American Benefits Council
Benefits Byte


October 7, 2014

The Benefits Byte is the American Benefits Council’s regular e-mail and online newsletter for members only, providing timely reports on legislative, regulatory and judicial developments, along with updates on the Council’s activities in support of employer-sponsored benefit plans.

The Benefits Byte is published by the American Benefits Council, based on staff reports and edited by Jason Hammersla, Council director of communications. Contact information for Council staff related to specific topics can be found at the end of each story.

Click here to read past issues on the Benefits Byte Archive page.

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EEOC Files Second Lawsuit Challenging an Employer Wellness Program

On October 1, the U.S. Equal Employment Opportunity Commission (EEOC) announced a lawsuit challenging a wellness plan sponsored by a Flambeau, Inc. (a Wisconsin-based manufacturer with 1,600 employees) as violating the Americans with Disabilities Act (ADA). The EEOC lawsuit in EEOC v. Flambeau, Inc. alleges that the company’s wellness plan required employees to complete biometric testing and a health risk assessment (HRA) on a day appointed by the employer. The complaint further alleges that an employee, who was on medical leave on the appointed day, did not complete the HRA or biometric testing, and was denied by the employer when they tried to complete the required HRA and biometric testing subsequently. The employee’s health insurance was allegedly terminated for failure to complete the wellness requirements and the employee was informed that he could apply for “medical insurance” and pay the entire COBRA premium rate.    

The EEOC’s suit, filed in the U.S. District Court for the Western District of Wisconsin, argues that the biometric testing and health risk assessment constituted "disability-related inquiries and medical examinations" that were not job-related and consistent with business necessity as defined by Title I the ADA, which prohibits disability discrimination in employment, including making disability-related inquiries.

This is the second lawsuit filed by the EEOC in recent months (and its Chicago District Office, specifically) challenging a wellness program under the ADA. In August, the agency filed suit against Orion Energy Systems, alleging that the company fired an employee (after first making her responsible for her entire health insurance premium) when she would not submit to a medical exam and inquiry related to a wellness program.  That lawsuit involves a participation-based wellness program requiring the completion of an HRA. The employee who declined to complete the HRA was permitted to enroll in the health plan, but was required to pay the full cost of the coverage ($413 per month for employee-only coverage).  The employee objected to the penalty and allegedly was fired for not participating in the wellness program.   The EEOC is alleging that this wellness program is not “voluntary” and thus violates the ADA. EEOC v. Orion Energy Systems was filed in the U.S. District Court for the Eastern District of Wisconsin. 

The EEOC announced in its most recent semi-annual regulatory agenda that it intends to issue regulations later this year addressing wellness programs under the Americans with Disabilities Act (ADA) and the Genetic Information Nondiscrimination Act of 2008 (GINA). The Council testified before the EEOC in a May 2013 hearing on this matter, describing employers' strong concern about the ongoing legal uncertainty exists that with respect to the application of the ADA and GINA to wellness programs and saying, "creating a regulatory framework by which employers can create nondiscriminatory wellness programs that help support the shared vision of improving health for all citizens is the ultimate goal.”

For more information on wellness program issues and health policy legal matters, contact Kathryn Wilber, senior counsel, health policy, at (202) 289-6700

Council Voices Support for Legislation Addressing Frozen Defined Benefit Plan Nondiscrimination Issue

On October 6, the Council sent two letters to both Representatives Pat Tiberi (R-OH) and Richard Neal (D-MA) of the U.S. House of Representatives Ways and Means Subcommittee on Select Revenue Measures and Senators Benjamin Cardin (D-MD) and Rob Portman (R-OH) of the U.S. Senate Finance Committee voicing support of recent legislation to address the inadvertent harmful effects of ERISA’s nondiscrimination rules on arrangements that exempt some or all of a defined benefit plan’s existing participants from changes to the plan.

