May 22, 2020Client Alert

Benefit Plans in the “COVID-19 Era” – Careful Strategy Review Now to Avoid Being a Target when Litigation Soars

While getting through each day may be as strategic as many HR and benefits departments can currently muster, there will be a time when we return to thinking about things other than pandemic response. In that time, there is also likely to be a surge of litigation brought on behalf of those individuals who perceive that they were not appropriately treated during the outbreak timeframe.

Given the unprecedented number of employment changes – including layoffs, furloughs, reductions in hours, reductions in pay, and changes in employment practices (e.g., mandated temperature taking and testing as a precursor to return to work) – a hygiene check on how employee benefits are being handled is more important than ever. We’ve compiled a list of certain challenges anticipated by the reviewing agencies and/or plaintiffs’ bar in a post-pandemic environment.  

  1. Did you consider whether your layoff strategy triggered a “partial termination” of your plan requiring accelerated vesting?

An employer’s plan may have a partial termination if a large group (generally more than 20%) of plan participants are laid off in a particular year. The law requires all “affected employees” to be fully vested in their entire account balance as of the date of a full or partial plan termination regardless of the plan’s vesting schedule. Check in to confirm how furloughs impact this calculation and who may qualify as an affected employee. Remember that a plan amendment may be necessary to track the accelerated vesting (and the finance department will want to understand the cost of this change).

  1. Did the fiduciary/committee with investment oversight responsibilities vet any changes recommended to investments based on the COVID-19 era?

While “staying the course” may be the end result for any fiduciary with plan investment oversight responsibility, given the tumultuous market (in the pandemic and the (apparent and/or anticipated) recession environment) documentation of what was done (what was not done) is recommended. As discussed in our prior alert (available in the Coronavirus and Benefit Plan Offerings Client Alert), while there is no “one size fits all” approach, there are a few strategies for consideration to afford fiduciaries the most protection from breach allegations.

  1. Did the fiduciary/committee with investment oversight responsibilities document any actions taken (or intentionally not taken) in response to COVID-19 era?

Again, while changes (or actions) at the plan level may be unwarranted, taking action to review investment options offered in the plan (with experts, as appropriate) – and documenting that review – is of paramount importance from an ERISA fiduciary perspective. Under the governing ERISA rules, a prudent process is more important than a good outcome. Prudence is judged at the time the transaction is entered – not in hindsight. Without documentation/records of the process, there may be no way to prove procedural prudence. Thus, document, document, document.

  1. Did ESOP sponsors consider fiduciary elements of valuation decisions (and document the decision making surrounding the same)?

A specific call out to ESOP sponsors; we understand that you may be facing a conundrum between the typical year-end valuation (maybe 12/31/19) applying for the following 12 month period (e.g., all of 2020) and the fact that the company value is remarkably different as we sit in Q2 of 2020 than it was at the end of Q4 of 2019. What to do?  As a starting place, consider what is allowed by the ESOP plan document and governing trust?  Assuming that an interim valuation is permitted, consideration of the totality of factors – including whether using an interim valuation is in the best interest of the plan participants and beneficiaries – is recommended. This is an area where careful vetting of approach is essential.

  1. Were decisions uniformly made on the continuation of benefits?  If not, did you confirm that the plan won’t have any possible discrimination issues?

Although plan sponsors generally have wide freedom to determine plan eligibility, in order to maintain a plan’s favorable tax treatment, the plan may not discriminate in favor of particular groups of employees (e.g., highly compensated employees, key employees, and owners). As layoffs and furloughs were occurring and decisions were being made about whether to continue benefits for those employees who were being furloughed or laid off, employers should have been also considering the uniform treatment of and the extent to which non-highly paid employees would be impacted versus highly paid employees to ensure such decisions were not discriminatory in nature or utilization. Even if these decisions have created discrimination issues, employers may have the ability to correct such issues.  

  1. Did you timely notify separating employees of any COBRA (or similar state continuation) rights?

A plan administrator must timely furnish a continuation coverage election notice to each qualified beneficiary (including the covered employee, covered spouse, and any covered dependent child) who loses plan coverage in connection with a qualifying event. In addition to COBRA, many states have health continuation coverage statutes that are analogous to COBRA, but these laws may have requirements that differ from or are additional to COBRA requirements. It is important for employers to ensure compliance with all such applicable laws. Failure to do so could result in significant financial consequences. Note, the DOL extended the time a group health plan sponsor or administrator has to provide a COBRA election notice during the (“outbreak period”), but careful attention to how/when election notices are sent (and elections are honored) should be carefully tracked.

  1. Did you inform employees of other post-employment benefits – e.g., the right to convert life insurance to a portable individual policy?

The post-employment continuation of benefits, such as a life insurance policy, is often fraught with issues that frequently lead to litigation. For example, the window to convert a life insurance policy is generally short and may be especially important when an employee has a medical condition that would make it difficult to secure coverage on his or her own elsewhere. As such, the onus is on the employer to give timely notice of conversion rights so that an employee may timely elect conversion. It is important not to overlook these conversion notice obligations.

  1. Was your strategy for continuation (or discontinuation) of benefits for furloughed and/or laid off employees tracked in plan documents (e.g., policies/SPDs)?

Whether an employer opted to continue or discontinue employees’ benefits during a furlough or layoff, the plan terms should provide for the continuation or discontinuation of benefits. If necessary, the relevant plan documents should be amended to ensure that the eligibility requirements in the plan documents reflect the eligibility rules being applied in practice. More importantly, no changes in administration should be made/have been made without agreement from the plan’s insurer or administrator, as applicable. Don’t forget stop loss carriers too.

Remember to carefully vet the nuances of some the special extensions made available by the DOL/IRS, including, for example:

  • How much time a participant has to enroll in health plan coverage
  • How much time a participant has to elect and pay for COBRA continuation coverage
  • How much time a participant has to dispute denials of claims for benefits and submit claims for coverage, including the run-out period for FSA and HRA plans
  • How much time a participant has to notify a health plan of a qualifying event or disability
  1. Were all benefit changes documented and were participants notified? (Note that we’re not discussing the CARES Act retirement plan changes (such as increased loan amounts and coronavirus-related distributions, which are discussed The CARES Act Relief Client Alert).

As the coronavirus pandemic response continues, employers may be implementing benefit changes in reaction (for example, allowing midyear health plan changes as discussed in this IRS Guidance Client Alert). Such changes likely require a plan amendment to implement and document the changes since a plan must be administered in accordance with the plan terms. It is also important for employers to coordinate with the plan’s insurer or administrator during this process to ensure that the insurer or administrator understands the benefits being offered and how the plan is to be operated. Furthermore, plan participants must be timely notified of any material modifications to the plan.

  1. If you use the Use the Look-Back Method to determine full-time employees for Affordable Care Act (ACA) employer mandate purposes, did you vet ACA considerations for reductions in hours/furloughs?

Jumping into the weeds of the ACA, remember that those employers who are subject to the employer mandate (generally speaking, requiring that an offer of minimum value, affordable health coverage is made available to certain full-time employees (and their beneficiaries)) may be in the middle of a “stability period” for certain groups of employees. Since an employer, generally speaking, must treat an employee as a full-time employee for the duration of the stability period (regardless of the employee’s number of hours of service during the stability period), as long as he or she remains an employee, vetting how this rule impacts offers of coverage during furloughs or other special reduced hours scenarios may be necessary.

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