California Employers: Get Ready for the CalSavers Program

Beginning on July 1, 2019, California private employers with 5 or more employees, who do not already sponsor a retirement plan, may enroll in the CalSavers Retirement Savings Program (CalSavers).   Mandated employers must enroll in CalSavers according to the following schedule:

  • Over 100 employees – June 30, 2020
  • 50-99 employees – June 30, 2021
  • 5-49 more employees – June 30, 2022

Below, we describe the key features of the CalSavers program.

  • CalSavers is the byproduct of California Senate Bill 1234, which Governor Brown signed into law in 2016. It is codified in Title 21 of the Government Code and in applicable regulations. It creates a state board tasked with developing a workplace retirement savings program for employers with at least 5 employees that do not sponsor their own retirement plans (“Eligible Employers”). This may mean a 401(k) plan, a 403(b) plan, a SEP or SIMPLE plan, or a multiple employer (union) plan.
  • CalSavers applies to private for-profit and non-profit employers, but not to federal or state governmental entities.
  • CalSavers calls for employees aged at least 18, and receiving a Form W-2 from an eligible employer, to be automatically enrolled in the CalSavers program after a 30 day period, during which they may either opt out, or customize their contribution level and investment choices.
  • The default is an employee contribution of 5% of their wages subject to income tax withholding, automatically increasing each year by 1% to a maximum contribution level of 8%. Employer contributions currently are prohibited, but may be allowed at a later date.
  • Prior to their mandatory participation date, Eligible Employers will receive a notice from the CalSavers program containing an access code, and a written notice that may be forwarded to employees. Eligible Employers must log on to the CalSavers site to either register online, or certify their exemption from Calsavers by stating that their business already maintains a retirement plan. The link to do so is here. To do either, you will need your federal tax ID number and your California payroll tax number, as well as the access code provided in the CalSavers Notice.
  • Eligible Employers who enroll in CalSavers will provide some basic employee roster information to CalSavers. CalSavers will then contact employees directly to notify them of the program and to instruct them about how to enroll or opt-out online. Those who enroll will have an online account which they can access in order to change their contribution levels or investment selections.
  • Once an Eligible Employer has enrolled in CalSavers, their subsequent obligations are limited to deducting and remitting each enrolled employee’s contributions each pay period, and to adding new eligible employees within 30 days of hire (or of attaining eligibility by turning age 18, if later).
  • Eligible employers may delegate their third party payroll provider to fulfill these functions, if the payroll provider agrees and is equipped to do so.
  • Eligible Employers are shielded from fiduciary liability to employees that might otherwise arise regarding investment performance or other aspects of participation in the CalSavers program.
  • There are employer penalties for noncompliance. The penalty is $250 per eligible employee for failure to comply after 90 days of receiving the CalSavers notification, and $500 per eligible employee if noncompliance extends to 180 days or more after the notice.
  • Eligible Employers must remain neutral about the CalSavers program and may not encourage employees to participate, or discourage them from doing so. They should refer employees with questions about CalSavers to the CalSavers website or to Client Services at 855-650-6918 or

The CalSavers program was challenged in court by a California taxpayer association, on the grounds that it was preempted by ERISA as a consequence of the automatic enrollment feature.[1] On March 29, 2019, a federal court judge concluded that ERISA did not prevent operation of the CalSavers program, because the program only applies to employers who do not have retirement plans governed by ERISA.  The taxpayer association is deciding whether to amend their complaint by May 25, 2019, or appeal the decision to the Ninth Circuit.  Therefore, further litigation may ensue, but after this important early victory the timely rollout of CalSavers seems likely, and employers should act accordingly.  (Programs similar to CalSavers are up and running in Oregon and Illinois, and have been proposed in a handful of other states.)

Employers reviewing this information should pause to re-examine their earlier decisions against maintaining a retirement plan for employees. The benefit of sponsoring your own plan is that it will bear the “brand” of your business and will serve to attract and retain quality employees.  Further, the administrative functions you must fulfill in order to participate in CalSavers are comparable to those required by a SEP or SIMPLE plan, both of which offer larger contribution limits and an employer deduction to boot.  If mandatory participation in CalSavers is bearing down on your business, now is a good time to talk to a retirement plan consultant, or your CPA or attorney, to determine whether you can leverage the time investment CalSavers will require, into a retirement arrangement that offers considerably more to your business and your employees.

