Workplace Prof Blog

A "How-to" Guide to Health Care Reform

Paul Fronstin (EBRI) (left) and Murray Ross (Kaiser Permanente) (right) have just posted on SSRN their article Addressing Health Care Market Reform Through an Insurance Exchange: Essential Policy Components, the Public Plan Option, and Other Issues to Consider.  Here's the abstract:

Managed competition and a health insurance exchange appear to be the primary proposed vehicles for expanding Americans’ access to health insurance coverage. For managed competition to work, most analysts agree that a number of components will need to be included: individual mandates, risk adjustment, streamlined comparability of benefit design, subsidies for the low-income population, some form of community rating, and guaranteed issue. Most also agree that, absent mechanisms to restrain the growth of the underlying costs of care, the combination of universal coverage and subsidized premiums will produce even faster cost growth than the current system.

This paper examines issues related to managed competition and the use of a health insurance exchange for the purpose of addressing cost, quality, and access to health care services. It discusses issues that must be addressed when designing an exchange in order to reform the health insurance market, examines state efforts at health reform that use a health insurance exchange, and discusses implications for employment-based health benefits. This paper is neutral on whether an exchange should or should not be formed, and focuses instead on the logistics and implications of what would be involved in implementing an insurance exchange and the potential ramifications of such an action.

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Obama's Extension of Some Benefits to Same Sex Partners

It's been an interesting week or so on the LGBT front for the Obama administration. The Department of Justice filed this brief defending the Defense of Marriage Act (for a good discussion, see this post at Hunter of Justice), and the President by memorandum extended some employee benefits to same sex partners. It seems that the lack of progress in this area (and lack of fulfillment of campaign progress) is not lost on the President:

In consultation with Secretary Clinton, who in her role as Secretary of State oversees our foreign service employees, and Office of Personnel Management Director John Berry, who oversees human resource management for our civil service employees, my Administration has identified a number of areas in which greater equality can be achieved under existing law by extending to the same-sex partners of Federal employees many of the same benefits already available to the spouses of heterosexual Federal employees. I am therefore requesting the Secretary of State and the Director of the Office of Personnel Management to extend the benefits they have identified to the same-sex partners of Federal employees where doing so can be achieved consistent with Federal law. I am also requesting the heads of all other executive departments and agencies to conduct a review of the benefits they administer to determine which may legally be extended to same-sex partners.

But this Presidential Memorandum is just a start. Unfortunately, my Administration is not authorized by existing Federal law to provide same-sex couples with the full range of benefits enjoyed by heterosexual married couples. That's why I stand by my long-standing commitment to work with Congress to repeal the so-called Defense of Marriage Act. It's discriminatory, it interferes with States' rights, and it's time we overturned it.

I am also proud to announce my support for an important piece of legislation introduced in both Houses of Congress last month -- the Domestic Partners Benefits and Obligations Act of 2009. This legislation will extend to the same-sex partners of Federal employees the same benefits already enjoyed by the opposite-sex spouses of Federal employees.

MM

Work Law, Pedagogy, and VEBAs

Congratulations to Ruben Garcia, Catherine Fisk, and others on the AALS Planning Committee for pulling together a a great mid-year conference on Work Law.  Thanks to Paul Secunda, Scott Moss, Melissa Hart, and others for proposing it and obtaining AALS approval.

Only one blemish:  I was disappointed to learn that at conferences such as this, AALS routinely waives the registration fee for speakers on substantive but not pedagogical topics.  I suspect that this is an accurate reflection of misplaced institutional priorities.

The biggest light-bulb moment for me came in the ERISA presentation Friday afternoon by Colleen Medill (Nebraska) and Susan Cancelosi (Wayne State), when I asked a question about underfunded auto-industry VEBAs.  (Recall that VEBAs are investment trusts into which employers place some assets and all the liabilities for covering future employee benefits.)  Susan pointed out that although auto-industry VEBAs are advertised as a long-term solution to retiree health care, neither the auto companies nor the unions have any expectation that the VEBAs will function this way.  Instead, the VEBAs are intended -- and funded -- merely as bridges to Medicare for the legions of auto-industry workers who have retired at an age too early to qualify for health insurance through that government program.

Ouch.

