American Benefits Council
Benefits Byte


June 25, 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.

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CBO Presentation Posits Limiting Health Insurance Tax Exclusion

A presentation prepared by the Congressional Budget Office (CBO) for the Fifth Biennial Conference of the American Society of Health Economists on June 23 examined a number of approaches for limiting the current-law exclusion of the cost of employer-sponsored health insurance from employees’ income tax.

The analysis, requested by the Joint Committee on Taxation, was developed “to stimulate discussion and critical comment” among members of Congress. It follows the CBO’s list of options for reducing the deficit,issued in November 2013 in anticipation of legislative negotiations over the federal budget and tax reform.

The presentation set forth the positive and negative effects of the established tax exclusion – noting, in particular, that it promotes affordable employment-based coverage – and examined how the enactment of the Patient Protection and Affordable Care Act (PPACA) has changed the context for possible reform.

The presentation then compared three specific approaches for limiting the exclusion:

     (A)   Totally eliminate the tax exclusion for federal income tax and payroll tax purposes.

     (B)   Eliminate the tax exclusion for federal income tax but not for payroll tax purposes.

     (C)  Cap income and payroll tax exclusions at the median premium for employment-based plans.

The CBO concluded that the current tax treatment – in comparison to the three alternative approaches – maximizes employment-based insurance while minimizing the uninsured population, the exchange population and the Medicaid and CHIP population. These results persist even when broken down by income group. Of the three alternatives, Option (C) comes closest to replicating current law.

The Council has communicated to federal policymakers that a change in benefits tax policy could disrupt the employer-sponsored system, particularly in the wake of transformational change precipitated by PPACA. Since there are so many misconceptions among lawmakers and economists about the value of employer-sponsored health coverage, the Council has developed a series of talking points for their consideration. These include:

For more information, contact Katy Spangler, senior vice president, health policy, at (202) 289-6700.

Supreme Court Strikes Down Presumption of Prudence for Stock Fund Fiduciaries

In a unanimous decision handed down on June 25, the U.S. Supreme Court rejected the application of a presumption of fiduciary prudence to a company stock fund. The Council had filed an amicus ("friend of the court") brief on behalf of the stock fund.

The case of Fifth Third Bancorp v. Dudenhoeffer centered on allegations that the defined contribution plan sponsor violated its fiduciary duty under ERISA by providing an investment option composed primarily of company stock when it was "imprudent" to do so. When the employer's stock price declined, retirement plan investment returns were negatively affected (commonly known as a "stock drop" case). Dudenhoeffer was the first employer stock case brought under ERISA to be heard by the Supreme Court, though the matter has arisen in many other cases at the district and appeals court levels.

In a decision written by Justice Stephen G. Breyer, the Supreme Court ruled that:

  • ESOP fiduciaries are not entitled to any special presumption of prudence and are subject to the same duty of prudence that applies to ERISA fiduciaries in general, except that they need not diversify the fund’s assets.  
  • The Sixth Circuit, which had originally ruled in favor of the plan, should reconsider its criteria for whether a complaint meets the “pleading” standard for a breach of fiduciary duty.

The Council’s amicus brief had urged the justices to uphold the "Moench” presumption of prudence, noting that Congressional policy strongly favors the offering of employee stock funds, the unique nature of employer stock funds warrant a presumption that fiduciaries act prudently by offering them, and if such presumption is not provided, sponsors will be discouraged from offering employer stock. The Council also issued a Benefits Blueprint summary, prepared for the Council by O’Melveny & Myers, LLP, discussing the history and possible future of the presumption of prudence and providing offers a “checklist” of actions that fiduciaries should consider.

This ruling raises additional concerns for plan sponsors and is indicative of heightened scrutiny of plan fiduciaries. For more information on this issue or the Council's amicus brief program, contact Jan Jacobson, senior counsel, retirement policy, or Lynn Dudley, senior vice president, global retirement and compensation policy, at (202) 289-6700.

Republicans to Challenge Obama's Executive Authority

Speaker of the U.S. House of Representatives John Boehner (R-OH) announced on June 24 that House Republicans plan to pursue a lawsuit against President Barack Obama, alleging abuse of executive authority. A formal announcement is expected to be issued shortly.

Boehner spokesman Michael Steel told reporters that such action is necessary because the Senate has declined to take up measures passed by the House that would check the power of the executive, including legislation to expedite potential House lawsuits against the president and targeting the use of executive actions beyond what has been authorized by Congress.

