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Compliance Update Health and Benefits

The United States Supreme Court Decides the Rutledge Case

In a previous article, we told you about a case that was argued in the United States Supreme Court on October 6, 2020.  That case, Rutledge, Attorney General of Arkansas v. Pharmaceutical Care Management Association, was decided by the Court in a unanimous opinion issued on December 10, 2020.

What Was The Case About?

To refresh your recollection, the State of Arkansas had passed a law, known as Act 900, regulating the price at which pharmacy benefit managers (PBMs) are required to reimburse pharmacies for prescription drugs.  While invisible to most plan participants, PBMs are an important part of most employer healthcare plans.

A PBM is an intermediary between a healthcare plan and a pharmacy.  When a plan participant goes to a pharmacy to fill a prescription, the participant may or may not have a co-pay.  Whether the participant has a co-pay or not, the participant expects that the cost of the prescription will be mostly paid by the plan.  Ultimately, the participant is right.  However, it is not the plan that makes a payment to the pharmacy.  The plan’s PBM pays the pharmacy, and the plan reimburses the PBM.

The problem that Act 900 sought to address is that the amount paid to the pharmacy by the PBM may bear no relation to either the amount paid by the pharmacy to acquire the prescription drug or the amount paid by the plan to the PBM.  The PBM enters into a contract with the pharmacy pursuant to which the PBM agrees to reimburse the pharmacy according to rates set by the PBM and known as the maximum allowable cost (MAC).  The PBM also enters into a contract with the plan pursuant to which the plan agrees to reimburse the PBM at a certain amount.  The difference between the MAC for a particular drug and the amount paid by the plan represents profit for the PBM.  However, in certain cases, it may only be the PBM that is making a profit.  That is because the MAC may be less than the pharmacy’s acquisition cost.  And, if that happens too often, a pharmacy may be forced out of business.

Act 900 attempted to resolve this problem by requiring PBMs to periodically update their MACs to ensure that the MAC for a particular prescription drug equaled the pharmacy’s acquisition cost.  In addition, Act 900 provided an appeal procedure whereby a pharmacy could challenge a PBM’s MAC when it was below the pharmacy’s acquisition cost.  Finally, Act 900 provided that a pharmacy could refuse to deliver a prescription drug to a plan participant if the PBM’s reimbursement rate was less than the pharmacy’s acquisition cost.

This case began when the Pharmaceutical Care Management Association (Association), a trade association of the some of the largest PBMs, sued the State of Arkansas in federal district court.  The Association claimed that Act 900 was preempted by the Employee Retirement Income Security Act of 1974 (ERISA) and, as a result, unenforceable.  The Association won in the District Court, and the District Court’s judgment was affirmed by the United States Court of Appeals for the Eighth Circuit.  The State filed a Petition for a Writ of Certiorari, which the Supreme Court granted.

The Supreme Court Finds No ERISA Preemption

In an opinion written by Justice Sotomayor, the Court reviewed the law of ERISA preemption.  It said that ERISA preempts any state law that relates to an employee benefit plan.  Further, a state law relates to an employee benefit plan if it has a connection with or reference to such plan.

The Court found that the purpose of ERISA was “to make the benefits promised by an employer more secure by mandating certain oversight systems and other standard procedures”.  It accomplished this by ensuring that an employer would not be subject to the differing rules and regulations of the various states.  “ERISA is therefore primarily concerned with preempting laws that require providers to structure benefit plans in particular ways, such as by requiring payment of specific benefits.”

Not every state law that affects an ERISA plan is preempted.  “This is especially so if a law merely affects costs.”  The Court discussed its earlier decision in New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Company, in which the Court held that a New York law that imposed a surcharge on hospital billing rates for plans other than Blue Cross Blue Shield plans was not preempted by ERISA.  In discussing the Travelers case, Justice Sotomayor wrote that:

Plans that bought insurance from the Blues therefore paid less for New York hospital services than plans that did not.  This Court presumed that the surcharges would be passed on to insurance buyers, including ERISA plans, which in turn would incentivize ERISA plans to choose the Blues over other alternatives in New York.  Nevertheless, the Court held that such an “indirect economic influence” did not create an impermissible connection between the New York law and ERISA plans because it did not “bind plan administrators to any particular choice.”