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Zelinsky on ERISA 514(a) Preemption

Edward Zelinsky (Cardozo) has just posted on SSRN his essay (forthcoming State Tax Notes) Golden Gate III, ERISA Preemption, and the San Francisco Health Care Security Ordinance.  Here's the abstract:

An exploration of the most recent decision of the U.S. Court of Appeals for the Ninth Circuit in Golden Gate Restaurant Association v. City and County of San Francisco (Golden Gate III) indicates that ERISA Section 514(a) preempts the San Francisco Health Care Security Ordinance. Two premises guide this exploration of Golden Gate III. First, employers’ ongoing payments to health care administrators, such as insurance companies, constitute employee benefit “plans” for ERISA purposes. Second, employers’ contributions are central features of their employee plans.

This first premise indicates that a San Francisco employer which regularly contributes to San Francisco pursuant to that City’s health ordinance thereby creates a “plan” for ERISA purposes. The ERISA status of this plan purchasing municipally-administered medical services is the same as the ERISA status of an analogous employer-financed plan paying a private administrator for comparable health care: As to all of these plans, ERISA Section 514(a) preempts state and local regulation.

Moreover, it is not persuasive for purposes of ERISA Section 514 to say (as does the Ninth Circuit) that San Francisco, by its health care ordinance, regulates employers’ health care contributions, but not employers’ health care plans. Contributions are central features of employers’ health care plans for their employees. By regulating employers’ contributions, San Francisco regulates employers’ plans.

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On Defined-Benefit Plans

Two studies just posted on SSRN paint a dismal picture of defined-benefit plans.  A study by Barbara Butrica et al., The Disappearing Defined Benefit Pension and its Potential Impact on the Retirement Incomes of Boomers, shows that on balance, the shift from defined-benefit to defined-contribution plans will produce more losers than winners and will reduce average retirement incomes.  A study by David Love et al., Should Risky Firms Offer Risk-Free DB Pensions?, shows that mispriced pension insurance gives firms an incentive to introduce risk into their pension promises.

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The PBGC's Investment Strategy

The Boston Globe is reporting on what turned out to be a very bad investment move by the Pension Benefit Guaranty Corporation.  Apparently, the PBGC decided to change its normally conservative strategy for investing its $64 billion in insurance funds (typically bonds) by putting much of the money in stocks, real estate, private equity funds, and emerging foreign markets.  The timing of the move?  Just months before the stock market collapse:

The agency refused to say how much of the new investment strategy has been implemented or how the fund has fared during the downturn. The agency would only say that its fund was down 6.5 percent - and all of its stock-related investments were down 23 percent - as of last Sept. 30, the end of its fiscal year. But that was before most of the recent stock market decline and just before the investment switch was scheduled to begin in earnest. No statistics on the fund's subsequent performance were released.

Nonetheless, analysts expressed concern that large portions of the trust fund might have been lost at a time when many private pension plans are suffering major losses. The guarantee fund would be the only way to cover the plans if their companies go into bankruptcy.

"The truth is, this could be huge," said Zvi Bodie, a Boston University finance professor who in 2002 advised the agency to rely almost entirely on bonds. "This has the potential to be another several hundred billion dollars. If the auto companies go under, they have huge unfunded liabilities" in pension plans that would be passed on to the agency. In addition, Peter Orszag, head of the White House Office of Management and Budget, has "serious concerns" about the agency, according to an Obama administration spokesman. . . .

However, Charles E.F. Millard, the former agency director who implemented the strategy until the Bush administration departed on Jan. 20, dismissed such concerns. Millard, a former managing director of Lehman Brothers, said flatly that "the new investment policy is not riskier than the old one." He said the previous strategy of relying mostly on bonds would never garner enough money to eliminate the agency's deficit. "The prior policy virtually guaranteed that some day a multibillion-dollar bailout would be required from Congress," Millard said. He said he believed the new policy - which includes such potentially higher-growth investments as foreign stocks and private real estate - would lessen, but not eliminate, the possibility that a bailout is needed. Asked whether the strategy was a mistake, given the subsequent declines in stocks and real estate, Millard said, "Ask me in 20 years. The question is whether policymakers will have the fortitude to stick with it." . . .

The agency's action has also been questioned by the Government Accountability Office, the investigative arm of Congress, which concluded that the strategy "will likely carry more risk" than projected by the agency. "We felt they weren't acknowledging the increased risk," said Barbara D. Bovbjerg, the GAO's director of Education, Workforce and Income Security Issues.

