EMPLOYEE BENEFITS BRIEFING

EMPLOYEE BENEFITS BRIEFING LEGISLATIVE UPDATE by Jennifer Lunski, Esq. November 2011 At Woodruff-Sawyer, we offer frequent updates on legislative changes that impact employee benefit plans. Employers should review the updates to ensure their plans and policies are in compliance with the newest legislation and regulations. This update includes articles on the following topics: 1. Supreme Court To Hear Health Care Reform Debate in March, 2012 2. Inplementing Compliant Wellness Programs 3. California Legislation 4. 2012 IRC Indexed Figures 5. California State Disability Rates SUPREME COURT TO HEAR HEALTH CARE REFORM DEBATE IN MARCH, 2012 On Monday, November 14, 2011, the United States Supreme Court granted three separate cases on the constitutionality of the Patient Protection and Affordable Care Act (ACA). For a detailed analysis of the debate surrounding ACA, read our October 2011 Our Perspective article. The Supreme Court has allotted a total of five and a half hours of oral argument in March 2012, broken down as follows: Two hours of argument on the constitutionality of the individual mandate; One and half hours on severability of the individual mandate from the rest of the law; One hour on jurisdiction given the Anti-Injunction Act; and One hour on constitutionality of the expansion of Medicaid for the poor and disabled The Court will determine whether the insurance-mandated penalties in ACA are a type of tax that can only be challenged after it is collected, rather than before. If the Court determines it is premature to deal with the core issue of the individual mandate, we may have to wait until 2014 before a ruling can be rendered. Your Woodruff-Sawyer representatives will continue to keep you up to date on the ACA and ensure compliance with its provisions. IMPLEMENTING COMPLIANT WELLNESS PROGRAMS It is documented that wellness programs, which promote employees to stay healthy, result in a more productive and engaged workforce. The Affordable Care Act (ACA) contains programs and incentives for employers to sponsor wellness programs. State exchanges may also offer wellness initiatives. In implementing successful wellness programs, compliance is essential to ensure

2 that your organization is not exposed to government penalties or litigation risk. The following summarizes some of the laws that we recommend you review with your consultant and legal counsel to ensure that your wellness programs are compliant. Health Insurance Portability and Accountability Act (HIPAA) Wellness programs that offer rewards based on health factors, such as lower co-pays or deductibles for non-smokers, present more complex compliance issues. Programs of this nature would violate HIPAA but for an exception in the law for wellness programs. To take advantage of the exception, the wellness program must strictly comply with five requirements: 1. The reward must not exceed 20% of the total cost of the participant s health insurance; 2. The program must be reasonably designed to promote health and prevent disease, and does not appear to be a pretext for discriminating against employees based on health factors; 3. The program must give participants at least one chance per year to qualify for the reward; 4. The program must provide a reasonable alternative means to obtain the reward for those who cannot meet the program s standard due to a medical problem or condition, or it must allow waiver of the standard for such people; and 5. The program must disclose to participants the program s terms, including the availability of alternative standards. A health factor-based reward program that meets these five criteria will comply with HIPAA, provided it is offered to all similarlysituated employees. If the program also complies with federal and state confidentiality requirements, it should encounter few, if any, compliance problems. Affordable Care Act (ACA) In 2014, the permissible allowance for participation in wellness programs will increase to 30% (up from 20%). HHS may choose to increase the permissible allowance to as much as 50% by regulation. This gives employers increased opportunities to create wellness programs. While health care reform legislation does not explicitly change any of the current laws that apply to wellness programs, informal guidance on the subject of grandfathered plans, cautioned that wellness program penalties, such as cost-sharing surcharges, should be examined carefully to ensure that they do not exceed cost-sharing increases that are permissible with grandfathered plans. ACA created a grant program that will assist eligible employers in providing comprehensive workplace wellness programs. Eligible employers are those with fewer than 100 employees who work 25 hours or more per week and did not provide a workplace wellness program as of March 23, 2010. Under this program, $200,000,000 was appropriated for the period of 2011 through 2015. Grants require eligible employers to submit an application to HHS that includes a proposal for a comprehensive workplace wellness program meeting certain criteria and requirements. A comprehensive workplace wellness program must be made available to all employees that includes health awareness initiatives, efforts to maximize employee engagement, initiatives to change unhealthy behavior and a supportive environment. Employers that meet the qualifications outlined in the grant program will be able to apply for grant programs if they are eligible once the programs become available from the federal government. HHS has not yet developed this grant program for small businesses, and has provided no indication of when it will do so. ACA authorized the Centers for Disease Control and Prevention (CDC) to provide employers of all sizes with assistance, tools and other web portal and call center resources to evaluate employer based wellness programs. CDC must conduct a survey to assess employer based health policies and programs. Once these tools become available, employers should work with their consultant to efficiently utilize these tools. Genetic Information Nondiscrimination Act (GINA) On November 21, 2009, the enactment of Title II of GINA prohibited employers from using genetic information to make employment decisions and limited the disclosure of such information. The final rule made clear that covered entities cannot