In the meantime, here are some online resources for Eligible Employers:

  • Employer checklist – a punchlist to help you prepare for enrollment.
  • CalSavers Program Disclosure Booklet – this goes into significant detail about the way CalSavers contributions will be invested; notably the cost of these investments (consisting of an underlying fund fee, a state fee, and a program administration fee), will range at launch between $0.83 to $0.95 for every $100 invested, which is approximately twice the cost load for typical 401(k) investments.  It is expected that the fees will drop as the assets in the program grow, according to a breakpoint schedule approved by the CalSavers board and program administrator.
  • Online FAQ

[1] A Department of Labor “safe harbor” dating back to 1975 excludes “completely voluntary” programs with limited employer involvement from the definition of an ERISA plan.  29 C.F.R. § 2510.3-2(d).  The Obama administration finalized regulations in 2016 that would have expressly permitted state programs like CalSavers as exempt from ERISA coverage. However, Congress passed legislation in 2017 that repealed those regulations.

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.  © 2019 Christine P. Roberts, all rights reserved.

5 Things California Employers Should Know About the Current State of Health Care Reform

by Amy Evans, HIP, President, Colibri Insurance Services and Christine P. Roberts, Mullen & Henzell L.L.P.

There is still a lot of debate going on at the federal and state levels about health care reform. In Washington, D.C., the Senate is working on a second round of revisions to the American Health Care Act (AHCA), but there is lack of alignment within the Republican party about the new plan, and the current administration is now occupied by other items. At the state level, a Senate bill proposing a state-wide single-payer health care system is making its way through the legislature and generating a lot of conversation about a complete overhaul of health care financing and delivery. With all of the uncertainty and political noise, it can be difficult for employers to know where to put their attention and resources. Here are five things California employers should know about the current state of health care reform.

1) California is leading the discussion about single-payer. California Senate Bill 562 is currently making its way through the state legislation. If enacted, SB 562 would eliminate the private health insurance system in California, including health insurance carriers, health insurance brokers and employer-sponsored health insurance benefits. It would replace them with a state-run, “single-payer” system called the Healthy California program, which would be governed by a 9-member executive board, and guided by a 22-member public advisory committee. At this juncture, funding measures for the bill are vague but include appropriation of existing federal funding for Medicare, Medi-Cal, CHIP and other health benefits provided to California residents, as well as an increase in payroll taxes. The estimated cost for this system is $400 billion annually, which is twice the size of the current budget for the entire state. SB 562 is widely popular in concept but also widely misunderstood, with many confusing it for a universal coverage system that would be supplemented by private and employer-sponsored coverage. The bill is currently in suspense with the Appropriations Committee in Sacramento. The committee chair (who is also the author of the bill) may wait for the results of a detailed study on the bill’s cost and impact, or he may choose to send it to the Senate for a vote. If the bill makes it through the Senate and the Assembly (which it is likely to do because it is such a popular concept), it is anticipated that it will be vetoed by Governor Jerry Brown, who has already expressed concerns about the bill’s financing. Alternatively, the legislature could vote on the bill and then table it until a new governor takes office in 2018. Either way, the bill would become a ballot measure to be approved by voters. Progress of the American Health Care Act in Washington, D.C. will impact SB 562 because the state bill would make use of state innovation waivers, which are slated to expand under the AHCA, but federal retooling of health care reform won’t impede SB 562’s progress to the Governor’s desk. Employers who offer health insurance as a benefit to attract and retain quality employees should be aware of the meaning and impact of this single-payer bill and should continue to track its progress.

 2) “Play or Pay” is still in play. The Affordable Care Act (ACA)’s “play or pay” penalties are still in place, so Applicable Large Employers are required to offer affordable, minimum value health insurance to eligible employees or pay a penalty. The current administration has suggested that they will reduce the penalties to $0 retroactive to 2016, but that has not happened yet. The 1094/1095 reporting requirements also remain in place. There has been some recent talk that penalty notices for 2015 and 2016 may be going out soon, perhaps first to the employers who have the largest penalty assessments.†  However, the Internal Revenue Service is also significantly understaffed so the availability of resources to enforce these penalties remains in doubt. Applicable Large Employers should continue to assess their play or pay options, track employee hours and offers of coverage, and complete 1094/1095 reporting for 2017. They should also address any penalty notifications from the IRS in a timely manner.