Analysts also believe the strategy would not have been approved if the government had foreseen the precipitous decline in the stock market. Now, they warn about a "perfect storm" scenario in which the agency's fund plummets in value just as more companies go into bankruptcy and pass their pension responsibilities onto the insurance fund. Many analysts say it is inevitable that the agency will face significantly increased liabilities in coming months.

Remind me not to go to the PBGC for advice on my 401k.

Hat Tip:  Matt Bodie

-JH

Opposition to Request for Stay Filed with SCOTUS in Health Benefits Case

We've blogged about the 9th Circuit case of Golden Gate Restaurant Ass'n v. City an County of San Francisco--mostly Ed Zelinsky's analysis. Most recently, the 9th Circuit denied a petition for rehearing as we noted here, and the restaurant association applied for a stay in the Supreme Court, pending resolution of the certiorari process. Today, the defendants filed this joint response to that motion (courtesy of Scotusblog). Essentially, the defendants argue that the medium and large employers covered by the program have been complying with the healthcare spending requirements  for 15 months, and there is no sign that any business is being harmed by it. The application is before Justice Anthony M. Kennedy as Circuit Justice; it is up to him to decide the stay issue himself or to refer it to his colleagues for action.

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Hofstra LELJ's ERISA Symposium

BNA's Pension & Benefits Daily (subscription required) has a story on an ERISA Symposium sponsored by the Hofstra Labor and Employment Law Journal.  Topics include whether ERISA preempts state "pay or play" health plan laws, problems with ERISA's remedial scheme, insections of ERISA preemption and remedies, and possible reform measures.

Check out the Hofstra website for a program list, which was made up of some of the top experts in this area, including blogger emeritus, Paul Secunda.

-JH

Law Prof. Amicus Brief in 7th Circuit ERISA Case

This is a cross-post from Marquette's Law Faculty blog by Paul Secunda:

Today, as part of a group of law professors around the country with interests in the mutual funds and employee benefits area, I helped to draft and signed on to an amicus brief which asked for the Seventh Circuit Court of Appeals to grant rehearing en banc in the ERISA case of Hecker v. Deere & Company.  The case concerns an issue of tremendous importance for American workers’ retirements: the appropriate scope of a fiduciary duty under ERISA in the context of personal savings and mutual fund fees.

In Hecker, a 7th Circuit panel affirmed the decision of the district court of the Western District of Wisconsin, which found a group of employee-plaintiffs did not state a claim for relief under ERISA when their employer, Deere, allegedly did not provide a sufficient menu of mutual fund options for their 401(k) retirement plan accounts.  Although the brief argued in part that the panel inappropriately adopted a remarkably narrow interpretation of fiduciary duty that relied crucially upon an assumption that the underlying market for mutual funds is vibrant and competitive, my part of the brief involved the proper fiduciary standard for employers who run 401(k) accounts under so-called 404(c) plans.

More specifically, we argued that the panel’s decision in Hecker drastically overstated the proper scope of the § 404(c) safe harbor for fiduciaries of 401(k) plans under ERISA and thereby threatens to undermine the ability of tens of millions of Americans to save effectively for their retirements.    This is because ERISA requires “care, skill, prudence, and diligence” on the part of a fiduciary to select a suitable menu of investments, not to select a small number of expensive options or to make essentially no selection at all.

And although it is true that ERISA § 404(c) eliminates fiduciary responsibilities for plan administrators to the extent participants direct how their pension fund assets are invested, it does not touch the obligation of fiduciaries to prudently select and monitor the menu of possible plan investments.  Yet, the Hecker panel concluded on mere pleadings that, “even if § [404(c)] does not always shield a fiduciary from an imprudent selection of funds under every circumstance that can be imagined, it does protect a fiduciary that satisfies the criteria of § 1104(c) and includes a sufficient range of options so that the participants have control over the risk of loss.”  This conclusion misstates ERISA law, as interpreted by the DOL, and insulates ERISA fiduciaries from liability for assembling an imprudent menu of investment choices for employees in the first instance.  We thus urge the panel to grant  en banc rehearing and deny the defendants’ motion to dismiss.