In Rutledge, the Court said that it is required to follow the holding of Travelers.

Act 900 is merely a form of cost regulation.  It requires PBMs to reimburse pharmacies for prescription drugs at a rate equal to or higher than the pharmacy’s acquisition cost.  PBMs may well pass those increased costs on to plans, meaning that ERISA plans may pay more for prescription-drug benefits in Arkansas than in, say, Arizona.  But “cost uniformity was almost certainly not an object of pre-emption.”

The Court also found that Act 900 does not refer to ERISA plans.  The reason that Act 900 does not refer to ERISA plans is that it is equally applicable to non-ERISA plans.  Since Act 900 does not have an impermissible connection to ERISA plans and does not refer to ERISA plans, it is not related to ERISA plans and is not preempted.

What Will Be The Impact of Rutledge?

This depends on whom you ask.  The State of Arkansas, as well as the over 30 other states with similar laws, will be pleased.  The states can now regulate the reimbursement rates that pharmacies are paid for prescription drugs to ensure that no pharmacy is forced to close because the MAC is less than the pharmacy’s acquisition cost.  The pharmacies are happy because, in states with such laws, they will no longer be forced to sell prescription drugs for less than cost.

On the other hand, the PBMs are not pleased.  Obviously, this could reduce their profit margins if they are required to increase their MACs.  The impact on prescription drug plans is less clear.  One of the arguments made by the Association before the Supreme Court is that PBMs will be forced to pass on increased costs to healthcare plans.  This will increase the cost of prescription drugs to the plans.  This may force plans to increase co-pays or eliminate certain coverages.  However, the Court’s role in this case was not to judge the wisdom of Act 900.  It was simply to determine whether it was preempted by ERISA.  And, since cost regulation does not relate to an ERISA plan, it found that Act 900 is not preempted by ERISA.

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Compliance Update Health and Benefits

IRS Releases PCORI Fee Guidelines

The Patient Protection and Affordable Care Act, otherwise known as Obamacare, added sections 4375 and 4376 to the Internal Revenue Code.  Section 4375 imposes a fee “on each specified health insurance policy” for each policy year ending after September 30, 2012.  Section 4376 imposes a fee on “any applicable self-insured health plan” for each plan year ending after September 30, 2012.  The fee imposed by sections 4375 and 4376 was intended to fund the Patient-Centered Outcomes Research Trust Fund and are known by the acronym PCORI.

The PCORI fee was scheduled to expire for policy and plan years ending after September 30, 2019.  However, in December, 2019, Congress passed the Further Consolidated Appropriations Act, 2020, which extended the termination dates of the PCORI fee to September 30, 2029.  So, those who were looking forward to their PCORI fee obligation terminating are still on the hook.

How Much is the PCORI Fee and Who Pays?

The PCORI fee is imposed on “each specified health insurance policy” and on “any applicable self-insured health plan”.  The term “specified health insurance policy” is defined in section 4375(c)(1) as:

. . . any accident or health insurance policy (including a policy under a group health plan) issued with respect to individuals residing in the United States.

Further, section 4375(b) provides that the fee shall be paid by the issuer of the policy.

The term “applicable self-insured health plan” is defined section 4376(c) as:

            . . . any plan for providing accident or health coverage if —

(1) any portion of such coverage is provided other than through an insurance policy, and

(2) such plan is established or maintained –

A. by 1 or more employers for the benefit of their employees or former employees,

B. by 1 or more employee organizations for the benefit of their members or former members,

C. jointly by 1 or more employers and 1 or more employee organizations for the benefit of employees or former employees,

D. by a voluntary employees’ beneficiary association described in section 501(c)(9),

E. by any organization described in section 501(c)(6), or

F. . . . by a multiple employer welfare arrangement . . .

Section 4376(b)(1) provides that the fee shall be paid by the plan sponsor, and section 4376(b)(2) defines the term “plan sponsor” as including (A) “the employer in the case of a plan established or maintained by a single employer”, (B) “the employee organization in the case of a plan established or maintained by an employee organization” and (C) “any association, committee, joint board of trustees or other similar group of representatives who establish or maintain the plan”.