3) If there are no penalties, revenue has to come from another source. The extremely unpopular revenue-generating pieces of the ACA, including the individual mandate, the employer mandate, and the Cadillac Tax (currently delayed to 2020) are likely to be cut from the new AHCA, but that would create a shortfall in revenue that would need to made up elsewhere. The employer exclusion is a popular target in current discussions – this is the tax benefit that allows employer contributions to health insurance to be considered separate from employee income. If the employer exclusion is capped or eliminated, it will effectively increase taxes on the approximately 50% of U.S. residents who receive health insurance through their employers, and deliver a huge blow to the employer-sponsored health insurance system. Employers who offer health insurance as a benefit to attract and retain quality employees should be aware of the meaning and impact of capping or eliminating the employer exclusion.

4) 2018 Health insurance renewals will be business as usual. Insurance carriers filed their health insurance plan designs and rates with the regulatory agencies (Department of Insurance and Department of Managed Health Care) for 2018, so any substantive changes to plans (for example, removing Essential Health Benefits) won’t happen until 2019. For employers offering coverage, this means business as usual for 2018 health insurance renewals. Expect increases to premiums to average 10-15%. Also expect lots of plan changes – some plans may be discontinued and participants will be mapped to new plans; benefits many change even if plan names remain the same; carriers may reduce networks and pharmacy benefits and increase deductibles and out of pocket maximums to keep premiums in check.

5) Cost-containment tools are gaining in popularity. As out of pocket costs continue to increase for health insurance participants, we will continue to see a move towards consumer-driven health care, where participants are encouraged to be more involved in the spending of their health care dollars. Health Savings Accounts (HSAs) are growing in popularity again, carriers are providing tools to promote transparency for comparison shopping, and alternative delivery systems like telehealth, nurse on call, minute clinics, free-standing urgent care centers, and even flat-fee house calls are gaining in popularity. Health Reimbursement Arrangements (HRAs), self-funding arrangements and cash-benefit policies can also be effective tools for cost containment. Employers should work with their health insurance brokers and other benefit advisers to assess the value of these tools in their current employee benefits programs.

In closing, employer-provided health benefits rest on shifting legal sands and that is likely to remain the case for some time.   Planning opportunities, and pitfalls, will arise as the reform process moves forward and the informed employer will be in the best position to navigate the changes ahead.

†Hat tip to Ryan Moulder, Lead Counsel at Accord-ACA for this detail.

Waiting Period Limits for California Small Group Early Renewals

The following post was published on September 5, 2014 and updated on September 23, 2014.

As we posted a few days ago, some uncertainty remains for California employers regarding eligibility waiting period limits for “late renewal” insured group health plans that follow, most commonly, a December 1 through November 30 cycle.   Many small to mid-sized California employers switched from a calendar year policy cycle to a late renewal cycle in 2013, in an effort to postpone their exposure to increased health premiums resulting from ACA coverage mandates and insurance market reforms taking effect in 2014.

The ACA permits an eligibility waiting period of up to 90 days for plan years beginning on and after January 1, 2014.  California law governing insurers and HMOs restricted the waiting period to 60 days under legislation that very recently has been repealed effective January 1, 2015.  The repeal left open the issue of whether carriers would hold employers renewing late in 2014 to the 60-day waiting period limit.

At least with regard to small group coverage (2 to 50 employees), the original answer to that question appeared to be “yes” for two major carriers in the state whose approach may be a bellwether for other carriers:  Anthem and Blue Shield.   Originally upon announcement of S.B. 1034’s passage, neither would permit a 90-day eligibility waiting period on small group policies or HMO contracts that are renewed or first issued during the remainder of 2014.  The permissible waiting period choices were to have been limited to first of month following date of hire, or first of the month following 30 days from the date of hire.  However Anthem later modified its position in this regard, and will permit employers to request, in writing, a waiting period extension (not to exceed 90 days total) to go into effect as of January 1, 2015.  Blue Shield appears to be sticking to the renewal options listed.