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IP Law Meets Labor/Employment Law

From Retirement Plan Blog:

Lincoln National Life Insurance Company, part of Ft. Wayne, Indiana-based Lincoln Financial Group, won a  $13.1 million jury verdict in a variable annuity patent infringement case against three Aegon USA companies, Transamerica Life Insurance Co., Transamerica Financial Life Insurance Co., and Western Reserve Life Assurance Co. of Ohio.

The patent claim at issue related not to the variable annuity itself but to a computerized method for administering variable annuity products that combine guaranteed minimum payment features with systematic withdrawal programs.

The patent also includes data processing methods used to administer variable annuities in the payout phase and withdrawals from mutual funds, particularly systematic withdrawals from funds.

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9th Circuit Denies Rehearing En Banc in ERISA Preemption Case

The Ninth Circuit today denied rehearing en banc in the important ERISA preemption case of Golden Gate Restaurant v. City & County of San Francisco.  As Ed Zelinsky described the case in February of last year:

[T]he Ninth Circuit's decision in Golden Gate Restaurant Association ... stayed a District Court ruling that had held the San Francisco Health Care Security Ordinance preempted by federal law. The core of that ordinance is the requirement that covered employers in San Francisco make minimum outlays for their own programs for their employees' health care or instead make contributions in the required amounts to the city to finance either San Francisco's Health Access Program (HAP) or municipally-run health reimbursement accounts. I conclude that under the U.S. Supreme Court's decisions construing ERISA Section 514(a), ERISA preempts the San Francisco Health Care Security Ordinance.

Hat tip: Paul Secunda.

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Zelinsky on Employer-Sponsored Health Care

On the same day that President Obama's proposed budget reignited the debate over the future of American health care, Edward Zelinsky (Cardozo) posted on SSRN his article Muddling Through: The Continuing Importance of Employer-Provided Health Care (forthcoming Yale J. Health Policy, Law, & Ethics).  Here's the abstract of this timely article:

For the foreseeable future, employer-provided health care will remain the central means of financing medical coverage for working Americans and their families. There are, moreover, strong normative grounds for perpetuating the existing system of employer-sponsored medical coverage. Among these grounds, an employer-based system is our best means for constraining medical costs, given the inability of the political process to control health care outlays.

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Moore on VEBAs

Kathryn Moore (Kentucky) just posted on SSRN her chapter (NYU Review of Benefits & Executive Compensation) The New Retirement Health VEBAs.  Here's the abstract: 

This article examines the recent trend of transferring employer retiree health care liabilities to VEBAs. After providing a brief history of retiree health benefits and an overview of the basic tax rules governing VEBAs, the article explains the difference between traditional VEBAs and the new retiree health VEBAs. The article then discusses the advantages and limitations of the new VEBAs. The article concludes that the new VEBAs may be an appropriate vehicle for pre-funding retiree health benefits for some employers, particularly financially distressed employers with significant retiree health liabilities and large union forces, but they are not a panacea for the country's health care financing woes.

As Moore points out, in theory, VEBAs should insulate retired and retiring employees from firm performance:  if the firm tanks, money should be left in the VEBA to fund current and future retiree health care.  The rub is described in Section 7.06[2]: firms often fund VEBAs with company stock, which by definition is worthless if the firm tanks. 

In fact, I'd go even a step farther, and suggest (based only on anecdotal, and no empirical, evidence) that a large proportion of firms (automakers, auto parts suppliers) that have been setting up VEBAs in the last year or so are firms that expect to tank, and that are using VEBAs as a vehicle to dump their underfunded retiree health care liabilitesknowing full well that the deposited "assets" are or soon will be worthless.  Their balance sheets look a little better now, and PBGC will be paying the piper later.

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Global Issues in Employee Benefits Law

Congratulations to Paul Secunda (Marquette), Sam Estreicher (NYU), and Rosalind Connor (Jones Day) on the publication of their book Global Issues in Employee Benefits Law (West 2009).  Here's the publisher's description:

This book focuses on developing issues in international, comparative, and transnational employee benefits law. It is divided into four areas that practitioners will need to become familiar with in order to thrive in our increasingly global economy and legal practice: sovereignty and jurisdictional issues involving the Employee Retirement Income Security Act (ERISA); public and private pension issues with emphasis on the trend toward privatization and defined contribution plans; public and private health care issues surrounding national health care systems and private health insurance schemes; and the intersection between employment discrimination laws throughout the world and global employee benefit law issues.

