PPI in the News Compliance Corner - January 19, 2023 Archive
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On December 2, 2022, HHS published a request for information (RFI) soliciting public comments on various essential health benefits (EHB) issues under the ACA. This is the first time HHS has requested comments on updating the EHBs since it became effective in 2014. As health insurance needs have changed, such as the increase in the utilization of telehealth and awareness of mental health and substance use disorder services benefits in recent years, this RFI will assist the agency in gauging how current EHB requirements should be updated.

The 10 categories of EHBs defined currently by HHS:

• Ambulatory patient services
• Emergency services
• Hospitalization
• Maternity and newborn care
• Mental health and substance use disorder services (including behavioral health treatment)
• Prescription drugs
• Rehabilitative and habilitative services and devices
• Laboratory services
• Preventive and wellness services and chronic disease management
• Pediatric services (including oral and vision care)

In the RFI, HHS requested comments, including to what extent state EHB-benchmark plan documents should include additional guidance and descriptions (e.g., “medically necessary transportation” vs. “ground, water and air ambulance”). Moreover, the RFI asks for public input regarding any barriers to accessing services due to coverage or cost, including mental health, behavioral health, and substance use disorders, and to what extent telehealth impacts access. The RFI also asks questions about prescription drug categories, whether the EHB definition needs to be updated to account for changes in medical evidence or scientific advancement (including to advance health equity issues), how EHBs could be modified to address access gaps and the impact an expanded EHB definition has on cost.

Employers should be aware of this development. Those wishing to submit comments must do so by January 31, 2023, in accordance with the RFI instructions.

HHS: Request for Information; Essential Health Benefit »

On November 21, 2022, in Collier v. Lincoln Life Assurance Company of Boston, the Ninth Circuit reversed the district court’s affirmance of an ERISA plan’s denial of LTD benefits. In the opinion, the Ninth Circuit emphasized that review of an ERISA plan administrator’s denial of benefits must be based upon the reasons reflected in the administrative record and not rationales subsequently introduced.

In this case, plaintiff Vicki Collier was an insurance sales agent who began employment with the Automobile Club of Southern California (AAA) in 2013. She suffered from ongoing pain in her back and upper extremities, which prevented her from being able to type and sit for extended periods of time. Eventually, she was diagnosed with mobility impairments and tried various treatments, including surgery, to address her symptoms. In 2018, she stopped working, citing her persistent pain.

In 2019, Collier submitted a claim for benefits to Lincoln Life Assurance Company of Boston (Lincoln), the insurer of the ERISA LTD benefit plan sponsored by AAA. Lincoln denied her claim based upon a reviewing physician’s report that she did not meet the plan’s definition of disability. The denial letter said nothing about Collier's credibility or her failure to submit objective medical evidence as the basis for denying benefits.

Collier timely appealed the denial and submitted additional medical records to support her claim. As part of its review, Lincoln scheduled an independent medical examination for Collier. The physician who conducted the exam concluded that Collier could work full-time, with certain limitations. Lincoln then denied Collier’s appeal, citing a lack of medical documentation to prove that her impairments and symptoms remained of such severity, frequency and duration that she was unable to perform the duties of her occupation (and thus did not meet the plan’s definition of disability).

Collier then filed a lawsuit for judicial review of the denial of her claim for ERISA LTD plan benefits. In trial briefs, Lincoln argued, for the first time, that Collier was not credible and that her doctors relied upon her subjective reports of pain rather than objective evidence of her disability. Collier asserted that the district court should reject Lincoln’s credibility and objective evidence arguments because Lincoln did not present those arguments in its denial letters. The district court affirmed Lincoln’s denial of Collier’s claim, relying upon the new reasons Lincoln set forth during the litigation.

On appellate review, the Ninth Circuit held that when a district court reviews a denial of ERISA benefits de novo (i.e., without deference to the plan administrator’s conclusions), it examines the administrative record to determine whether the administrator erred in denying benefits. Therefore, the district court’s task was to determine whether Lincoln’s decision was supported by the plan’s administrative record and not to engage in a new determination of whether Collier was disabled based upon reasons introduced in litigation that Collier had no opportunity to respond to during the administrative process. The Ninth Circuit noted that a contrary conclusion would deny Collier her statutory right under ERISA to “full and fair review” of her claim denial. Accordingly, the Ninth Circuit reversed the district court’s ruling and remanded the case for reconsideration.

The decision is important because it clarifies the scope of a trial court’s authority in reviewing an ERISA plan’s denial of benefits. For plan administrators, the case is a reminder of the importance of adhering to ERISA’s claim review requirements and procedures in order to provide impartial and consistent treatment of benefit claims. Plan administrators should carefully and thoroughly review each claim and ensure a claim denial notice includes the specific reason(s) for the denial and a description and explanation of additional material or information necessary to perfect the claim.

Collier v. Lincoln Life Assurance Company of Boston »

On January 3, 2023, the IRS released Revenue Procedure (Rev. Proc.) 2023-4, which outlines the procedures for requesting determination letters and private letter rulings from the IRS for qualified retirement plans. Rev. Proc. 2023-4, which is published in Internal Revenue Bulletin 2023-01, is a general update to the information previously provided in Rev. Proc. 2022-4. Determination letters indicate whether the IRS finds the form of an employer’s employee benefit plan document meets the necessary qualification requirements. Private letter rulings interpret and apply the Internal Revenue Code to a set of facts presented by a taxpayer.