For small group policy renewals and new sales occurring on or after January 1, 2015, the carriers will permit waiting periods equal to 90 days from date of hire, first of month following date of hire, and first of month following 30 days from the date of hire.   One of the carriers may also offer first of month following 60 days, but this is not yet certain.  Another carrier will prorate premiums when the 91st day after hire falls in the middle of the month.

So far these carriers are silent on waiting periods for large group renewals and new sales occurring in the remainder of this year.  Employers in this category likely can establish their own waiting period limits within the overall ACA 90-day cap.

The carriers are permitting the 90-day waiting period limit for individuals whose small group coverage takes effect on or after January 1, 2015.  Therefore, coverage for individuals whose waiting period bridges the end of 2014 and the beginning of 2015 should begin at the end of the waiting period that began in 2014, rather than after “tacking on” additional wait time permitted in 2015.  Although not expressly required by carriers, this would seem to be a logical strategy for large group employers to take with regard to employees whose waiting periods began to elapse at a time when the maximum limit was 60 days, but end after the point at which the employer increased the maximum limit to 90 days.   This would also have the advantage of meeting ACA requirements so long as the total waiting period does not exceed 90 days.

The final regulations on the maximum ACA waiting period state that carriers (technically, “health insurance issuers”) may rely on eligibility information reported by the employer or other plan sponsor, and will not be considered to have violated the ACA waiting period rule in instances where both of the following requirements are met:

  • the carrier requires the employer/plan sponsor to disclose the terms of any eligibility conditions or waiting period, and to provide notice of any changes to these rules; and
  • the carrier has no specific knowledge of the imposition of a waiting period that would exceed the maximum 90-day period.

Imposing eligibility waiting periods in excess of the ACA 90-day cap other than will trigger excise taxes equal to $100 per day, per impacted plan participant, up to a maximum of $500,000.  Employers and other plan sponsors must voluntarily disclose and pay the tax on IRS Form 8928, Section II.   The excise tax may be abated in whole or in part if the violation was due to reasonable cause and not willful neglect.

California Expands Domestic Partner Health Insurance Coverage to Out of State Providers

Last year California Governor Jerry Brown signed into law a provision that, if it successfully can be implemented, will close a loophole in the California Insurance Equity Act which exempts out of state employers from having to offer domestic partner health insurance coverage to employees residing in this state.

Originally enacted in 2004, the California Insurance Equality Act (AB 2208) amended the California Insurance Code to require that insurance policies that were “marketed, issued, or delivered” to a California resident treat registered domestic partners equal to lawfully-married, opposite sex spouses. Similarly the Health & Safety Code required domestic partner coverage to be offered by California HMOs. For group health coverage this rule generally went into effect as of January 1, 2006. This rule still applies to all manner of insurance contracts within California, not just those providing group health coverage.

The original Act, however, did not apply to insurance coverage issued “outside of California to an employer whose principle place of business and majority of employees are located outside of California.” Cal. Ins. Code § 10112.5. It also did not specifically apply to HMO contracts formed outside of California.

This meant that California residents employed by certain out-of-state companies could not extend group health coverage to their domestic partners lawfully registered with the California Secretary of State.
Effective January 1, 2012, SB 757 closes that loophole, but only with regard to group health insurance and HMOs issued outside of California to any employers. Other types of insurance coverage are not affected.

The law requires that a domestic partner be registered with the California Secretary of State in order to be covered and also that, if the employer require proof of such registration for coverage, it must also require that opposite-sex couples provide proof of their marriage in order to obtain spousal coverage. Written documentation also is required for proof of the end of a marriage or domestic partnership.

It is not clear how the California Insurance Department or the California Department of Managed Health Care will enforce this rule against insurers and HMOs that are not licensed under California law and whose contract is with an out-of-state employer. The office of California Senator Ted Lieu, who sponsored the bill, is working with those agencies towards an enforcement mechanism. It is also possible that the “full faith and credit” clause of the U.S. Constitution could be invoked to require other states to conform to California law. If the law can be enforced it will impact the terms of coverage for non-California companies with California employees. It would not likely be preempted by ERISA, however, because it directly governs insurers and HMOs, and only indirectly impacts employer-sponsored group health plans.

Year-End Troop Return Triggers Benefit Obligations under USERRA

Last month President Obama announced that the remaining 40,000 or so American troops in Iraq would be returning home by December 31 of this year; it is also expected that he will announce an additional troop draw-down from Afghanistan.