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Milwaukee's Paid Sick Leave Ordinance Enjoined

Milwaukee's paid sick leave ordinance, which Paul had reported on here, was supposed to go into effect today. On Friday, operation of the ordinance was enjoined. From the Milwaukee Journal Sentinal,

Before a packed courtroom of ordinance supporters and opponents, with many spilling into the hall where a monitor was set up so they could follow the proceedings, Judge Thomas R. Cooper granted the temporary injunction sought by the Metropolitan Milwaukee Association of Commerce.

The business organization called the ordinance a job killer for the city and has challenged the legality of the measure, which was passed with 69% of the vote in the Nov. 4 election.

Supporters argue that workers should not be forced to choose between being sick or caring for a sick child and a paycheck.

Milwaukee is only the third city in the country to pass such an ordinance. San Francisco and Washington, D.C., are the others.

Cooper set a hearing on a permanent injunction for May 11. He said he has not made up his mind how he will rule.

"But there's a dead certainty that the case will go to the Court of Appeals and the Supreme Court," he said of the likely appeals.

. . .

[Judge Cooper] called the decision to issue a temporary injunction necessary and not difficult.

"This call is such a big deal to everybody that we better do it right from the start," he said.

For the city and employers, implementing paid sick days is a major issue, he said. And if the ordinance is enacted and then overturned, those in low-paying jobs who can least afford it could be faced with paying back the benefit they had received, he said.

The proceeding also was unusual because the city, a defendant in the case, did not object to the request for a temporary injunction.

Instead, the case against the injunction was argued by attorneys for 9to5, National Association of Working Women, which asked to join the city as a defendant.

The City said that it couldn't defend the ordinance because the ordinance will be enforced by a commission that is still being created. Critics suggested that the lack of defense by the City was because the mayor opposed the ordinance.

MM

Secunda on [No] ERISA Remedies

Paul Secunda (Marquette) has just posted on SSRN his article (forthcoming Hofstra LELJ) Sorry, No Remedy: Intersectionality and the Grand Irony of ERISA.  Here's the abstract:

Congress enacted the Employee Retiree Income Security Act of 1974 (ERISA or Act) to protect employees' retirement and welfare benefits. Nevertheless, the Act has been interpreted by the U.S Supreme Court over the years to be in essence an Employers' Security Act, with employers using ERISA to shield themselves against employee benefit-related claims.

The flaw in the current ERISA scheme lies at the intersection of ERISA's preemption and remedial provisions. Courts broadly interpret the preemption provisions of ERISA under Section 514 to invalidate employee benefits-related state laws and then force employees to depend on an inadequate, "comprehensive and reticulated" remedial scheme under Section 502(a). This intersectionality problem leads to a state of affairs that is contrary to ERISA's purpose of protecting the interests of participants and beneficiaries by "providing for appropriate remedies, sanctions, and ready access to the Federal courts."

The Court has accomplished this feat of perverting Congressional intent by choosing to elevate a secondary purpose of ERISA over its primary one. While the primary purpose of ERISA is clearly stated in the Act to be the protection of employees' benefits, the Court has instead emphasized a subsidiary policy of containing employee benefit plan costs. In doing so, the Court's ostensible goal is to ensure that employers continue to voluntarily adopt ERISA plans. Yet, this restrictive approach is contrary to the remedial nature of the legislation and the elevation of this secondary purpose consistently favors employer interests.

Unlike some ERISA commentators, I believe that the legislative history of ERISA clearly rejects the idea that these "right without remedy" cases arise because of a compromise entered into by interested parties at the time of ERISA's enactment. Although ERISA's broad preemptive reach was calculated and intentional, there is no similar evidence that Congress meant there to be a limited remedial scheme for protecting employee benefits. Nothing in the legislative record, the view of the so-called literalist Justices to the contrary notwithstanding, evinces Congress' intent to say all that it intended to say on particular remedies. Instead, it is the Supreme Court that has blundered in its incorporation of inappropriate trust law analogies in this area of the law. In short, intersectionality is only a problem under the current scheme not because of broad preemption alone, but because of the impact of this broad preemption coupled with a limited ERISA remedial scheme.

