Publications: Wellness Programs, Health Savings Accounts and Plan Reimbursement and Recovery Rights

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Careful Design and Implementation of Wellness Programs is Necessary

More and more employers are adopting wellness programs to reduce health care costs and increase productivity. However, because these arrangements are subject to complicated rules, many employers may unknowingly be exposing themselves to lawsuits or penalties.

To help employers create wellness programs that comply with HIPAA, the Departments of Treasury, Labor, and Health and Human Services have issued final regulations that employers will be required to follow. These regulations govern the use of plan-based wellness rewards such as reduced copayments, coinsurance, deductibles and premiums.

Under HIPAA, a plan is free to give “at risk” participants more favorable treatment. For example, a plan is free to offer a premium discount to an employee who participates in a diabetes disease management program while others without diabetes pay the full premium rates. A plan can also offer a reward that is not based on a “health factor.” For example, a plan may offer a reward to those who participate in wellness screening programs as long as their participation is not tied to the achievement of a desired health result. However, if a reward is tied to specific health factor (for example, achieving a favorable cholesterol level) certain criteria must be met: 

• The reward must be limited to a maximum of 20% of the applicable coverage amount.
• The wellness program must be reasonably designed to promote health or prevent disease. 
• Each participant must be given the opportunity to qualify for the reward at least once per year.
• The program must be available to all similarly situated individuals.

The last point means that a plan must provide an alternative standard for people who will find it unnecessarily hard to meet the primary standard because of a medical condition. For example, a wellness program can offer a reward for quitting smoking, but it also must establish a reasonable alternate standard for receiving the reward (such as attendance in a smoking cessation program) in the event an individual cannot quit due to nicotine addiction. The reward must be limited to 20% of the cost of employee-only coverage under the plan (includes employer contribution) and the participant must be given the opportunity to meet the alternative standard at least once each
year.

In addition to HIPAA, employers must also comply with the Americans With Disabilities Act (ADA). This means that a plan cannot make a disability-based distinction unless it is cost-justified based on actuarial data specific to the employer or actual experience. Because the standard for costjustification is not easy to meet, it is generally best to make sure a plan does not create a disability-based distinction.

The ADA also generally prohibits health-related inquiries or examinations in connection with a wellness program unless they are voluntary. According to EEOC guidance, “voluntary” means that no penalty is assessed for an employee’s refusal to participate in a wellness program, and the employee is not otherwise required to participate.

Finally, ERISA Section 510 prohibits an employer from discharging, firing, suspending, expelling, disciplining or otherwise discriminating against a participant for exercising any rights the plan provides for. So it is critical that plan documents are consistent with all applicable components of the wellness program.

Because of the complex rules that govern them, it is important for employers to involve counsel in the design, implementation, and administration of employee wellness programs.

Legislation Increases Desirability of Health Savings Accounts

The Tax Relief and Healthcare Act of 2006 made several changes to the rules governing health savings accounts that are generally effective January 1, 2007. Such changes include the following:

Until January 1, 2012, the Act permits a one-time rollover from a health reimbursement account (HRA) or flexible saving account (FSA) to a health savings account (HSA) in an amount up to the HRA or FSA account balance as of September 21, 2006. Plan sponsors that wish to allow such a rollover must amend their plans. In order to avoid taxation, an individual must remain eligible to contribute to an HSA for 12 months after the date of transfer. This new rollover ability may be desirable for an employer who 1) established an HRA before HSAs were available, and who 2) now wishes to establish an HSA as the defined contribution portion of its employees’ health coverage.

The Act eliminates the conflict that existed between an FSA grace period and the establishment of an HSA. An employee who participated in an FSA in the year before an HSA was established will be able to contribute to the HSA at the beginning of the year (regardless of whether the FSA has a grace period) if the individual’s FSA account is exhausted by the end of the year or the entire remaining balance of the FSA is contributed to an HSA as permitted under the Act.

Under prior law, the amount an individual could contribute to an HSA was limited by the lesser of the statutory limit and the high deductible health plan (HDHP) deductible amount. The Act eliminates the need to limit an HSA contribution to the amount of the HDHP deductible. This change will require modification of HSA instruments and cafeteria plan provisions that contain the former dual limit.

Under prior law, the HSA contribution limit was prorated for an individual who became HSA eligible after the beginning of the year. Under the Act, a full HSA contribution will be allowed for any individual covered under an HDHP on December 1 of any year. Outside of a cafeteria plan, the Act permits an employer to provide lower HSA contributions to highly compensated individuals than it does for rank and file employees.

