ending after Dec. 31, 2014, do not need to test for the current tax year. Transmitters and issuers must use approved software to perform the communications test, which is only required to be successfully completed once.

Additional details and IRS resources are available on the IRS’ AIR Program main page.


Waiver From Electronic Filing Requirement
A hardship waiver may be requested from the electronic filing requirement by submitting Form 8508, Application for Waiver from Electronic Filing of Information Returns, to the IRS. Reporting entities are encouraged to submit Form 8508 at least 45 days before the due date of the returns, but no later than the due date of the returns. The IRS does not process waiver requests until Jan. 1 of the calendar year the returns are due.


According to the Form 8508 instructions, a reporting entity’s first request for a waiver will be automatically granted. However, if a reporting entity has requested a waiver in the past, they must attach required cost estimates or a written statement justifying their application for a waiver to electronically file. Examples include:

  • Undue financial hardship in which the cost of filing the information returns exceeds the cost of filing the returns on other media. Two cost estimates comparing the filing of information returns electronically with the cost to file in paper form must be attached.

  • Business suffered a catastrophic event in a federally declared disaster area that made the business unable to resume operations or made necessary records unavailable.

  • Fire, casualty, or natural disaster affected the operation of the business.

  • Death, serious illness, or unavoidable absence of the individual responsible for filing the information returns affected the operation of the business.

  • Business was in its first year of establishment.

  • Foreign entity who is unable to file electronically due to inability to obtain software, third party provider, or other issues outside of their control.

Reporting entities cannot apply for a waiver for more than one tax year at a time and must reapply at the appropriate time for each year a waiver is required. Any approved waivers should be kept for the reporting entity’s records only. A copy of an approved waiver should not be sent to the service center where paper returns are filed.
If a waiver for original returns is approved, any corrections for the same types of returns will be covered under the waiver. However, if original returns are submitted electronically, but the reporting entity wants to submit corrections on paper, a waiver must be approved for the corrections if the reporting entity must file 10 or more corrections.


Without an approved waiver, a reporting entity that is required to file electronically but fails to do so may be subject to a penalty of up to $310 per return (as adjusted annually) unless it can establish reasonable cause. However, reporting entities can file up to 10 returns on paper. Those returns will not be subject to a penalty for failure to file electronically. The penalty applies separately to original returns and corrected returns.
 

Filing Extension Requests
Reporting entities can request an automatic 30-day extension of time to file by completing Form 8809, Application for Extension of Time To File Information Returns, and filing it with the IRS on or before the due date of the returns. No signature or explanation is required for the extension. Form 8809 may be submitted on paper or through the FIRE System either as a fill-in form or an electronic file.


This Compliance Bulletin is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice. ©2023-2024 Zywave, Inc. All rights reserved.

Medicare Part D Disclosures due by Feb. 29, 2024 for Calendar Year Plans

February 29, 2024

Each year, group health plan sponsors are required to complete an online disclosure form with the Centers for Medicare & Medicaid Services (CMS), indicating whether the plan’s prescription drug coverage is creditable or non-creditable. This disclosure requirement applies when an employer-sponsored group health plan provides prescription drug coverage to individuals who are eligible for coverage under Medicare Part D. 

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CMS Disclosure Deadline


The plan sponsor must complete the online disclosure within 60 days after the beginning of the plan year. For calendar year health plans, the deadline for the annual online disclosure is Feb. 29, 2024 (since 2024 is a leap year).


In addition to the annual disclosure requirement, the disclosure to CMS must be made whenever any change occurs that affects whether the coverage is creditable. More specifically, within 30 days after any change in the plan’s creditable coverage status or after the termination of a plan’s prescription drug coverage.


Online Disclosure Method


Plan sponsors are required to use the online disclosure form on the CMS creditable coverage website. This is the sole method for compliance with the disclosure requirement unless the entity does not have internet access.


The disclosure form lists the required data fields that must be completed in order to generate the disclosure notice to CMS, such as types of coverage, number of options offered, creditable coverage status, period covered by the disclosure notice, number of Part D-eligible individuals covered, date the creditable coverage disclosure notice is provided to Part D-eligible individuals, and change in creditable coverage status. 

CMS has also provided guidance and instructions on how to complete the form.

Action Steps


To determine whether the CMS reporting requirement applies, employers should verify whether their group health plans cover any Medicare-eligible individuals (including active employees, disabled employees, COBRA participants, retirees, and their covered spouses and dependents) at the start of each plan year.


Employers that are required to report to CMS should work with their advisors to determine whether their prescription drug coverage is creditable or non-creditable. They should also visit CMS’ creditable coverage website, which includes links to the online disclosure form and related instructions.

2024 Family and Medical Leave Act (FMLA) Guidelines

January 2024

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