In an unpublished opinion*, the 10th Circuit Court in Moon v. Tall Tree Administrators, LLC (10th Cir. May 19, 2020) upheld a self-insured group health plan’s exclusion of “pregnancy charges acting as a surrogate mother” as unambiguous and enforceable, even though that exclusion was nested within a larger exclusion of “[n]on-traditional medical services, treatments, and supplies.”

In the case, Moon, an employee of Mountain View Hospital in Utah and a participant in their self-insured group health plan, asked the third party administrator in 2011 whether surrogate maternity expenses were covered and was told that they were not.  Moon underwent a surrogate pregnancy in 2013 without notifying the plan and her expenses were covered.  She agreed to act as a surrogate again in 2015, but this time the plan denied coverage for her pregnancy expenses under the cited exclusion.  Moon argued that her expenses were conventional prenatal and childbirth expenses and that because the exclusion for surrogacy expenses was nested within a larger exclusion of “non-traditional” services and treatment, it was not applicable.  The district court disagreed, and granted summary judgement for the plan.

Because it was decided on summary judgment, the 10th Circuit reviewed the matter “de novo” – i.e., as a trial court would, rather than under the “abuse of discretion” standard of review applicable under Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989) when the plan document expressly accords discretion to the plan administrator to interpret the terms of the plan document.

The 10th Circuit affirmed enforcement of the exclusion on the grounds that “a reasonable person in the position of the participant would view ‘pregnancy charges acting as a surrogate mother’ as an example of a non-traditional medical expense” and hence as excluded care.  Perhaps illustrating the legal maxim that “bad facts make bad law,” it is impossible to tell whether the court’s conclusion was tainted by the fact that the plaintiff proceeded with two separate surrogate pregnancies after confirming that that the plan did not cover this type of expense.

In an earlier case, Roibas v. EBPA, LLC, 346 F. Supp. 3d, 164 (D. Maine 2018), the exclusion simply stated “[e]xpenses for surrogacy,” and a dispute arose as to whether that referred to the cost of hiring a surrogate, or the surrogate’s own pregnancy and childbirth expenses.  The plan had already covered some prenatal coverage before learning that it was a surrogate pregnancy and denying subsequent claims.  Acknowledging that the exclusion was ambiguous, the Maine District Court upheld it out of deference accorded to the plan administrator’s interpretation of the ambiguous plan term (the Firestone standard of review applied), and based on the conclusion that the plan administrator’s interpretation was reasonable.

For sponsors of self-insured health plans, these cases highlight the importance of careful drafting of plan exclusions, particularly in an area like surrogate births where medical advancements and social trends are evolving fairly rapidly.  They also provide an inflection point to examine some of the other legal pitfalls of excluding surrogate pregnancy costs from coverage.

First, there is a practical concern presented by not always being able to know when a participant or dependent’s pregnancy is for surrogacy purposes.  The plans in both the Moon and Roibas cases unwittingly reimbursed some surrogate pregnancy expenses before terminating coverage.  Because the facts of surrogacy are not always transparent, the plan sponsor may have difficulty consistently enforcing even unambiguous exclusions of surrogate pregnancy expenses.   This could potentially lead to fiduciary breach charges.  Plan sponsors may also be hard pressed to justify denying the costs of an intended surrogate pregnancy while covering the maternity expenses of a participant who intends to permit the child to be adopted.

As for legal concerns, there are two salient ones.  First, the Pregnancy Discrimination Act, applicable to employers with 15 or more employees, mandates that a group health plan cover pregnancy in the same manner as other medical conditions, making it difficult for a plan sponsor to justify excluding coverage of a pregnancy based on the way in which the mother became pregnant or on their plans for the child, once born.  Second, for non-grandfathered group health plans under the Affordable Care Act, the Act requires first-dollar coverage of preventive services including prenatal and post-natal care.  The ACA does not carve out surrogate pregnancies in this regard.  There are also potential tax consequences to providing surrogacy benefits, and fertility benefits, that are reviewed in some detail here.

As an alternative to a coverage exclusion, group health plan sponsors who want to limit the use of their plan benefits by individuals who may be compensated for a surrogate pregnancy may give thought to applying their plan’s right of reimbursement and subrogation to compensation that the participant receives.  Subject to state insurance law, this is generally how group health insurance carriers approach the issue, covering the cost of surrogate prenatal care and delivery but seeking reimbursement, or asserting subrogation rights, thereafter.**

To take this approach essentially equates the compensation paid to a surrogate by a couple struggling with infertility, to the recovery an injured participant receives from a third party tortfeasor.  Plan sponsors may have varying levels of comfort with this approach and should certainly seek ERISA counsel first, as well as counsel with expertise in surrogacy laws, as they vary significantly state to state.

*Unpublished opinions generally are not binding precedent but may be cited for persuasive value. The 10th Circuit covers the district courts of the states of six states of Oklahoma, Kansas, New Mexico, Colorado, Wyoming, and Utah, plus those portions of the Yellowstone National Park extending into Montana and Idaho.

