The Affordable Care Act—Countdown to Compliance for Employers, Week 31: ERISA Section 510 and Limiting Employee Hours
Written by Alden J. Bianchi and Edward A. Lenz
In last week’s post, we examined the appropriateness of capping the annual hours of new “variable hour employees” as a way to limit exposure under the Affordable Care Act’s employer shared responsibility rules. (These rules are codified at Internal Revenue Code § 4980H and implemented in final regulations issued in February of this year. The IRS has also published a helpful set of Frequently Asked Questions on the subject.) We asserted that the strategy does not work in the case of new employees during the initial measurement period. This week’s post examines its application to “ongoing employees.”
Background
As we explained previously,
“Whenever Congress draws a line in the sand—such as with exposure for assessable payments under the Affordable Care Act’s employer shared responsibility rules—entities subject to regulation (here, applicable large employers) will inevitably seek ways to avoid having to comply.”
Nowhere has this rule been discussed more publicly than in connection with efforts on the part of employers to cap hours of (almost exclusively rank-and-file) employees at or under 30 hours per week so as to avoid having to make any offer of minimum essential coverage. Discussions of these and other avoidance strategies inevitably invoke the specter of § 510 of the Employee Retirement Income Security Act (ERISA). In our experience, much of this analysis misses the mark.
ERISA § 510 makes it unlawful for any person to discriminate against a plan participant or beneficiary for exercising rights provided by an employee benefit plan. This provision has generally, though not exclusively, been invoked in cases involving pension benefits. Some commentators have predicted a flood of cases under ERISA § 510 aimed at employers that seek to cap hours in order to avoid Code § 4980H exposure, but these claims often overlook that ERISA § 510 confers rights only on plan participants and not on employees generally. And nothing in ERISA or any other Federal law requires employers to offer group health plan coverage. (The issue of “participant” vs. “employee” is treated at length in a recent blog post by Ann Caresani of Porter, Wright, Morris & Arthur LLP, Cleveland, Ohio.)
It would be a serious mistake, however, to think that the participant/employee distinction ends the matter, and that an employer has nothing to fear under ERISA § 510 if it uses an hours cap strategy to prevent employees from achieving full-time status. ERISA § 3(7) defines a “participant” as an employee or former employee “who is or may become eligible for a benefit of any type from an employee benefit plan.” In a case going back to 1989 (Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101), the Supreme Court held that this definition includes a former employee who can show “a colorable claim that (1) he will prevail in a suit for benefits, or that (2) eligibility requirements will be fulfilled in the future” (pp. 117-18 italics added). This holding was subsequently expanded on (see, e.g., Shahid v. Ford Motor Co., 76 F.3d 1404, 1410 (6th Cir. 1996)) to permit a plaintiff to prevail if he or she can demonstrate that “but for” the employer’s misconduct, he or she would continue to have participant status. Thus, an employer cannot discharge an employee to prevent him or her from achieving benefits eligibility and then argue that the former employee is no longer a participant without standing to sue under ERISA § 510.
A more recent case further expanded the reach of ERISA § 510. Sanders v. Amerimed, No. 1:13-cv-813 (S.D. Ohio Apr. 25, 2014), involved a claim for group health benefits by a former employee, John Sanders, who was never a participant or beneficiary in his employer’s group health plan. The employer argued that Mr. Sanders was not entitled to benefits as a part-time employee, and as such, he lacked standing to bring a claim under ERISA § 510. The court disagreed, holding instead that Mr. Sanders had standing based on ERISA’s definition of participant and on evidence that the employer accepted his application and interviewed him for a full-time position. (Ms. Caresani criticizes the court’s holding in Sanders v. Amerimed as “overreaching,” and she may well be correct.)
Although we don’t yet know how the courts will interpret ERISA § 510 in the context of the Affordable Care Act’s employer shared responsibility rules, we can make some educated guesses. For example, an employee hired into a position for which benefits are not offered (and assuming no other “bad facts” as may have been adduced in Sanders) should not be able to demand benefits by invoking ERISA § 510. Rights under ERISA § 510 may arise, however, in the case of full-time employees who are currently covered under an employer’s group health plan and who subsequently lose coverage when their hours are reduced. These latter cases will inevitably be fact intensive, and the burden of proof will shift back-and-forth. For example, an employer may assert that the transfer to part-time had nothing to do with group health coverage but was instead motivated by other legitimate business concerns. The burden would then shift to the employee who might cite the employer’s public statements that it is limiting or reducing employee hours for purposes of avoiding “pay-or-play” penalties. Whatever the particulars, it should surprise no one if at least some of these plaintiffs prevail.
Ongoing Employees and ERISA §510
This brings us to the question of the treatment of “ongoing employees” as defined in the Affordable Care Act. Recall that the final Code § 4980H regulations provide two ways to determine an employee’s status as “full-time”: the “monthly measurement method” and the “look-back measurement method.” Under the latter method, an employer is not required to make an offer of coverage during an initial measurement period to newly hired “variable hour employees,” “seasonal employees,” and “part-time employees.” In last week’s post we asserted that an employee whose annual hours are capped at 1560 will not qualify as variable hour. He or she is, instead, likely to be a full-time employee to whom coverage would need to be offered following three full months of employment to avoid penalties under § 4980H and within 90 days to comply with the maximum waiting period allowed under the Public Health Service Act. But once this employee has been employed for a full standard measurement period, he or she will be an ongoing employee, and, as such, an employer is free to impose a cap on hours during the standard measurement period.
The ERISA problem is immediately apparent: Capping the hours of an ongoing employee during a standard measurement period would result in the withdrawal of coverage or at least eligibility for coverage. These individuals “are or may become eligible for a benefit. . . from an employee benefit plan,” i.e., they are participants for ERISA purposes. If the employee can demonstrate that the reason an employer imposes a 1,560 hour (or some similar) cap is to reduce exposure for penalties under Code § 4980H, it would seem that the employee would have little difficulty establishing the requisite level of interference required to state a claim under ERISA § 510.