For U.S. employers, this means that it is time to get reacquainted with benefit reinstatement rights under the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA). USERRA generally protects the workplace rights of persons who voluntarily or involuntarily leave employment positions to undertake military service and broadly applies applies to all U.S. employers, public or private. Essentially USERRA requires employers to treat employees as if they were employed throughout their period of military service, despite their physical absence.

Provided that the returning servicemember applies for reemployment within set time frames under the regulation, which are based on the period of military service, there is a duty to rehire the servicemember that is subject to very few exceptions. Further, the returning servicemember must be reinstated not to his or her “old” job but to the position – and compensation and perks – that the servicemember would have enjoyed had he or she never interrupted their career to serve our country. This is called the “escalator position.” As with the duty of reemployment there are exceptions to the duty to restore to the “escalator position” but they are few and narrowly construed.

With specific regard to health benefits, employees have a COBRA-like continuation coverage right upon leaving for military service that, provided they pay applicable premiums at 102% of the active employee’s rate, can last for as long as two years following commencement of military service. Upon return to employment those employees would simply transition to the same coverage they enjoyed as active employees. Employees who let their group health coverage lapse while on military leave have the right to have their coverage reinstated. If no waiting period or exclusions would have applied to the servicemember had their coverage been uninterupted, none may apply upon restoration of such coverage. USERRA regulations allow an employer to permit a servicemember to delay reinstatement of health plan coverage until a date that is later than the date of reemployment, but the employer is not required to do so, and employers who wish to do so are advised to first checkwith their insurers to make sure that such coverage will be honored.  Employers planning to delay coverage within USERRA guidelines should also be aware that they may have different insurance reinstatement obligations under the Servicemembers Civil Relief Act.  In short, any plan other than to provide immediate reinstatement of coverage upon reemployment should be discussed with legal counsel and otherwise vetted before implementation.

With regard to retirement plans, the reemployed servicemember is treated as though he or she had remained continuously employed for purposes of pension plan participation, vesting, and accrual of benefits. USERRA treats military service as continuous service with the employer for benefit plan purposes, such that “break in service” rules are not triggered. USERRA pension protections apply to defined benefit plans and defined contributions plans as well as plans provided under federal or state laws governing pension benefits for government employees.

If pension plan contributions are not dependent on employee contributions, the employer must make them within 90 days after reemployment or when contributions are normally made for the year in which the military service was performed, whichever is later. If pension plan contributions are derived from employee contributions or elective deferrals, (such as employer matching contributions to a 401(k) plan) or from a combination of employee contributions or elective deferrals and matching employer contributions, the reemployed service member may make his or her contributions or deferrals during a time period starting with the date of reemployment and continuing for up to three times the length of the employee’s immediate past period of military service, with the repayment period not to exceed five years. The employer is not required to restore retirement plan contributions in advance of a servicemember’s actual return to work.

More information is available in a convenient question and answer format in the Department of Labor’s Final Regulation under USERRA, published December 19, 2005, which you can review here.

Stanford Health Privacy Breach Highlights Downstream Vendor Risks, Issues

In an earlier post I described a HIPAA privacy breach that occurred when a spreadsheet detailing the emergency room treatment of nearly 20,000 patients of Stanford Hospital was posted online, for the better part of a year, at a “homework for hire” website, The New York Times has published an article tracing the breach to a job applicant who received the spreadsheet from a one-person marketing agency hired by the Hospital’s third party billing contractor.

The spreadsheet was originally transmitted in encrypted format from the Hospital to the marketing agent, who had represented himself as a vice-president of the billing contractor and was in fact the hospital’s main contact for the billing contractor. In fact, he was not an executive of the billing contractor, but the billing contractor nonetheless condoned his use of that title in order to get access to various health executives and generate customers for its billing services. The marketing agent unencrypted the spreadsheet and provided it to the job applicant with the request that she demonstrate her skills converting it to bar graphs and charts. Without recognizing that the names and treatment codes on the spreadsheet were “real world” data, the job applicant then sought help with the assignment by posting the spreadsheet on, where it was discovered almost a year later by the parent of a Hospital patient named in the chart.