It is not yet clear what specific administrative activity will be targeted in the potential lawsuit. It is likely that the charges will reference executive action related to implementation of employee benefits policy, including the president’s decision to delay the employer mandate of the Patient Protection and Affordable Care Act (PPACA).

As individual members of Congress do not have legal standing to sue the President, Congress as an institution would have to sue on the basis of its legislative powers being superseded. In order to do so, Boehner may assemble the Bipartisan Legal Advisory Group, a panel of leaders that votes on whether or not to sue on behalf of the House. The suit would have to prove the institutional injury and that no other private plaintiff has standing to challenge the suspension of executive action and that there are no other avenues for meaningful political remedies by Congress.

For more information, contact James Klein, president, at (202) 289-6700.

House Subcommittee Hearing Discusses Risk Mitigation Provisions in PPACA

In a June 18 hearing of the U.S. House of Representatives Committee on Oversight and Government Reform Subcommittee on Economic Growth, Job Creation and Regulatory Affairs, witnesses gave testimony on the three mechanisms to mitigate risk under the Patient Protection and Affordable Care Act (PPACA): reinsurance, risk adjustment and risk corridors. During the hearing, Poised to Profit: How Obamacare Helps Insurance Companies Even if it Fails Patients, Republican members of the subcommittee were thoroughly critical of the law and its consequences for participants.

They asserted that the risk corridor program effectively transfers money from insurers with lower-than-expected claims for qualified health plans sold in the individual and small-group markets (inside and outside of public exchanges) to insurers with higher exchange plan claims. PPACA requires insurers and health plans to pay into the reinsurance, risk adjustment and risk corridor program for three years, but the federal government would likely be called upon to pay a portion of the cost of the risk corridor program if insurance company payments are insufficient.

In his opening statement, Subcommittee Chairman Jim Jordan (R-OH) characterized the risk mitigation provisions as constituting a “bailout” of private insurance companies, citing inconsistent Congressional Budget Office (CBO) evaluations of the programs. He suggested that it was “crucial for us to understand how the Administration plans to funnel taxpayer money to health insurance companies to subsidize profits” and with what legal authority the Administration is able to do so.

Ranking Democratic subcommittee member Matt Cartwright (D-PA) said in his opening statement that each of the three provisions is funded in a way that reinforces the accuracy of the CBO’s estimate of budget neutrality. He stated that rather than continuing to attack the PPACA, he hoped to reexamine ways to increase the efficiency and effectiveness of the law.

Ranking Democratic member of the full committee Elijah Cummings (D-MD) also provided an opening statement, noting that the risk mitigation provisions in the PPACA were previously included in Medicare Part D, passed and adopted by a Republican administration and Congress, and have been very successful thus far.

The subcommittee heard testimony from the following witnesses:

  • Senator Jeff Sessions (R-AL) testified that PPACA did not meet the requirements to receive an appropriation from Congress to finance the risk corridor programs. He urged lawmakers of both parties to act in defense of Congress and the authority delegated to it by the Constitution.
  • John R. Graham, senior fellow at the National Center for Policy Analysis, discussed how, despite the assurance from the CBO and the Department of Health and Human Services (HHS), that the risk corridor programs are budget-neutral, it is unlikely to occur in reality, and urged Congress “to ensure that [taxpayers’] liabilities in the risk corridors are limited and precisely quantified.”
  • Seth J. Chandler, foundation professor of law at the University of Houston Law Center, expressed his concern about how the risk corridors are being implemented and the calculation methodology used by CBO.
  • Cori E. Uccello, senior health fellow at the American Academy of Actuaries, explained the inherent financial risks imposed on insurers under PPACA and stated that any revisions must be made with sensitivity to the possible impact on insurer risks, insurance availability, and insurance premiums.
  • Edmund F. Haislmaier, senior research fellow in health policy at the Heritage Foundation, stated that the reinsurance and risk adjustment programs alone should be “more than sufficient to address the basic uncertainties – market selection and individual selection risks ­­­­– that insurers face in the post-PPACA market” and urged Congress to eliminate the risk corridor program.
  • Dr. Mandy Cohen, acting deputy administrator and director at the Center for Consumer Information and Insurance Oversight at the Centers for Medicare & Medicaid Services, stated that the access to health care for the previously uninsured under the PPACA effectively benefits those who had already been insured, as uncompensated costs are commonly passed to American families through higher taxes, premiums and health care costs.

During the question-and-answer period, the discussion centered on the accuracy of the CBO estimates, the possible liability for taxpayers, how the risk programs operate to reduce uncertainty and the impact of the law on health care costs.

For more information, contact Katy Spangler, senior vice president, health policy, at 202-289-6700.

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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).