BAN Blog

On July 8, 2020, the United States Supreme Court upheld the Final Rules issued by the Department of Health and Human Services (HHS) that exempt all employers with a religious objection to contraception, and all non-profit and non-publicly traded for-profit employers with a moral objection to contraception, from complying with the previous contraceptive coverage requirements adopted by HHS under President Obama.

Background on ACA’s Contraceptive Coverage Mandate

The ACA was enacted in March 2010. The ACA requires covered employers to provide women with “preventive care and screenings” without cost-sharing.  “Preventive care and screenings” was not defined in the law; however, the law authorized guidelines, which did not exist at the time, to be developed by the Health Resources and Services Administration (HRSA) of the Department of Health and Human Services (HHS).  The Departments promulgated rules to, among other things, provide guidelines for preventive care and screening, but did not use the traditional notice and comment rulemaking process, opting instead to utilize a “good cause exception” to the Administrative Procedures Act (APA), which allows rules to be effective immediately.

In 2011, regulations were released that contained the HRSA guidelines that included all Food and Drug Administration (FDA)-approved contraceptives, sterilization procedures, and patient education and counseling for women with reproductive capacity, as prescribed by a health care provider. Once these rules took effect in 2012, women enrolled in most health plans and health insurance policies (non-grandfathered plans and policies) were guaranteed coverage for recommended preventive care, including all FDA-approved contraceptive services prescribed by a health care provider, without cost-sharing.

In 2013, new rules were released with exemptions for certain religious employers (generally churches and houses of worship), as well as “accommodations” for non-profit religious organizations that “self-certify” their objection to providing contraceptive coverage on religious grounds. Under the accommodation approach, an eligible employer did not have to arrange or pay for contraceptive coverage. Employers could provide their self-certification to their insurance carrier or a third-party administrator (TPA), which will make contraceptive services available for women enrolled in the employer’s plan, at no cost to the women or the employer.

In 2014, regulations were published to establish another option for an employer to avail itself of the religious accommodation. Under these rules, an eligible employer may notify HHS in writing of its religious objection to providing coverage for contraceptive services. HHS or the Department of Labor, as applicable, will notify the insurer or TPA that the employer objects to providing coverage for contraceptive services and that the insurer or TPA is responsible for providing enrollees in the health plan separate no-cost payments for contraceptive services.

In 2015, in response to the Supreme Court’s decision in Burwell v. Hobby Lobby Stores, Inc., regulations were released that expanded the availability of the accommodation to include a closely held for-profit entity that has a religious objection to providing coverage for some or all contraceptive services.

In 2017, President Trump issued an Executive Order that directed the Departments to consider amending the contraceptive coverage regulations in order to promote religious liberty. Specifically, the Executive Order instructed the Departments to “consider issuing amended regulations . . . to address conscience-based objections to the preventative-care mandate.”

Consistent with the executive order, in 2018, the Departments issued “Interim Final Rules with Request for Comment” and provided 60 days for comments before issuing the final regulations in November 2018. The final regulations were effective on January 14, 2019.

Overview of the Moral & Religious Objection Regulations

The Regulations expand existing exemptions to the ACA’s contraceptive care requirement. The Religious Exemption automatically exempts all employers—non-profit and for-profit organizations alike—with a religious objection to contraception from complying with the contraceptive care requirement.

The Moral Exemption exempts all non-profit employers and non-publicly traded for-profit employers with a moral objection to contraception from complying with the contraceptive care requirement. The rules also give exempted employers the authority to decide whether their employees receive independent contraceptive care coverage through the accommodation process. In other words, by making the accommodation process voluntary for employers, employees would no longer be guaranteed the seamless coverage for contraceptive care that currently exists under the accommodation process.

Entities that qualify for the exemptions include churches and their integrated auxiliaries, nonprofit organizations, closely-held for-profit entities, for-profit entities that are not closely held, any non-governmental employer, as well as institutions of higher education and health insurers offering group or individual insurance coverage. Publicly traded companies, however, are not eligible for the Moral Exemption.

Challenge to the Interim and Final Regulations

Pennsylvania and New Jersey challenged the final regulations, claiming the regulations were both procedurally defective and substantively unlawful.  Specifically, they argued the Departments lacked authority under the law (both the ACA and the Religious Freedom Restoration Act (RFRA)) to allow such moral or religious exemptions and that the Departments failed to comply with the APA’s notice and comment requirements.  The rules were enjoined in federal district court, and the decision was upheld by the Third District Court of Appeals. The 3^rd District Court of Appeals’ decision was appealed to the United States Supreme Court.