In other words, the breach was not attributable to a Hospital employee, or an employee of the Hospital’s business associate, the billing contractor, but to a “downstream vendor” or “subcontractor” of the billing contractor, and not even to an employee of the downstream vendor but to a mere job applicant. One of the patients disclosed in the spreadsheet has since sued Stanford Hospital and the billing vendor in L.A. County Superior Court, seeking damages of $1,000 for each of the 20,000 affected individuals.

This is a frightening object lesson for covered entities – the Stanford Hospitals of the world – and for business associates such as the billing contractor – about the risks presented by “downstream” vendors, and the need to ensure that their handling and use of protected health information and e-PHI meets HIPAA and applicable state law privacy and data security standards. HIPAA as amended by HITECH now demands that business associates vouch in this manner for their downstream vendors in their business associate agreements. Clearly, to do so, the parties first must clearly identify downstream vendor relationships, and not disguise the vendor’s staff as business associate employees, as occurred in the Stanford case. Even where the vendors clearly are identified, business associates should also address, in business associate agreements, whether the covered entity can share data directly with the downstream vendors, and if so, under what conditions. The Stanford case is unusual due to the disguising of the marketing agent’s true status, but it suggests that business associates might always want to be at least notified of such communications, if this is administratively practical. Or, they might want to vouch for privacy/security compliance only when data passes through them to the downstream vendor, but require the covered entity to be responsible for breaches resulting from its direct communications with the downstream vendors.

Trying to stay ahead of the technological curve in data transmission is almost impossible, but we can learn from others’ mistakes and take whatever steps are necessary not to repeat them.

Worker Inactivity: the Next Wellness Frontier?

Researchers and some employers are using technology to measure the incidence and health impact of worker inactivity due to long periods behind the wheel of a car, or in front of a computer.   This article from the online publication MIT Technology Review covers some of the measuring methods in use, including thumb-sized activity monitors called “Fitbits,” and accelerometers and inclinometers to measure active versus sedentary work time. Use of the latter two devices is teamed with blood chemistry analysis to determine the link between sedentary behavior and long-term health conditions including diabetes, high blood pressure and elevated blood cholesterol. The article also describes a few ways employers are trying to change office landscapes to encourage more physical activity, including testing of a $1,000 worktable that adjusts to workers’ standing or seated positions. (My thanks to Dave Baker for circulating the article in BenefitsLink Health & Welfare Plans Newsletter for August 15, 2011.)

It appears to be medically beyond dispute that protracted sedentary behavior takes a long-term toll on employee health, and that integrating moderate activity in the workplace may reduce the incidence of expensive chronic health conditions. I can’t help but remark, however, on the similarities between the studies described in the MIT articles, and author Gary Shteyngart’s vision of the workplace in a dystopian near-future, in his latest novel Super Sad True Love Story (Random House, 2010). In that future, employees’ blood chemistry levels are posted on a repurposed train schedule board, and co-workers jibe one another about less-than-stellar readings:

“Instead of the arrivi and partenze times of trains pulling in and out of Florence or Milan, the flip board displayed the names of Post-Human Services employees, along with the results of our latest physicals, our methylation and homocysteine levels, our testosterone and estrogen, our fasting insulin and triglycerides, and, most important, our ‘mood + stress indicators,’ which were always supposed to read ‘positive/playful/ready to contribute’ but which, with enough input from competitive co-workers, could be changed to ‘one moody betch today’ or ‘not a team playa this month.’”