In addition to minor non-substantive changes, the updates include the following:

• Sections 6, 8, 9, 10, 11, 19, and 20 and Appendix B were revised to provide the procedures for obtaining a determination letter with respect to a Section 403(b) individually designed plan, beginning June 1, 2023. Appendix A adds user fees for these submissions. (As reported in our December 8, 2022 article, the determination letter program has expanded availability to individually designed Section 403(b) plans.)
• Sections 6.02 and 16 are revised to provide that Form 5307, Application for Determination for Adopters of Modified Nonstandardized Pre-Approved Plans, and Form 5316, Application for Group or Pooled Trust Ruling, may be submitted electronically beginning June 1, 2023, and must be submitted electronically beginning July 1, 2023, including payment of the user fee.
• Sections 3 and 31 and Appendix A reflect the temporary suspension of the opinion letter program for prototype IRAs (traditional, Roth and SIMPLE IRAs), SEPs (including salary reduction SEPs (SARSEPs)), and SIMPLE IRA plans.
• Section 9.02 reflects changes to the scope of determination letters.
• Appendix A has been modified to increase certain user fees.
• A new Appendix G has been added, which provides a checklist for applications for nonbank trustee approval letters.

Retirement plan sponsors who may apply for a determination letter or request a private letter ruling should familiarize themselves with this updated guidance.

Internal Revenue Bulletin: 2023-01 »

On January 12, 2023, the Pension Benefit Guaranty Corporation (PBGC) published revised civil penalty amounts for failure to provide certain notices or other material information, as required by ERISA. The amounts apply to penalties assessed on or after the publication date. The adjusted maximum amounts are $2,586 (up from $2,400) for Section 4071 penalties and $345 (up from $320) for Section 4302 penalties, which are related to multiemployer plan notices.

PBGC Revised Penalties »

The IRS recently released the new Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions, to replace Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments, in certain instances. Form W-4P, and now Form W-4R as well, are used to address federal income tax withholding for taxable IRA distributions.

Form W-4R was optional in 2022 but is now required in 2023 for IRA distributions considered nonperiodic, which are those paid on demand as opposed to a specific schedule. Form W-4R will be updated annually to incorporate current marginal tax rate tables, which are used as part of the withholding calculation. Individuals receiving IRA distributions should familiarize themselves with the new form and consult with their tax advisor on applying each form to their situation.

Form W-4R »
Form W-4P »

Employers should consider all the facts and circumstances surrounding the mistake before taking any action to correct it.

Under section 125, the employee's election must occur prior to the coverage effective date, and the related deduction should come out of a future paycheck. Section 125 also states that employees should not have the ability to change their elections after the effective date of coverage (i.e., during the plan year) unless the employee experiences a qualifying event. Under ERISA, the employer should operate/administer the plan according to the plan terms, according to relevant laws and in the best interest of plan participants/beneficiaries. So, for all those reasons, the employer should not allow election changes for any period following the effective date of coverage. Rather, allowing election changes after the effective date could be viewed as a violation of section 125 and ERISA. Accordingly, the practice of allowing those changes post effective date should generally be discouraged.

However, employers can allow election changes AFTER open enrollment and BEFORE the coverage effective date. That's a good idea and practice to keep in place to catch errors before the coverage period starts. Also, it's permissible to correct true errors and mistakes that are discovered after the coverage period begins. But it must be a true mistake, not an employee simply changing their mind.

There is a lack of formal guidance when it comes to correcting mistakes, but the general notion from the IRS is that if there's clear evidence of some type of mistake, then the employer can take steps to place everyone back in the position they would've been absent the mistake. Whether the clear and convincing standard is satisfied depends on the nature of the mistake, including when it occurred and when it was discovered. Generally, employer clerical or data entry type mistakes would qualify. Additionally, situations in which the employee could not have benefitted from the election are clear and convincing. For example, if an employee made a dependent care deferral election at enrollment but did not have a dependent, this seems rather clear and convincing evidence of a mistake.

Essentially, it is a facts and circumstances analysis. Factors to consider include:

• The employee's past elections and benefit usage.
• Assessment of the employee's truthfulness.
• Time that has elapsed since the first payroll date after the election was in force.
• Changed circumstances experienced by the employee that might be evidence of reconsideration rather than a mistake.
• Other extrinsic evidence of a mistake.

These factors should be applied on a consistent and nondiscriminatory basis and documented.

In the end, it would be the employer’s decision as a plan sponsor to determine whether there is clear and convincing evidence of a mistake. However, the employer should consider the situation carefully before making exceptions because the employer has an obligation to follow the terms of the plan document. Additionally, the employer has an obligation to treat all eligible employees in a like manner. Finally, making an exception may also create an undesirable precedent.

If the employer chooses to recognize the mistake, the insurer or stop loss carrier would need to be agreeable. From a payroll perspective, again, there is no formal guidance, but the general principle is that corrections should put the plan and the participant in the same position as if the mistake had not occurred. The document should be reviewed to see if there is any language that addresses the correction of mistaken elections and recoupment of amounts not withheld. The employer should also confirm that any necessary withholding from an employee’s pay does not violate any state wage withholding laws.

Due to the lack of formal IRS guidance regarding the recognition of mistakes and related corrections, the employer should consult with counsel for guidance. Generally, to avoid section 125 and ERISA compliance issues, the best practice is not allowing employees to change their elections once the coverage period has begun and once salary has been taken from their paychecks — unless there is clear evidence of a mistake.