In a 7-2 decision, with only Justices Sotomayor and Ginsburg dissenting, the Court reversed and remanded the decision, holding that the Departments had the authority under the ACA to promulgate religious and moral exemptions because the ACA granted the Departments full authority to define “preventive care and screenings” in its guidelines, which also includes full authority to establish any exemptions to the guidelines.  Furthermore, the Court recognized that the Departments were compelled to, and not prevented from, consider the RFRA in promulgating their guidelines.  Finally, the Court determined the Departments fully complied with the APA by providing adequate notice, allowing 60 days for comments, and publishing the final regulations more than 30 days before they were effective.

Impact on Employers

Employers may avail themselves of the Moral and Religious Exemptions but should consult with qualified ERISA counsel before making plan changes to ensure they do so appropriately and in compliance with any applicable state law, where contraceptive coverage may be a state-mandated benefit. Practically speaking, this means that employers sponsoring fully insured non-grandfathered group health plans may be precluded from exercising either exemption because insurance carriers in those states would be required to write policies that provide such coverage. While the regulations allow employers to exclude contraception from coverage under certain conditions, it’s possible an employer availing itself under either exemption could potentially face private lawsuits from participants and beneficiaries under Title VII of the Civil Rights Act of 1964, which prohibits discrimination based on sex, depending on the facts and circumstances.

As HHS Finalizes Its Updated §1557 Rules, the United States Supreme Court Rules Title VII Protects Individuals From Discrimination Due To Sexual Orientation or Gender Identity

On June 12, 2020, the U.S. Department of Health and Human Services (“HHS”) released its Final Rule under Section 1557 of the Affordable Care Act which, among other things, modifies the regulation issued by HHS in May 2016 (“2016 Rules”).  The 2016 Rules were subject to multiple lawsuits over the years and HHS claims the Final Rules, among other things, “better comply with the mandates of Congress…reduce confusion…and clarify the scope of Section 1557 in keeping with pre-existing civil rights statutes and regulations prohibiting discrimination on the basis of race, color, national origin, sex, age, and disability.” 

Just days after the Final Rule was released, the United States Supreme Court released its much-anticipated opinion in Bostock v. Clayton County, Georgia regarding whether an employee’s sexual orientation or gender identity protects them from discrimination on the basis of sex under Title VII.

While these two issues are seemingly unrelated, as we discuss in this alert, we believe the Court’s decision makes the Final Rule ripe for a legal challenge.  The decision also impacts employer-sponsored group health plans regardless of whether they are “covered entities” for purposes of Section 1557.

Section 1557

Covered Entities

Under prior HHS Rules (issued in 2016) Section 1557 of the ACA applied to “covered entities,” which were defined as health programs or activities that receive “federal funding” from HHS (except Medicare Part B payments), including state and federal Marketplaces.  Examples include hospitals, health clinics, community health centers, group health plans, health insurance issuers, physician’s practices, nursing facilities, as well as employers with respect to their own employee health benefit programs if the employer is principally engaged in providing or administering health programs or activities (i.e., hospitals, physician practices, etc.), or the employer receives federal funds to fund the employer’s health benefit program.

Further, group health plans themselves were subject to the rule if they received federal funds from HHS (e.g., Medicare Part D Subsidies, Medicare Advantage). In other words, employers who were not principally engaged in providing health care or health coverage generally were not subject to these rules directly unless they sponsor an employee health benefits program that receives federal funding through HHS, such as a retiree medical plan that participates in the Medicare Part D retiree drug subsidy program.

This created confusion for many employers.  Therefore, in May 2019, HHS issued a proposed rule (“Proposed Rule”) that narrowed the scope of “covered entities” regulated by Section 1557 clarifying that entities not “principally engaged in health care” are not subject to Section 1557 unless they are funded by, and only to the extent funded by, HHS.  Additionally, Entities whose primary business is providing healthcare will also be regulated if they receive federal financial assistance.

Consistent with the Proposed Rule, the Final Rule eliminates the definition of “covered entity”, and clarifies that HHS enforcement authority only extends to (1)  a health program or activity, any part of which is receiving federal financial assistance, (2) any program or activity administered by HHS under Title I of the ACA (such as health insurance Marketplaces), but not those that are administered by another federal agency, and (3) any program or activity administered by an entity established under Title I of the ACA.  “Health program or activity” encompasses all operations of entities principally engaged in the business of providing healthcare that receive federal financial assistance.