It is interesting to contrast this scenario with current conditions under which employers, through wellness programs, may collect employees’ biometrics and other health information. The laws governing an employer’s ability to do so, particularly in exchange for cash incentives, are evolving on a number of different fronts, including federal (and state) laws governing disability discrimination in the workplace, privacy of health information, and privacy of genetic information including family histories. (The applicable federal laws are, respectively, the Americans with Disabilities Act of 1990 (“ADA”); the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), the Genetic Information Nondiscrimination Act of 2008 (“GINA”).) Some basic parameters, sourced in regulations under these laws and in other EEOC guidance, are as follows:
• Employers may provide any level of financial incentive in connection with “participation-only” wellness programs that do not require achievement of certain results (such as lowered BMI or blood pressure).
• Financial incentives to participate in results-based wellness programs may not exceed 20% of the applicable premium (this percentage will rise to 30% under PPACA and possibly may increase to 50%).
• Results-based wellness programs must provide alternative options for persons whose disabilities or other health conditions keep them from achieving program goals.
• Participation in a “voluntary” wellness program that obtains medical data is not a violation of the ADA provided that employers maintain the data as confidential and do not misuse it.
• The EEOC has defined “voluntary” as neither requiring employees to participate nor penalizing employees for non-participation. It has also stated that financial inducements that are within the 20% rule are deemed to be “voluntary.”
• Disability-related questions must be “job related and consistent with business necessity” to satisfy the ADA, and generalized questions on various diseases that are typical of health risk assessments (HRAs) do not meet this standard.
• With specific regard to genetic information, including family history, the following rules apply:
o No financial inducement may be offered when such information is sought, nor may such information be collected “prior to or in connection with” enrollment in a group health plan. (The combined effect of these rules means that HRAs must either avoid any genetic information or family history inquiries altogether, or must be taken only after enrollment and without any financial incentive.)
o Further, health risk assessments should contain a disclaimer to discourage employees from volunteering family history or other genetic information in response to HRA questions. Final GINA regulations contain a template for the disclaimer.
o Employers must follow procedural requirements for the collection of genetic information: participants must grant prior, written authorization to the disclosure and the authorization must describe both the information being sought and the safeguards that are in place to protect against unlawful wellness programs.
• Employers may not receive any individualized health data from wellness providers, only aggregate information. However participant and their health care providers may receive individualized data resulting from wellness programs.
Most recently, a June 2011 opinion letter by EEOC Legal Counsel Peggy R. Mastroianni responded to two wellness program queries: (1) whether financial incentives for wellness program participation violated the ADA or GINA, (refused to take a position vis-a-vis ADA violation, and “Yes” re: GINA violation) and (2) whether family medical history provided voluntarily could be used to guide employees into disease management programs. In response to the latter question, the opinion letter reiterates that no financial incentive may be offered in exchange for genetic information, but that an employer that lawfully obtains genetic information (e.g., without a financial inducement, after enrollment in a health plan, and disclosed only on an aggregate basis) may provide a financial incentive to guide employees into disease management programs. You can read the opinion letter here. You can buy Gary Shteyngart’s novel many places, including local bookstores, and here.

Anthem Limits Small-Group Renewals to Non-Grandfathered Plans

Anthem Blue Cross, one of the largest California group and individual insurers, has announced that effective October 1, 2011 it will only renew small group policies (2 – 50 employees) for employers that do not claim “grandfathered” status for purposes of many changes under PPACA. This will mean that small group plans insured with Anthem Blue Cross will have to “map” their coverage to a new policy with another carrier, in order to avoid loss of grandfathered status. (“Mapping” relief is described in amended interim final grandfathering regulations issued in November 2010).

Many grandfathered group health plans – small group or otherwise – have adopted such status in order to remain exempt from nondiscrimination rules that apply to insured group health plans for the first time under PPACA. Nondiscrimination rules – which generally prohibit plan provisions that favor “highly compensated individuals” -were to go into effect on January 1, 2011 for calendar year plans and are to be modeled on the nondiscrimination rules that have always applied to self-funded group health plans. However, the IRS has suspended enforcement of nondiscrimination rules for insured arrangements until it can issue regulations that describe the standards plans must satisfy. While it is hoped that the IRS regulations will describe design “safe harbors” that automatically meet nondiscrimination requirements, there is no guarantee that such guidance will be available before October of this year.

This puts small group plans insured by Anthem Blue Cross in a difficult place if they want to maintain “discriminatory” plan designs – i.e., those that provide any accellerated eligibility or more favorable coverage terms to “highly compensated individuals” – a group that includes 10% or more shareholders, as well as the top 25% of employees ranked by pay.

In order to remain grandfathered, employers will need to locate another carrier whose terms of coverage are virtually identical to Anthem Blue Cross’s small group product. Carriers may charge the employer more for such coverage than they are paying to Anthem Blue Cross – and employers cannot pass the cost increases on to employees without losing grandfathered status. Employers for whom the price squeeze is too much will have to relinquish grandfathered status and offer benefits on equal terms to non-highly compensated and highly compensated groups, alike. This could prove unaffordable for many employers in sectors such as hospitality and retail, which often limit group health coverage to administrative or management employees.