3 offer financial inducements for individuals to provide genetic information as part of a wellness program. One exception allows a covered entity to acquire genetic information about an employee or his or her family members when it offers health or genetic services, including wellness programs, if the information is acquired on a voluntary basis. Genetic information of a participant in a wellness program may be provided to the participant and his/her health care provider. The employer may only receive genetic information of participants on an aggregate basis. As a result, employers who have financial incentives associated with wellness programs must examine the policies and procedures. Family medical questions on health risk assessments must be carefully examined and possibly removed. Incentives offered to employees who complete health risk assessments must make clear that the reward is not dependent upon the employee answering questions about genetic information. It has been reported that one regional office of the EEOC has initiated enforcement action against several employers for providing incentives to an employee whose spouse participates in a health risk assessment. Apparently, the EEOC has determined that an incentive offered in connection with a spouse completing a health risk assessment is a financial inducement that violates GINA, as it is requesting family medical history. Employers that currently offer financial incentives for spousal participation in a health risk assessment need to closely examine their wellness policies and procedures for possible GINA violations. If the employer wants to ensure that they do not violate GINA, programs need to be revised to ensure that there is no incentive associated with the spouse completing a health risk assessment. Employers that wish to continue providing financial incentives to spouses who complete health risk assessments, need to weigh the risk of an EEOC enforcement action and monitor the situation in the event that other Federal agencies take the same position. Consideration can also be given to speculation in the wellness industry that the EEOC position could be clarified and changed in the future. Taxation of Employer Provided Rewards Non-cash rewards associated with a wellness program are generally taxable. However, each type of reward needs to be reviewed individually to determine whether it would be taxable or non-taxable. Employee wellness discounts that fall within code Section 132 would not be taxable. Section 125 Election Change Issues Wellness rewards that take the form of a premium reduction, co- payment or deductible waiver, may affect mid-year cafeteria plan election rules. A significant reduction in premium would permit participants to make mid-year plan changes. A wellness program that offers mid-year rewards will need to ensure that they have administrative capabilities to process mid-year change requests from participants. Alternatively, plan sponsors should consider structuring a plan such that eligibility for the rewards and incentives is determined before Open Enrollment for the next plan year to avoid mid-year change requests. Discrimination Testing Wellness or disease management rewards that take the form of employer contributions to a Health Saving Account (HSA) plan will need to be reviewed to ensure they satisfy the cafeteria plan discrimination plan rules and comparability requirements. Moreover, rewards in the form of Health Reimbursement Account (HRA) contributions to a self-funded HRA plan must satisfy code 105(h). COBRA A wellness program that goes beyond the promotion of good health to provide physical examinations, health risk assessments, cholesterol screening, flu shots, nutrition counseling and education, and similar benefits are considered medical benefits and will likely be treated as a group health plan under ERISA. Any wellness programs should be coordinated with COBRA administrators to ensure that COBRA notices are provided. Wellness programs that fail to satisfy COBRA requirements may trigger excise taxes that must be self-reported by the employer on IRS Form 8928.