As we have previously reported, the increasingly necessary practice of defined benefit plan sponsors " soft freezing" their plans (closing them to new entrants) has created new challenges for employers. These plan sponsors have used various approaches to assist older employees with the transition to the new system. However, over time, some of these transition approaches can become technically inconsistent with current regulations prohibiting discrimination in favor of highly compensated employees. Generally, to avoid claims of nondiscrimination, both the old and new plans must pass one of three tests (requiring the plans to (1) be primarily defined benefit in character, (2) be broadly available, or (3) meet minimum benefit formula standards) before they can combine the plans for another round of nondiscrimination testing.

The letter to Senators Cardin and Portman expressed the Council’s strong support of their recently introduced bill, the Retirement Security Preservation Act of 2014 (S. 2855), which states that a defined benefit plan does not fail the nondiscrimination rules, or the minimum participation requirement, provided the composition of the closed class of participants in the plan meets the following requirements:

  • The closed class satisfied the rules as of the date the class was closed (including the nondiscrimination rules for benefits, rights and features offered to the closed class).
  • After the closing date, any plan amendments that modify the closed class (or benefits, rights and features provided to the class) satisfy the nondiscrimination rules.

The bill also provides special rules in the case of an amendment that does not satisfy the second requirement and for defined contribution plans that are tested with the closed plan.

The Council letter emphasized that S. 2855 takes the correct approach to solving the issue of nondiscrimination rules by clarifying that a plan, which passed the nondiscrimination tests at the time it was soft frozen, will be deemed to pass the tests as long as it is not amended in any discriminatory manner. S. 2855 would prevent these closed plans from inadvertently violating the Treasury rules prohibiting discrimination in favor of highly compensated employees, and thus help mitigate the need for “hard freezes” that would otherwise be effectively compelled by the nondiscrimination rules.

The Council also sent a letter to Representatives Tiberi and Neal, sponsors of H.R. 5381, a measure similar to S. 2855. Under H.R. 5381, if a “grandfathered” group of employees is a nondiscriminatory group when it is first formed, it would be treated as a nondiscriminatory group permanently unless the group is modified in discriminatory ways by plan amendment.

It is unclear whether S. 2855 and/or H.R. 5381 will be considered by the full House and Senate prior to the end of the year since there are few legislative days left and the agenda for the “lame duck” session is uncertain. However, because the bills are so similar, it is possible these measures could be included in tax legislation considered prior to the end of the session, such as potential legislation that may extend expiring tax provisions.  If it is not considered by the end of this year, it would need to be reintroduced in 2015.

The measure also presents an opportunity for Congress to maintain dialogue with the Treasury Department on this issue. The Council will continue to work very closely with members of Congress such as Senators Portman and Cardin, Representatives Tiberi and Neal and Treasury officials to emphasize the urgent need for a comprehensive solution.

For more information, contact Diann Howland, vice president, legislative affairs, or Lynn Dudley, senior vice president, senior vice president, global retirement and compensation policy, at (202) 289-6700.

ERISA Advisory Council Drafts Recommendations on Plan Outsourcing, Lifetime Plan Participation, PBMs

On September 29, the ERISA Advisory Council (EAC) met via teleconference to discuss their draft recommendations to the U.S. Department of Labor (DOL) on PBM fee disclosure, plan outsourcing and lifetime plan participation.

The EAC is a group of benefits experts established under the Employee Retirement Income Security Administration (ERISA) to identify emerging benefits issues and advise the Secretary of Labor on health and retirement policy. Its final report is due to the DOL on November 4, 2014.

This teleconference session follows two previous 2014 hearings held in June (as reported in the June 20 Benefits Byte) and August (as reported in the August 27 Benefits Byte).