To cure what currently ail ERISA, this article proposes three alternative reforms - one judicial and two legislative. The judicial approach would call for the Court to adopt a remedialist approach, which would be in line both with Congress's intent to incorporate most of the common law of trusts into ERISA, and also consistent with a modern interpretation of a remedial statute. Only to the extent that there were intended to be deviations from that common law should the unique characteristics of the ERISA statute be considered in applying the remedial provisions.

Failing an adequate judicial fix, Congress should take steps to expand the remedies available under ERISA. To effect this recalibration, Congress should re-examine and reject the far-fetched analogy between ERISA, enacted in 1974, and the "days of the divided bench" analysis offered up by Justice Scalia in Mertens v. Hewitt Associates. Congress should overrule Mertens by providing an express and expansive definition for "appropriate equitable relief" under proposed Section 3(43). Additionally, Congress could pass an ERISA Civil Rights Act under proposed Section 502(a)(11), which, like the Civil Rights Act of 1991 in the Title VII context, would permit capped, compensatory and punitive damage awards in appropriate cases.

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"Just Get It Over With"

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From Indexed, via Retirement Plan Blog.

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Feuer on the Kennedy Case

Albert Feuer, who has provided us with valuable analysis of Kennedy v. DuPont as it was pending before the Supreme Court, has now done the same for the Court's final decision.  He will have a more extensive discussion of the case in his article, “Will the Supreme Court Reinforce or Undermine Basic ERISA Principles When it Decides a Death Benefit Dispute,” which is to be published soon in the Charleston Law Review.  In the meantime, he's prepared a shorter analysis of the case .  A preview of that analysis:

In Kennedy v. DuPont Savings and Investment Plan (the “DuPont Plan”), the Supreme Court decided that if a voluntary disclaimer in a domestic relations order (“DRO”) by the divorcing spouse of an ERISA pension plan participant did not comply with the terms of the governing plan documents, the plan could pay the death benefit only to the participant’s designee, who was the former spouse and disclaimant. The Court agreed with the former spouse that her disclaimer was ineffective. Thus, the plan administrator correctly denied the claim of the participant’s default designee. The decision raises at least six troubling questions for family law practitioners, ERISA practitioners, ERISA plan sponsors, administrators, participants and administrators.

According to Feuer, four of the more troubling points of the decision are:

The Supreme Court decision did not provide that a plan administrator must always disregard disclaimers in divorce decrees.  Administrators may have the discretion to follow disclaimers.  Moreover, those plans which allow no beneficiary disclaimers may have to consider disclaimers in divorce decrees regardless of plan terms. 

The Supreme Court decision suggests that ERISA does not permit benefit claims based on QDROs for those plans, whose documents do not explicitly incorporate the ERISA requirement that benefit entitlements are determined in accord with the terms of a QDRO. More generally the Court suggested that benefit claims may not be based on ERISA requirements not incorporated in plan documents.

The Supreme Court decision suggests that QDROs may not be used by divorcing spouses to retain survivor benefits in divorce decrees.  Classical defined benefit plans that provide survivor benefits only to the spouses of participants thus may no longer permit such retentions.

The Supreme Court decision also suggests that ERISA benefit entitlements are limited to the right to receive the benefits from an ERISA plan but does not include the right to keep the benefits.

Check out this must-read piece!

-JH

Rate Your 401k

In an effort to make 401k plans (and fees) more transparent, Brightscope has launched the country's first online 401k rating system.  RetirementPlanBlog describes the rating system here;  here's the Brightscope press release.  This is a very good thing -- fees have a huge impact on long-term investment performance, and it's too easy now for these fees to be buried in the fine print. 

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New Rules on 401k & IRA Investment Advice

The Department of Labor today publication of a final rule on employers providing  advice to employees regarding 401k and IRA investments.  The final rule will be published in the Jan. 21, 2009, edition of the Federal Register.  The rule includes a regulation that implements the new statutory exemption for investment advice added to ERISA by the Pension Protection Act and a related class exemption.

The PPA amended ERISA by adding a new prohibited transaction exemption that allows greater flexibility for participants of 401(k) plans and IRAs to obtain investment advice.  One of the ways in which investment advice may be given under the exemption is through the use of a computer model certified as unbiased.  The other way is through an adviser compensated on a "level-fee" basis.  Several other requirements also must be satisfied, including disclosure of fees the adviser is to receive.

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