The amount of the fee was initially $2.00 times the average number of lives covered under the policy or the plan.  Both section 4375 and section 4376 provided for an annual increase in the fee.

Notice 2020-44

As stated above, the PCORI obligation originally did not apply for policy or plan years ending after September 30, 2019.  However, in December, 2019, Congress extended the termination date to September 30, 2029.  The IRS recognized that this may have imposed an undue burden on some issuers of specified health insurance policies and plan sponsors of applicable self-insured health plans who had not anticipated the need to determine the number of covered lives for any period after September 30, 2019.  As a result, on June 8, 2020, the IRS issued Notice 2020-44.

What Does Notice 2020-44 Provide?

Notice 2020-44 provides a transition rule for issuers of specified health insurance policies and plan sponsors of applicable self-insured health plans.  It provides four methods for issuers of specified health insurance policies to use in calculating the number of covered lives:

  1. the actual count method;
  2. the snapshot method;
  3. the member months method; and
  4. the state form method.

In addition, an issuer can use any other reasonable method.

Likewise, Notice 2020-44 provides that a plan sponsor of an applicable self-insured health plan may use any one of three methods to calculate the number of covered lives:

  1. the actual count method;
  2. the snapshot method; and
  3. the Form 5500 method.

In addition, a plan sponsor can use any other reasonable method.

Notice 2020-44 also provides the dollar amount that must be used to calculate the fee imposed by section 4375 and section 4376.  For policy and plan years ending on or after October 1, 2019, and before October 1, 2020, the applicable dollar amount is $2.54 per covered life.

The IRS anticipates issuing treasury regulations to reflect the extension of the PCORI obligation.

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Business Insurance Captive Insurance Compliance Update Technical Memorandum

Further DOL Guidance on Families First Coronavirus Response Act

Shortly after publishing its FAQ on the Families First Coronavirus Response Act (the “Act”), the Department of Labor (DOL) issued Field Assistance Bulletin No. 2020-1 (the “Bulletin”).

What does the Bulletin mean for business?

The Bulletin announces a temporary delay in the enforcement of the Act, which goes into effect on April 1, 2020.

The DOL states that it will not bring enforcement actions against employers who are making a good faith effort to comply until after April 17, 2020.

If your business is subject to the Act, you should begin making changes to comply with its requirements.

The Bulletin states:

The Department will not bring enforcement actions against any public or private employer for violations of the Act occurring within 30 days of the enactment of the Act, i.e. March 18 through April 17, 2020, provided the employer has made good faith efforts to comply with the Act.

So, the question is, what constitutes a good faith effort to comply with the Act?

The DOL sets forth three conditions, all of which must be present for an employer to be treated as having made a good faith effort to comply:

  1. An employer must remedy any violation, including making all employees whole
  2. The violations must not be willful. A violation is willful if an employer “either knew or showed reckless disregard for the matter of whether its conduct was prohibited”.
  3. The employer provides the DOL with a written commitment to comply with the requirements of the Act in the future.

The stay on enforcement will be lifted on April 17, 2020.

In the meantime, the DOL will take enforcement action against an employer who violates the Act willfully, fails to provide a written commitment to the DOL regarding future compliance with the Act, or fails to remedy the violation.

While not permanent, this temporary stay should give employers some breathing room while trying to figure out how to comply.

Is your business affected by the DOL’s Bulletin?

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Compliance Update

Avrahami v. Commissioner [Compliance Update]

On August 21, 2017, the United States Tax Court released its opinion in Benyamin Avrahami and Orna Avrahami v. Commissioner of Internal Revenue, and Feedback Insurance Company v. Commissioner of Internal Revenue.  The Court held that certain amounts paid to Feedback were not insurance premiums for federal income tax purposes.

CLICK HERE to read the full Compliance Update.

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Compliance Update

Department of Labor Request [Compliance Update]

On July 6, 2017, the Department of Labor (DOL) will issue a Request for Information Regarding the Fiduciary Rule and Prohibited Transaction Exemptions (RFP).  In the RFP, the DOL says that the retirement industry has responded to the Fiduciary Rule with innovations designed to reduce the likelihood of conflicts of interest.  As a result, the DOL has determined that it would be helpful to seek public input that could form the basis of new exemptions or changes to the Fiduciary Rule and the currently existing Exemptions in response to these and other potential innovations.  The RFP also seeks input on whether a further delay of the January 1, 2018, implementation date would be helpful to this process.

