The ERISA Litigation Newsletter - July 2012

Editors' Overview

This month, we feature two articles that examine the state of the law on two important areas in employee benefits. Last month, the Supreme Court issued its much anticipated decision regarding the Patient Protection and Affordable Care Act. Our lead article examines the impact of that decision on plans and plan fiduciaries, as those entities work towards compliance with the Act in the absence of significant regulatory guidance. Against that backdrop, the authors examine the risks and exposures that employers may face in adjusting their programs to the new requirements imposed by the Act. The authors also examine the litigation risks and potential causes of action that may arise in the wake of the Act's implementation.

Our second article examines deferred-compensation arrangements. Using recent judicial decisions as a guide, the author considers ERISA's relationship with deferred-compensation programs and ERISA's impact on disputes involving benefits payable under those programs. The author concludes with suggestions for employers considering such arrangements as part of their compensation programs.

As always, be sure to review the section on Rulings, Filings, and Settlements of Interest.

PPACA Victory Sets The Stage For New Wave of

Litigation1

Contributed by Howard Shapiro, James R. Napoli, Kara L. Lincoln and Brian S. Neulander

The Patient Protection and Affordable Care Act (PPACA) has largely survived its constitutional challenges, providing a degree of certainty to health care insurers, providers and consumers regarding the general coverage rules applicable to group health plans.

Although PPACA provides the general coverage mandates, uncertainty remains as to the specific rules that will govern employer-provided group health plans, because the various federal oversight agencies, such as the U.S. Department of Labor (DOL), have not yet issued those rules.

As such, plan sponsors and fiduciaries are left to implement PPACA's coverage mandates in an environment where "good faith" compliance is the standard, but where risks of litigation exist as to the manner in which the various coverage mandates are implemented and/or administered. This article explores some of these litigation risks.

Potential Causes of Action

PPACA amended several federal statutes, including the Employee Retirement Income Security Act of 1974, the Public Health Services Act (PHSA) and the Fair Labor Standards Act (FLSA). Litigation to enforce PPACA's mandates against employers, plan sponsors and fiduciaries could arise under any of these statutes.

Many of the suits challenging PPACA's coverage mandates are expected to be brought pursuant to ERISA's remedial provisions, because such mandates are incorporated into ERISA under PPACA.

Defendants are also likely to see a rise in actions brought pursuant to the FLSA. PPACA amended this statute to provide "whistleblower" protections to individuals reporting statutory violations, after filing a complaint with the U.S. Occupational Safety and Health Administration and exhausting administrative remedies.

Litigation Risks

PPACA's new coverage mandates are likely to generate both complex class actions and single-plaintiff cases. Such litigation may implicate ERISA's fiduciary duty to act for the exclusive purpose of providing benefits, plan communications regarding benefits, participants' expectations regarding the various coverage mandates and alleged cutbacks to accrued benefits, as well as alleged employment discrimination, retaliation or interference with benefits.

While it is uncertain how PPACA and its requirements will be challenged in the courts, several foreseeable examples are discussed below.

Mandated Benefits

First, participants and beneficiaries may bring various causes of action to enforce PPACA's coverage mandates. These coverage mandates include: coverage for preventive care, pre-existing conditions, and dependent children until age 26, as well as the elimination of annual and lifetime dollar limits on "essential health benefits."

It is anticipated that litigation seeking to enforce PPACA's coverage mandates will take one of two general forms; namely, claims that challenge (1) the manner in which a plan implements or administers a coverage mandate, and (2) the manner in which a coverage mandate has been communicated to participants.

For example, a participant may challenge an annual dollar limit or seek payment for an "essential health benefit," asserting that additional benefits are required by PPACA even if not provided by the governing plan's terms.

Likewise, a participant may be able to challenge a plan's grandfathered status on the grounds that the plan administrator failed to adequately communicate the plan's status. If successful, the loss of grandfathered status would subject the plan to certain additional coverage mandates, and could further subject the plan to claims for benefits pursuant to those mandates.

Work Force Realignments

Additionally, there could be litigation related to employers' work force realignments. Beginning in 2014, PPACA requires employers to provide affordable health care coverage to full-time employees or pay a penalty. For this purpose, a full-time employee is anyone who works 30 or more hours per week.

To avoid the penalty, some employers may realign their work forces with more employees working less than 30 hours per week. Any such workforce realignment inherently carries with it risks of litigation under ERISA § 510, which generally prohibits interference with a participant's benefits or other rights under ERISA.

In addition, such workforce realignments may implicate various other federal antidiscrimination statutes, e.g., the Age Discrimination in Employment Act and Title VII of the Civil Rights Act.

Retiree-Only Plans

PPACA generally does not apply to plans that cover fewer than two active employees, often referred to as "retiree-only plans." Thus, some employers have spun off retiree-only plans from plans covering both actives and retirees in order to avoid having to provide PPACA's various coverage mandates, i.e., enhanced benefits, to certain retiree populations.

There is already an extensive body of retiree-rights litigation under ERISA and the Labor Management Relations Act (LMRA), holding that retirees may not be deprived of "vested" benefits. The restructuring of existing plans to become or create new retiree-only plans is likely to follow the contours of the established ERISA and LMRA battle grounds.

Employer Use of State Exchanges

We expect litigation involving the interaction of employer-provided health benefits with the state-sponsored health insurance exchanges mandated by PPACA. Under PPACA, the exchanges must be operational by Jan. 1, 2014, to provide a set of standardized health insurance plans from which eligible individuals can purchase health insurance.

Employers may face litigation when utilizing the insurance exchanges as part of their overall benefit strategies. For example, an employer could terminate its retiree medical plan and use the insurance exchanges as a ''soft landing'' for the affected retirees. Litigation could ensue regarding the details, timing and implementation of strategies involving the exchanges.

IROs

PPACA mandates that non-grandfathered plans must provide an effective external review process by independent review organizations (IROs). Decisions by IROs are generally final...