Moreover, an entity principally or otherwise engaged in the business of providing health insurance is not, by virtue of such provision, principally engaged in the provision of healthcare.  Thus, the preamble to the Final Rule explains that to the extent an employer-sponsored group health plan does not receive federal financial assistance, such as credits, subsidies, or contracts of insurance, from HHS and is not principally engaged in the business of providing healthcare, the health plan, and the employer are not covered entities.  This applies even if the plans are not covered by ERISA (e.g., church plans or non-federal governmental plans). 

Sex Discrimination

Section 1557 prohibits entities that receive federal financial assistance, any programs or activities administered by an Executive Agency under Title I of the ACA, or a health insurance marketplace (established under Title I) from discriminating against individuals on the basis of race, color, national origin, sex, age, or disability.

The Final Rule eliminates the definition of “on the basis of sex,” which previously included the termination of pregnancy, sex stereotyping, and gender identity. By eliminating this definition, the Final Rule excludes gender identity, stereotyping, and pregnancy termination as protected categories under Section 1557. 

The Final Rule uses enforcement mechanisms under other applicable laws and regulations incorporated under Section 1557, which include including the Title VI of the Civil Rights Act of 1964 (race, color, or national origin), Title IX of the Education Amendments of 1972 (sex), the Age Discrimination act of 1975 (age), or Section 504 of the Rehabilitation Act (disability) for purposes of any violations of Section 1557.

To address the elimination of termination of pregnancy, the Final Rule includes the following provisions:

• Individuals, hospitals, or other institutions, programs, or activities receiving federal funds cannot be forced or required to pay for pregnancy termination.
• No person, public or private entity can be required to pay for any benefit or services, including the use of facilities, related to pregnancy termination.

Taglines

Under Section 1557, to assist individuals with limited English proficiency, covered entities were required to send certain notices in 15 different languages in every significant communication associated with the health plan that was larger than a brochure or postcard, such as SPDs.  As set forth in the Proposed Rule, HHS viewed this requirement as being too costly without data to back up that the taglines are beneficial.

Consistent with the Proposed Rule, the Final Rule eliminates the requirement for taglines to be included in significant communications associated with the health plan.

U.S. Supreme Court Decision Regarding Sexual Orientation and Gender Identity

Title VII of the Civil Rights Act of 1964 makes it unlawful for, among other things, an employer to fail or refuse to hire, discharge, or otherwise discriminate against an employee with respect to the employee’s compensation, terms, conditions, or privileges of employment because of the employee’s sex.  Due to a split among lower courts about whether an employee’s “sex” includes an employee’s sexual orientation or gender identity, the U.S. Supreme Court agreed to hear the issue in the Bostock case last year.  On Monday, June 15, 2020, the Court issued its much-anticipated decision.   

President Trump’s appointee, Justice Gorsuch, wrote the Majority Opinion and was joined by Justices Roberts, Breyer, Ginsberg, Kagan, and Sotomayor in holding that an employer violates Title VII if the employer terminates an employee based on the employee’s sexual orientation or gender identity.  While all parties conceded that the term “sex” in 1964 referred specifically to the biological distinctions between males and females, the Court concluded that when the employer uses an employee’s sexual orientation or gender identity as a basis for hiring or firing, the employee’s sex is (or sex-based rules are) so inextricably intertwined with the decision that a violation of Title VII occurs. Specifically, the opinion provides, “It is impossible to discriminate against a person for being homosexual or transgender without discriminating against that individual based on sex.”

Therefore, whether “sex” discrimination includes gender identity or sexual orientation is a settled issued under federal law, and employers should ensure they update any handbooks or other employer policies and take any other necessary actions to ensure compliance with the law.

Section 1557 in Light of the Supreme Court’s Decision

While many speculated that HHS delayed releasing the Final Rule on Section 1557 due to the outstanding U.S. Supreme Court decision, the timing could not have been any more interesting.  While the Bostock opinion speaks exclusively to Title VII and Section 1557 speaks to Title IX for purposes of sex discrimination, given the similar protections of Title IX and Title VII, which apply “because of” or “on the basis of” sex, we expect the removal of “gender identity” from the protections of Section 1557 will bring about new challenges to the Final Rule in light of the Bostock opinion.