**Effective January 1, 2020, Nevada is a notable exception to other states in this regard, banning carriers from denying coverage for surrogate pregnancies and from seeking reimbursement, subrogation, etc.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. © 2020 Christine P. Roberts, all rights reserved.

Photo Credit: Christian Bowen, Unsplash.

            Employers value flexibility in designing their group health benefits so as best to attract and retain qualified personnel. One issue that remains perpetually murky, in this regard, is the legality of management carve-outs, whereby an employer offers certain group health insurance options or classes of coverage only to management or other highly paid groups.   The following true or false discusses some of the rules that come into play.

1. The ACA contains a rule that restricts employers’ ability to offer different insured group health benefits to highly compensated employees, than to other employees.

             TRUE:  Under Section 2716 of the Public Health Service Act, which was incorporated into the Affordable Care Act (ACA), non-grandfathered, insured group health plans generally must satisfy nondiscrimination rules similar to those that apply to self-insured group health plans under Section 105(h) of the Internal Revenue Code (“Code”). These rules generally require some measure of parity between higher-paid employees, and non-highly paid employees.  Limited scope dental or vision plans provided under policies separate from group medical coverage are excepted.

2. However, the IRS is not currently enforcing the ACA nondiscrimination rules for insured group health plans.

             TRUE:  In 2011 the IRS postponed enforcement of these rules, pending publication of regulations that will guide employers as to how to comply. As we approach the ACA’s eighth anniversary in March 2018, regulations have yet to issue.  When regulations do issue they will apply on a prospective (going forward) basis.

3. Therefore employers have free reign to offer different benefits to management employees or other highly-compensated groups of employees.

             FALSE:   Although there are some circumstances in which employers may offer different and/or better group health insurance to management or other highly-paid employee groupings, the Section 125 cafeteria plan rules do impose some design restrictions.  These rules will apply to employers that have any type of Section 125 cafeteria plan arrangement, including premium-only plans (e.g., employees’ share of premiums are paid on a pre-tax basis, with no other cafeteria plan features) and to employers with other cafeteria plan features such as a health flexible spending account or dependent care flexible spending account.  The rules are explained in the questions that follow.

4. All management employees are “highly-compensated employees” for cafeteria plan testing purposes.

             FALSE: First, the technical term is “highly-compensated individuals,” and it includes the following groups, which will not necessarily overlap 100% with an employer’s management group population:

• Officers during the prior plan year
• Greater than 5% shareholders (in either the preceding or current plan year)
• Highly compensated employees (those earning more than $120,000 in 2017 are highly compensated employees in 2018)
• Spouses or dependents of any of the above.

5. If I maintain just a premium-only plan and all employees can participate and elect the same salary reductions for the same benefits, the premium only plan is nondiscriminatory.

             TRUE.  Proposed cafeteria plan regulations that issued in 2007 provide this safe harbor rule. Employers may rely on the proposed rules.

6. If I maintain just a premium-only plan and don’t meet the requirements of the safe harbor, the POP is automatically discriminatory.

            FALSE.  Under these circumstances your premium-only plan will not satisfy the safe harbor mentioned above, but it could still pass other applicable nondiscrimination tests.  There is some uncertainty, under the 2007 proposed regulations, as to whether the only applicable test applies to eligibility, or whether there is a benefits component of the test.  It may be best to consult a seasoned third party administrator, or benefits attorney, if you have questions.

7. If my cafeteria plan fails all types of nondiscrimination testing, all is lost.

             FALSE. The 2007 proposed regulations permit “disaggregation” – breaking up one plan into separate component plans – one benefitting participants who have completed up to three years of employment, and another benefitting those with three or more years of employment.  Each component plan must separately pass cafeteria nondiscrimination rules applicable to eligibility, and contributions and benefits.  Plans that fail nondiscrimination testing as a whole may pass testing after permissive disaggregation.  The proposed regulations did not discuss whether plans may be disaggregated based on factors other than length of employment, and further guidance on this point would be welcome.

8. The IRS does not audit cafeteria plans so it doesn’t matter anyway.

FALSE. Although audits specific to a cafeteria plan are seldom seen, the IRS could expand a payroll audit or other business or benefit plan audit to encompass operation of a cafeteria plan, even a premium-only plan.  Therefore it is important to comply with the cafeteria plan nondiscrimination rules.

9. Our company pays 100% of health premiums for highly compensated individuals directly to the carrier (or the employees pay themselves on an after-tax basis), so there is no cafeteria plan nondiscrimination issue.

             TRUE.  However, any insured group health plan design that provides better treatment for higher paid employees may fall afoul of the ACA nondiscrimination regulations mentioned in questions 1 and 2, when they issue; although the regulations will apply prospectively, neither employers nor their highly compensation staff should assume that preferential health plan designs are more than temporary.

10. A “Simple” Cafeteria Plan is exempt from Section 125 nondiscrimination rules.

             TRUE.  A nondiscrimination safe harbor applies to “simple” cafeteria plans under Code Section 125(j), however those plans are subject to other design restrictions that may prove unworkable for many employers, including mandated employer matching or non-elective contributions. They are also limited to employers with 100 or fewer employees on business days during either of the two preceding years.