Anthem Blue Cross’s announcement – attached below – gives several reasons for abandoning the grandfathered small group market, including lack of employer interest in maintaining grandfathered plans, the administrative complexity of offering grandfathered and non-grandfathered coverage options, cost efficiencies available for a more homogeneous client base, and similar moves by other insurers. Blue Shield of California last year announced that it would not offer grandfathering to new small group plans or to large group plans on standard policies, retaining the option only for highly customized insured plans.

News Flash-Grandfathering

AB 36 Becomes Law; California Employers Face Corrective Reporting for 2010

Governor Jerry Brown signed AB 36 into law on April 7, 2011. This law brings California income and certain employment tax laws into parity with federal tax law, retroactive to March 30, 2010, regarding group health coverage extended to employees’ children up to age 26. That is the date that federal law first permitted treatment of “overage” dependents to be excluded from employees’ income, for tax purposes, through the year in which their child turns age 26, and irrespective of the child’s student or marital status. Prior to passage of AB 36, California employers were required to track overage dependent coverage, assign it a value, and add that value to employees’ taxable wages as “imputed income.”

Now California employers who offered overage dependent coverage in 2010 and properly tracked imputed state income have to amend 2010 state payroll tax returns retroactive to the date the employer first permitted overage dependent coverage. Employers will have to identify how much imputed state income each employee received in 2010, and prepare amended W-2s (Forms W-2C) for employees excluding this amount from Box 16.

Preparation of amended employer returns is made more complicated in 2011 as the California Employment Development Department (EDD), which collects employment taxes, has just changed its payroll withholding returns and forms effective this year. Fortunately, the EDD has already posted online guidance for employers here. It directs employers to use EDD Form DE 678 to report corrections of income reported on DE 6 quarterly withholding reports for 2010. Employers have until the end of this month to file quarterly withholding reports for the first quarter of this year, and the EDD guidance states that employers may exclude imputed income from their DE 9 returns (quarterly withholding reports that replace DE 6) and file returns that are accurate with the new retroactive law. Employers that have already submitted their DE 9 are directed to report corrections for first quarter of 2011 using the new version of DE 678, Form DE ADJ.

All employers will still have deposited payroll taxes in excess of the corrected amount reported. Detailed instructions for correcting excess deposits are found on pages 77-78 of the California Employer’s Tax Guide for 2011; note that the instructions differ depending on whether taxes were deposited using Form 88, or electronically, and that correction of over-withheld personal income tax differs from correction of over-withheld employment taxes (state disability insurance, unemployment insurance, etc.).

The Franchise Tax Board, governing personal and business income tax, also has updated its website with guidance for employees who included overage dependents in their coverage last year. They are directed to file amended state income tax returns (FTB Form 540X), once they receive their Forms W-2C omitting the imputed state income. They are also told to use FTB Form 3525 as a substitute for federal Form W-2C if unable to obtain a Form W-2C from their employer.

California Legislature Likely to Pass Retroactive Relief from Imputed Income for Overage Dependent Coverage

California Assembly Bill 36, which will bring state income taxes into line with federal changes under the PPACA, will offer retroactive relief from imputed state income tax resulting from group health coverage extended to employees’ children who are age 24 or older and not full-time students (or not otherwise fulfilling federal income tax dependency requirements prior to PPACA).

Specifically, the bill offers relief from imputed state income back to March 30, 2010, which is the date on which federal tax laws changed to waive dependency requirements for children up to age 26.

The bill is moving forward in the legislative process. Yesterday the Assembly Appropriations Committee approved it with a unanimous vote. The next steps include an Assembly vote and if that is favorable, the Senate will entertain a parallel bill which if passed would go to Governor Brown for signature. It is possible this will all happen by mid- or late-March, but given that the relief will be retroactive that is not a significant concern at this point.

AB 36 is listed number one on the top ten “most popular bills” reported by This bodes well for its swift passage into law, and a collective sigh of relief from employers and payroll providers. For employers who reported imputed income for 2010 there will be a decision point over processing refunds; given the small amounts at issue employers should take a close look at administrative costs for processing refunds, and weigh them against the net benefit to employees. Alternatively the refunds possibly could be calculated and processed through 2011 payroll; with any luck these issues will be addressed by the Franchise Tax Board as the bill nears passage.