Outsourcing Employee Benefit Plan Services

The EAC is studying the outsourcing of employee benefit plan services, with a particular focus on the allocation of legal responsibilities and risk for activities of a service provider on behalf of a plan. Allison Klausner, assistant general counsel – benefits for Honeywell International Inc. and a member of the American Benefits Council’s Executive Board, gave testimony on this topic on behalf of the American Benefits Council on June 18. The EAC drafted the following recommendations with respect to outsourced services:

  • Educate plan sponsors on current practices for outsourced services. The EAC recommended the DOL provide industry information about the range of outsourcing options and types of providers, specifically with respect to “outsourced CIO [Chief Investment Officer]” arrangements, and provide information on contracting practices, such as termination rights, indemnification, liability caps and service level agreements, which might assist plan sponsors and other fiduciaries in negotiating service agreements. The EAC emphasized that any education offered by the DOL should not be prescriptive in nature. 
  • Clarify the legal framework under ERISA for delegating responsibility to service providers. The EAC recommended clarification of (1) plan sponsors’ responsibility under ERISA Section 404 where the plan document designates a “named fiduciary” under ERISA Section 3(21)A that is not the plan sponsor, and (2) the scope of liability for a fiduciary who appoints a non-fiduciary service provider to perform functions necessary for the operation. The EAC also recommended (3) clarification on administration of the plan and application of the co-fiduciary provisions of ERISA Section 405, including whether the co-fiduciary liability provisions of ERISA Section 405(c)(2)(B) impose additional obligations of an appointing fiduciary beyond the duty to select and monitor an appointed fiduciary, and if so, the extent of those duties, the standard of knowledge required for co-fiduciary liability under ERISA Section 405(a) and contribution rights among co-fiduciaries. In particular, the drafters of this recommendation intentionally avoided taking a position about whether delegating the “named fiduciary” function was a fiduciary act. 
  • Provide additional guidance on the duty to select and monitor service providers.The EAC recommended that the DOL provide guidance through: (1) consolidating prior guidance on a fiduciary’s duty to select and monitor service providers, (2) providing guidance on the frequency and scope of monitoring requirements, (3) identifying “questions to ask” and other best practices in selecting and monitoring service providers, (4) providing guidance on managing potential conflicts of interest in engaging fiduciary service providers and (5) publishing clear examination and enforcement priorities with the publication of relevant examination findings.
  • Facilitate the use of Multiple Employer Plans (MEPs) and similar arrangements as a means of encouraging plan formation by relieving plan sponsors of fiduciary obligations and administrative burdens. The EAC recommended the DOL accomplish this by (1) revisiting the requirement that there be a relationship among participating employers in a multiple employer plan as contemplated by Advisory Opinion 2012-04A (although this suggestion may change as a result of discussion within the EAC), (2) considering developing a sample structure for MEPs that will help insure that conflicts of interest, prohibited transactions and true fiduciary independence and disclosures are in place, and (3) developing safe harbors for MEP sponsors and adopting employers that would not expose them to liability from acts of non-compliant adopting employers. The EAC has agreed to revisit this subject at a November 3 meeting.

The Council has supported the encouragement of MEPs as a way of expanding employer-sponsored coverage. The EAC’s discussion and potential recommendation on MEPs directly correlates with a recommendation made in the Council’s strategic plan, A 2020 Vision: Flexibility and the Future of Employee Benefits, which supports allowing small, unrelated businesses to join MEPs.

  • Update and provide additional guidance on insurance coverage and ERISA bonding practices of outsourced service providers. The EAC suggested DOL update fidelity bond regulations and Field Assistance Bulletin 2008-04, and educate plan sponsors on the availability of fiduciary insurance coverage including information on scope of coverage, deductibles, policy limits, and ratings of insurers.

