There are many things I enjoy about practicing employee benefits law at Ogletree Deakins. One of them is having more than 35 other benefits lawyers with whom to brainstorm so that we can serve our clients better and more efficiently. The depth of our Employee Benefits Practice Group is the springboard for this blog post, in which I discuss an issue under the Affordable Care Act that several of us have collaborated on recently.
As many readers are aware, some people, including some business owners, have strongly-held moral views regarding certain medications and medical procedures. To take one example that has gotten a lot of press recently, some business owners may have moral reservations about supporting medication-based methods of birth control if the medication is administered after fertilization. But if the business’s group health plan is not a grandfathered plan, it generally must provide first dollar coverage for such drugs during plan years beginning on or after August 1, 2012, under regulations issued under the Affordable Care Act.
If the business owner’s moral reservations are sufficiently strong, lawyers may be asked to think of a way to accommodate them. This issue led to a very lively email discussion among several of my colleagues because, at least at first blush, there seem to be only three paths for such a business owner to follow, and each one of them features serious if not insurmountable barriers.
1. If an employer has a self-insured and self-administered group health plan, in theory it could simply elect to pay the excise tax imposed on sponsors of plans that do not comply with the applicable regulations. However, under Internal Revenue Code (IRC) Section 4980D, the amount of that excise tax is $100 per day per person affected by the non-compliance. Even a relatively small employer might owe an excise tax in the seven figure range after a year of non-compliance. Moreover, plan participants arguably could sue to compel provision of the objectionable drugs.
2. If the employer simply ceases to offer any group health coverage to its employees, it would be immune from the excise tax under IRC Section 4980D, but it very likely would face crippling recruitment, retention, and morale issues with its work force. Moreover, beginning on January 1, 2014, it would be exposed to an excise tax under IRC Section 4980H, the so-called “employer mandate” provision of the Affordable Care Act. On an annualized basis, that excise tax is $2,000 per year for each full-time employee after the first 30 full-time employees. A company with as few as 280 full-time employees could pay $500,000 per year in excise tax under IRC Section 4980H.
3. Finally, an employer could follow the lead of several employers that have sued in federal courts, seeking to enjoin the federal government from enforcing the IRC Section 4980D excise taxes against them. A number of employers have chosen this path, despite what must have been serious public relations concerns. However, only one of these employers has succeeded in obtaining even temporary relief (in the form of a preliminary injunction). Moreover, the district court in that case made it quite clear that the preliminary injunction was issued based on facts specific to that plaintiff and stated that the preliminary injunction did not prevent the government from enforcing IRC Section 4980D against any other employer. Late last month, the federal government filed its notice of appeal in that case.
So is there a fourth option? Discussions with several of my colleagues in the Ogletree Deakins benefits practice have led me to believe that there is, at least for some employers under some circumstances. It would allow the employer’s group health plan to comply with the coverage mandate, but it would build a wall around employer contributions so that they would be dedicated exclusively to other forms of medical care and treatment. Moreover, it does not rely on a mere bookkeeping convention. The division of funds would be real, not notional.
Best of all, the solution we have discussed relies on a method for funding welfare benefit plans that has been in wide use for many decades: an employee welfare benefit trust, such as a trust that qualifies for tax-exempt status under IRC Section 501(c)(9) (often called a “VEBA trust”) or a simple grantor trust.
These arrangements are not a panacea, by any means. They involve careful administration as well as significant hard costs (both up-front and on a going-forward basis), and they may or may not be suitable in a given situation. I will discuss these and other details in a subsequent post.