Moreover, as Title VII prohibits employers from discriminating against employees in the terms and conditions of employment on the basis of their sex, including gender identity or sexual orientation, employers should consider this when determining coverage options for employees.  Blanket exclusions in group health plans for services related to gender dysphoria or gender identity disorder may be subject to challenge under Title VII.

IRS Releases Updated Form 720 Used For PCORI Fee Payments

As we recently reported, on June 8, 2020, the IRS released the applicable PCORI fee for plan years ending between October 1, 2019, and September 30, 2020.  As we indicated in that alert, an updated Form 720 had not yet been released and, therefore, employers were advised to wait to file their PCORI fees until the IRS released the updated form.  Late last week, the IRS issued the updated Form 720, which is the April 2020 Revised form. Employers who sponsored a self-funded health plan, including an HRA, with a plan year that ended in 2019 should use this updated Form 720 to pay the PCORI fee by the July 31, 2020 deadline.

As a reminder:

• The insurance carrier is responsible for paying the PCORI fee on behalf of a fully insured plan. 
• The employer is responsible for paying the fee on behalf of a self-insured plan, including an HRA.  In general, health FSAs are not subject to the PCORI fee.
• Plans that ended between January 1, 2019, and September 30, 2019 use Form 720 to pay their PCORI fee of $2.45 per covered life. 
• Plans that ended between October 1, 2019, and December 31, 2019, use Form 720 to pay their PCORI fee of $2.54 per covered life. 

REMINDER:  PCORI Fees Due By July 31, 2020

Employers that sponsor self-insured group health plans, including health reimbursement arrangements (HRAs) should keep in mind the upcoming July 31, 2020 deadline for paying fees that fund the Patient-Centered Outcomes Research Institute (PCORI).  As background, the PCORI was established as part of the Affordable Care Act (ACA) to conduct research to evaluate the effectiveness of medical treatments, procedures, and strategies that treat, manage, diagnose or prevent illness or injury.  Under the ACA, most employer sponsors and insurers were required to pay PCORI fees until 2019, as it only applied to plan years ending on or before September 30, 2019.  However, the PCORI fee was extended to plan years ending on or before September 30, 2029, as part of the Further Consolidated Appropriations Act, 2020. 

The amount of PCORI fees due by employer sponsors and insurers is based upon the number of covered lives under each “applicable self-insured health plan” and “specified health insurance policy” (as defined by regulations) and the plan or policy year-end date.  This year, employers will pay the fee for plan years ending in 2019.

For plan years that ended between January 1, 2019, and September 30, 2019, the fee is $2.45 per covered life and is due by July 31, 2020.  

Since the extension of the PCORI fee deadline in December, issuers, and sponsors of self-funded plans have been anxiously awaiting information from the IRS concerning the applicable PCORI fee for plans with plan years ending between October 1, 2019, and before October 1, 2020.  On June 8, 2020, the IRS Issued Notice 2020-44, which sets the applicable PCORI fee for these plans at $2.54 per covered life.  As of June 8, the IRS has not released the second quarter Form 720.  The second quarter Form 720 must be used to pay the PCORI fee. 

In addition, Notice 2020-44 provides transition relief to issuers and self-funded plan sponsors for purposes of calculating the PCORI fee for plan years ending on or after October 1, 2019, and before October 1, 2020.  The rationale provided by the IRS is because issuers or plan sponsors may not have anticipated the need to identify the number of covered lives during this time period because they believed the PCORI fee expired on September 30, 2019. 

Accordingly, the IRS provides that plan sponsors of impacted plans may continue to use the actual count, snapshot, or Form 5500 method to calculate the average number of lives and determine the applicable PCORI fee.  These methods are discussed more fully later in this alert.  Additionally, the IRS also provided that plan sponsor of impacted plans may opt to use a “reasonable method” to calculate the average number of covered lives for the plan year ending on or after October 1, 2019 (but before October 1, 2020) as long as the method is applied consistently for the duration of the plan year. 

Therefore, for example, a plan year that ran from July 1, 2018, through June 30, 2019, will pay a fee of $2.45 per covered life and use the snapshot, Form 5500, or actual count method to determine the average number of covered lives.  On the other hand, the calendar year 2019 plans will pay a fee of $2.54 per covered life and use the snapshot, actual count, Form 5000, or another reasonable method to calculate the average number of covered lives for the plan year. 