4 CALIFORNIA LEGISLATION Senate Bill 117 (SB 117) On September 6, 2011, Senate Bill 117, the Equal Benefits Bil became law in the State of California. SB 117 prohibits a state agency from entering into a contract for the acquisition of goods or services in the amount of $100,000 or more with a contractor who, in the provision of benefits, discriminates between employees with spouses and employees with domestic partners, or discriminates between the domestic partners and spouses of those employees. The legislation requires state contractors with contracts of $100,000 or more to provide the same type and level of benefits to same-sex spouses and samesex registered domestic partners of employees as those provided to different-sex registered domestic partners and different-sex spouses.this law covers current and prospective contracts for goods or services of $100,000 or more per contractor in a fiscal year. This legislation applies only to those portions of the contractor s operations that are being performed within California, on real property outside of California if the property is owned by California. Senate Bill 946 (SB 946) SB 946 is a bill requiring health insurance companies that offer contracts covering hospital, medical and surgical services, to also cover behavioral, vocational, and occupational therapies for those diagnosed with Autism. The bill limits the mandated Autism benefits to the extent they do not exceed the essential health benefits as defined by federal law. The new coverage must be in place no later than July 1, 2012. The bill will sunset on July 1, 2014. Senate Bill 299 (SB 299) SB 299 will also prohibit an employer with 5 to 49 employees, which is not subject to FMLA, from refusing to maintain and pay for coverage under a group health plan when an employee takes maternity leave. The law can also impact employers with 50 or more employees, when the employee goes on pregnancy leave prior to FMLA eligibility or after FMLA is exhausted. Governor Brown also signed AB 499, which will allow children aged 12 and older to obtain preventive treatment for sexually transmitted infections without parental consent. The measure takes effect January 1, 2012. Your Woodruff-Sawyer representative will work with you and your carriers to ensure that you are in compliance with this regulation by the required timeline. 2012 IRC INDEXED FIGURES Qualified Transportation Fringe Benefits Effective January 1, 2012, the monthly Qualified Transportation Fringe Benefit limits will be: Parking $240 (up from $230) Transit $125 (down from $230) Bicycle $20 (unchanged) It is possible that Congress may act between now and December 31, 2011 to increase the 2012 Transit benefit to the current $230 level, or to the inflation adjusted $240 benefit.

5 Indexed Compensation Levels The indexed compensation levels for determining who is highly compensated or a key employee are as follows. 2010 2011 2012 Highly Compensated Employee $110,000 $110,000 $115,000 Top Paid Group of 20% $110,000 $110,000 $115,000 Key Employee, Officer $160,000 $160,000 $165,000 Health Savings Account (HSA) Minimum decuctible amounts for the qualifying HDHP Individual Coverage $1,200 $1,200 Family Coverage $2,400 $2,400 Maximum Contribution Levels Individual Coverage $3,050 $3,100 Family Coverage $6,150 $6,250 Catch-Up Coverage Allowed for those 55 and over $1,000 $1,000 Maximums for HDHP out-of-pocket expenses Individual Coverage $5,950 $6,050 Family Coverage $11,900 $12,100 Long-Term Care For a qualified long-term care insurance policy, the maximum non-taxable per diem $300/day $310/day 401(k) Plans The maximum for elective deferrals will increase to $17,000 for 2012. For those 50 or older, the catch-up contribution rate will remain the same as it was in 2011 at $5,500 for 2012. CALIFORNIA STATE DISABILITY RATES Effective January 1, 2012, California State Disability rates will be as follows: Contribution rate: 1.0% Taxable Wage Base: $95,585.00 Weekly Benefit Maximum: $1,011.00 Maximum Annual Contribution: $955.85 The information provided in this Legislative Update should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only and you are urged to consult an attorney concerning your own situation and any specific legal questions you may have. Woodruff-Sawyer is one of the largest independent insurance brokerage firms in the nation, and is an active partner of International Benefits Network and Assurex Global. For over 90 years, Woodruff-Sawyer has been partnering with clients to implement and manage cost-effective and innovative insurance, employee benefits and risk management solutions, both nationally and abroad. Headquartered in San Francisco, Woodruff-Sawyer has offices throughout California, Oregon and in Atlanta, Georgia. For more information, call 415.391.2141 or visit www.wsandco.com. About Jennifer Jennifer is Vice President, Compliance Officer in the Benefits practice at Woodruff-Sawyer & Co. She consults directly with our Employee Benefits clients on all matters of compliance and leads both internal and external trainings. She has also conducted numerous trainings on ERISA, COBRA and HIPAA to Department of Labor employees, the Department of Justice and to employers that sponsor ERISA-covered plans. A published expert on ERISA, COBRA and HIPAA rules and regulations, Jennifer has investigated a broad spectrum of company employee benefit plans and has extensive experience negotiating with industry fiduciaries and service providers. Before joining Woodruff-Sawyer, Jennifer was a Senior Investigator at the US Department of Labor (DOL), Employee Benefits Security Administration in San Francisco. Jennifer can be reached at 415.402.6577 or jlunski@wsandco.com.