CLICK HERE for the full update.

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Compliance Update

Presidential Memorandum on Fiduciary Duty Rule [Compliance Update]

On February 3, 2017, President Trump instructed the Secretary of Labor to review the effect of the Fiduciary Duty Rule on the ability of Americans to obtain retirement information and financial advice.  If the Secretary determines that the Fiduciary Duty Rule adversely affects the ability of Americans to obtain such information and advice, then the Secretary is further instructed to recommend a proposed rule either rescinding or revising the Fiduciary Duty Rule.  Any proposed rule rescinding or revising the Fiduciary Duty Rule would be subject to the same notice and public comment requirements as the Fiduciary Duty Rule.  The President’s Memorandum does not delay the effective date of the Fiduciary Duty Rule; although Acting U.S. Secretary of State Ed Hugler issued the following statement in response to the President’s Memorandum:

The Department of Labor will now consider its legal options to delay the applicability date as we comply with the President’s memorandum.

The Presidential Memorandum of Fiduciary Duty Rule reproduced in its entirety.

If you have any questions, contact RMC’s headquarters at 888.599.5553 or your regional representative.

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Compliance Update Technical Memorandum

Notice 2017-08 Transaction of Interest – Section 831(b) Micro-Captive Transactions

On December 29, 2016, the Internal Revenue Service (IRS) released Notice 2017-08, which extends the deadline for filing Form 8886 and Form 8918 in connection with “micro-captive transactions” to May 1, 2017. CLICK HERE for a copy of Notice 2017-08.

RMC previously provided a memorandum regarding Notice 2016-66, in which the Department of the Treasury and the IRS identified certain “micro-captive transactions” as a “transaction of interest”. CLICK HERE for a copy of our Technical Memorandum on Notice 2016-66.

A taxpayer participating in a transaction of interest is required to attach a Form 8886 to its tax returns. This includes the captive, the insured business and the owners of the captive and the insured business.  In addition, the Form 8886 must be filed with the IRS Office of Tax Shelter Analysis (OTSA).  A person who is a “material advisor” is required to file Form 8918 with OTSA.  Notice 2016-66 required taxpayers participating in a “micro-captive transaction” to file the Form 8886 with OTSA by January 30, 2017.  In addition, Notice 2016-66 required material advisors to file Form 8918 with OTSA by January 30, 2017.  Notice 2017-08 extends this date to May 1, 2017.

If you believe you have participated in a transaction the same as or similar to the one identified in Notice 2016-66, you should consult your independent legal and tax advisors to determine whether you are required to file Form 8886 or Form 8918.

If you have any questions, contact RMC’s headquarters at 888.599.5553 or your regional representative.

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Compliance Update

Notice 2016-66 [Compliance Update]

On November 1, 2016, the Department of the Treasury and the Internal Revenue Service (the “IRS”) issued Notice 2016-66. The Notice describes a certain type of captive insurance company and identifies the transaction as a “transaction of interest”. Persons engaging in the transaction are required to disclose their participation in the transaction to the IRS.

CLICK HERE for a copy of our Compliance Update for Notice 2016-66.

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Compliance Update

PATH Act Technical Explanation [Compliance Update]

The Joint Committee on Taxation recently released a 268-page technical explanation of the Protecting Americans from Tax Hikes Act of 2015 (or “PATH Act”).  Section 333 of the PATH Act amends section 831(b) of the Internal Revenue Code in a number of ways that may affect the tax treatment of small property and casualty insurance companies, including captive insurance companies.  For an excerpt of the full report that is specific to section 333, please click here.

For the full report, please click here.

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Compliance Update

IRS Revenue Ruling 2002-90 [Compliance Update]

In 2002, the IRS issued guidance on captive insurance. The three new revenue rulings and a revenue procedure address deductibility of premiums paid to a wholly owned insurance subsidiary.  The second revenue ruling can be found HERE.