Facilitating Lifetime Plan Participation

The EAC is also studying the factors leading participants to leave their assets in or move them out of an employer-sponsored retirement plan. The EAC made the following preliminary recommendations with regard to facilitating lifetime plan participation:

  • Provide education and outreach to participants and plan sponsors and develop a model notice for participants. Suggested measures include providing sample educational materials that can be used by plan sponsors and development of a “plain English” model notice that can be provided to participants prior to enrollment and throughout employment, to help them decide what to do with retirement assets particularly at job change and retirement or other distribution events. The EAC ultimately declined to endorse the position that staying with an employer plan is more beneficial for participants, because many factors could change this equation for various individuals and in various circumstances.
  • Provide education to plan sponsors relating to plan features that encourage lifetime participation.The EAC’s final report will likely identify a list of “best practices” for this purpose.
  • Provide additional guidance to encourage plan sponsors to offer lifetime income options. The EAC recommended the DOL provide additional guidance (including an updated defined contribution plan annuity safe harbor) and explore making certain tools (such as the agency’s Lifetime Income Calculator) more integrated and available.
  • To the extent that plan sponsors make loans available to participants, the DOL should encourage them to consider allowing continuation of loan repayments after separation. The DOL could also point out the advantages of loan initiation post-separation to prevent leakage. There was some debate among EAC members about whether the body should be encouraging plan loans at all.
  • Allow for technological advances. The EAC recommends that the DOL: (1) create uniform sample forms for improving plan-to-plan transfers (roll-ins and roll-outs), (2) foster technology standards to simplify certain administrative functions and (3) ask a future Advisory Council to consider the issues related to standardized technology solutions for automatic account aggregation for job changers. These recommendations are based in part on recent efforts in the Australian system.

Pharmacy Benefit Manager Compensation and Fee Disclosure

The EAC also discussed recommendations concerning pharmacy benefit manager (PBM) compensation and fee disclosure, with a focus on whether PBMs should be required to comply with plan fee disclosure regulations under ERISA Section 408(b)(2). The Council reported on the PBM fee disclosure testimony during the August hearings – at which Klausner testified on Honeywell’s behalf – in detail in the August 22 Benefits Byte.

After discussing a number of findings based upon witness testimony, including testimony from employers’ regarding difficulty in getting compensation-related information from PBMs and concerns regarding possible conflicts of interest underlying the compensation arrangements, the EAC made the following recommendations:

  • Consider making the 408(b)(2) regulations applicable to welfare plan arrangements with PBMs.  The EAC noted that the testimony it received, on balance, supported further examination of the matter of PBM compensation. The EAC also concluded that the PBM’s concerns about anti-competitive behavior and the release of proprietary information could be addressed through confidentiality agreements.
  • DOL should issue guidance to assist plan sponsors in determining whether to and how to conduct a PBM audit of direct and indirect compensation. Many plan sponsors told the EAC that such audits are necessary to help them meet their fiduciary duties.  However, while such audits are believed to be needed because they allow fiduciaries to confirm that PBMs are paid in accordance with the terms of the service contract, many plan sponsors have difficulty in obtaining the information they need to appropriately and efficiently conduct the audit.  The EAC expressed the belief that DOL guidance will help clarify both the need for such audits and the plan fiduciaries’ and PBMs’ responsibilities in the conduct of such audits.

Notably, the EAC decided not to recommend further consideration of whether all health and welfare arrangements should be subject to a the ERISA Section 408(b)(2) regulatory regime. The EAC however, intends to include some related observations in its final report to DOL rather than through a formal recommendation.


Special thanks to Michael Hadley at Davis & Harman LLP and David Kaleda at Groom Law Group, Chartered, for providing notes on the EAC’s teleconference discussion.

The EAC reserved the right to change or edit the draft recommendations prior to presenting their final recommendations on November 4.

For more information on the two retirement issues, contact Jan Jacobson, senior counsel, retirement policy, or on the PBM fee disclosure issue, contact Kathryn Wilber, senior counsel, health policy.  Both can be reached at (202) 289-6700.

The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.

Notice: the information contained herein is general in nature. It is not, and should not be construed as, accounting, consulting, legal or tax advice or opinion provided by the American Benefits Council or any of its employees. As required by the IRS, we inform you that any information contained herein was not intended or written to be used or referred to, and cannot be used or referred to (i) for the purpose of avoiding penalties under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party any transaction or matter addressed herein (and any attachment).