Finally, the Act allows a one-time rollover from an IRA into an HSA. Such rollover is limited to the amount that the HSA would permit as a contribution for the year. Both the IRA and HSA account holders must be the same.

Precise Plan Language Critical to Preserve Third-Party Recovery Rights

A group health plan could lessen the impact of a catastrophic claim if it is able to recover anamount payable to a participant or beneficiary by a third party as a result of the illness or injury triggering the claim. Last year, in Sereboff v. Mid-Atlantic Medical Services, the U.S. Supreme Court unanimously upheld the right of a plan to enforce its third party recovery rights. The Court held that a plan could recover an amount paid to a participant if that amount constitutes specifically identifiable funds in the participant’s possession (as distinguished from an attempt to recover from the participant’s assets generally).

In Popowski v. Parrott, the U.S. Court of Appeals for the Eleventh Circuit strictly applied the Sereboff standard while examining the language of two plans. “Plan 1” provided that “the plan has a lien on any amount recovered by the covered person whether or not designated as payment for medical expenses. This lien shall remain in effect until the plan is repaid in full. The covered person must repay to the plan the benefits paid on his or her behalf out of the recovery made from the third party or insurer.” “Plan 2” provided that if “the covered person receives a settlement, judgment, or other payment relating to the accidental injury or illness from another person, firm, corporation, organization or business entity paid by, or on behalf of, the person or entity who allegedly caused the injury or illness, the covered person agrees to reimburse the plan in full, and in first priority, for any medical expenses paid by the plan relating to the injury or illness.”

The court held that the language in Plan 1 was sufficient to confer a right of recovery, but the language in Plan 2 was not. The court reasoned that Plan 1 specified both the fund (recovery from the third party or insurer) out of which reimbursement was due to the plan and the portion due the plan (benefits paid by the plan on behalf of the covered person).

On the other hand, the language in Plan 2 did not specify that any reimbursement be made out of any particular fund, as distinct from the beneficiary’s general assets. Instead, it made receipt of “a settlement, judgment, or other payment relating to the accidental injury or illness” a trigger for the general reimbursement obligation. Further, in requiring reimbursement “in full,” it failed to limit recovery to a specific portion of a particular fund. The court concluded that because Plan 2 failed to specify that recovery come from any identifiable fund or to limit that recovery to any portion thereof, it failed to meet the requirements outlined in Sereboff.

The Eleventh Circuit set an exacting standard to determine whether a plan establishes a right of third party recovery. It is not much of a stretch to read Plan 2 as saying in substance the exact same thing as Plan 1. Therefore, it is essential for employers to ensure that their plans are carefully drafted in a manner that provides a right of recovery. It is also helpful to ensure that each plan participant executes a subrogation and right of recovery agreement containing language sufficient to confer a right of recovery, and a proper provision should also be contained in the plan’s summary plan description.

Set-Off Right Must Be Contained in Plans

Employers often ask counsel whether they can recover a benefit overpayment by reducing future benefit payments until the overpayment is recovered. The U.S. Court of Appeals for the Seventh Circuit has determined that this is in fact possible: In Northcutt v. General Motors Hourly-Rate Employees Pension Plan, the court held that plan contractual provisions may be used to reduce or suspend a participant’s benefits to recoup a benefit overpayment.

The facts of the case are as follows: A pension plan allowed the plan to reduce benefits paid to a participant who received Social Security disability benefits. The plan further provided that if a participant received benefits and later received a retroactive Social Security benefit, the participant must repay the plan for any overpaid benefits. Two employees who received disability benefits unreduced for Social Security benefits refused to reimburse the plan. The participants brought a lawsuit alleging that the plan’s contractually based reimbursement provision violated the statutory structure and policies of ERISA.

The court determined that Supreme Court decisions related to plan reimbursement do not address the contractual reimbursement arrangement found in the plan at issue. The participant’s position overlooked the fact that ERISA was designed to ensure the integrity of written plans and to enforce them as written. Similarly, according to the court, the participants overlooked the important role that reimbursement of overpaid plan benefits plays in the continuing viability of plans for all participants and beneficiaries.

Although this case applied to a pension plan, it can also be applied to other benefit plans such as defined contribution retirement plans, medical plans and disability plans. For example, many long-term disability plans contain a Social Security set-off provision similar to that found in the plan in Northcutt. Plan sponsors should consult with counsel to ensure that appropriate set-off language is contained in plan documents and summary plan descriptions.