The insurance carrier is responsible for paying the PCORI fee on behalf of a fully insured plan.  The employer is responsible for paying the fee on behalf of a self-insured plan, including an HRA.  In general, health FSAs are not subject to the PCORI fee.

Employers that sponsor self-insured group health plans must report and pay PCORI fees using IRS Form 720, Quarterly Federal Excise Tax Return.  

NOTE: Employers must wait until the second quarter Form 720 is released by the IRS to pay the fee.  If this is an employer’s last PCORI payment and they do not expect to owe excise taxes that are reportable on Form 720 in future quarters (e.g., because the plan is terminating), they may check the “final return” box above Part I of Form 720.

Also note that because the PCORI fee is assessed on the plan sponsor of a self-insured plan, it generally should not be included in the premium equivalent rate that is developed for self-insured plans if the plan includes employee contributions.  However, an employer’s payment of PCORI fees is tax-deductible as an ordinary and necessary business expense. 

Historical Information for Prior Years

• For plan years that ended between October 1, 2018, and December 31, 2018, the fee is $2.45 per covered life and was due by July 31, 2019.
• For plan years that ended between January 1, 2018, and September 30, 2018, the fee is $2.39 per covered life and was due by July 31, 2019.
• For plan years that ended between October 1, 2017, and December 31, 2017, the fee is $2.39 per covered life and was due by July 31, 2018.
• For plan years that ended between January 1, 2017, and September 30, 2017, the fee is $2.26 per covered life and was due by July 31, 2018.
• For plan years that ended between October 1, 2016, and December 31, 2016, the fee is $2.26 per covered life and was due by July 31, 2017.
• For plan years that ended between January 1, 2016, and September 30, 2016, the fee is $2.17 per covered life and was due by July 31, 2017.
• For plan years that ended between October 1, 2015, and December 31, 2015, the fee was $2.17 per covered life and was due by August 1, 2016.
• For plan years that ended between January 1, 2015, and September 30, 2015, the fee was $2.08 per covered life and was due by August 1, 2016.
• For plan years that ended between October 1, 2014, and December 31, 2014, the fee was $2.08 per covered life and was due by July 31, 2015.
• For plan years that ended between January 1, 2014, and September 30, 2014, the fee was $2 per covered life and was due by July 31, 2015.
• For plan years that ended between October 1, 2013, and December 31, 2013, the fee was $2 per covered life and was due by July 31, 2014.
• For plan years that ended between January 1, 2013, and September 30, 2013, the fee was $1 per covered life and was due by July 31, 2014.
• For plan years that ended between October 1, 2012, and December 31, 2012, the fee was $1 per covered life and was due by July 31, 2013.

Explanation of Counting Methods for Self-Insured Plans

As discussed above, plan sponsors of plans years ending before October 1, 2019, may choose from the three methods below when determining the average number of lives covered by their plans. Plan sponsors with plan years ending on or after October 1, 2019, and before October 1, 2020, can use any of the three methods below or another reasonable method. The IRS did not specify a reasonable method that could be used, though employers should use good faith when determining the count.

Actual Count method.  Plan sponsors may calculate the sum of the lives covered for each day in the plan year and then divide that sum by the number of days in the year.

Snapshot method.  Plan sponsors may calculate the sum of the lives covered on one date in each quarter of the year (or an equal number of dates in each quarter) and then divide that number by the number of days on which a count was made. The number of lives covered on any one day may be determined by counting the actual number of lives covered on that day or by treating those with self-only coverage as one life and those with coverage other than self-only as 2.35 lives (the “Snapshot Factor method”).

Form 5500 method.  Sponsors of plans offering self-only coverage may add the number of employees covered at the beginning of the plan year to the number of employees covered at the end of the plan year, in each case as reported on Form 5500, and divide by 2.  For plans that offer more than self-only coverage, sponsors may simply add the number of employees covered at the beginning of the plan year to the number of employees covered at the end of the plan year, as reported on Form 5500.

Special rules for HRAs. The plan sponsor of an HRA may treat each participant’s HRA as covering a single covered life for counting purposes, and therefore, the plan sponsor is not required to count any spouse, dependent, or other beneficiary of the participant. If the plan sponsor maintains another self-insured health plan with the same plan year, participants in the HRA who also participate in the other self-insured health plan only need to be counted once for purposes of determining the fees applicable to the self-insured plans.