Massachusetts Paid Family and Medical Leave 2019 Regulations – Focus on the Private Plan Exemption

** Please note that this post has been superseded, all or in part, by more recent updates provided here and here **

Under the new Massachusetts Paid Family Leave Law, M.G.L c. 175M (“MAPFML”) employees and other covered individuals in the Commonwealth will be entitled to a generous set of new leave benefits and rights beginning January 1, 2021.  Last week, the Department of Family and Medical Leave (the Department) issued the final MAPFML regulations effective July 1, 2019 (the “Regulations”) and several key MAPFML deadlines were extended by three months.  In our companion post, we cover the key components of MAPFML, including the changes set forth in the Regulations.  This post takes a deep dive into the MAPFML “Private Plan” exemption pathway.

The Private Plan exemption provides employers and covered business entities an alternative to collecting and remitting contributions to the Commonwealth’s MAPFML fund by relying on their own private leave plans.  Or, to put a finer point on it, employers with a compliant Private Plan do not need to make the required employer medical leave contribution (currently, 0.37% of eligible payroll for employers with 25 or more covered individuals).  Naturally, this potential cost savings is driving many businesses, particularly those with large workforces, to seriously consider the Private Plan exemption.  Employers who already provide generous leave benefits are also intrigued by this opportunity.

There’s a catch, though; the benefits offered to workers by the approved plan must be greater than or equal to the benefits provided by MAPFML.  More specifically, the approved plan must meet all the minimum requirements listed below and must not cost employees any more than they would be required to contribute to the state plan under MAPFML.  In addition, the Private Plan exemption does not relieve businesses of the PFML notice obligations and worker protections.

How the Private Plan Exemption Works

The Private Plan exemption may be requested for a family leave plan, a medical leave plan, or both.  But the exemption contains many requirements and traps for the unwary.  The Regulations make substantial changes to these requirements – not all of which are welcome to employers.  This section summarizes the requirements of the Private Plan exemption. 

Minimum Private Plan Terms

Family leave benefits: the following minimum terms are required in order for a plan to meet the Private Plan exemption for family leave benefits:

• All employees (full-time, part-time, permanent, or seasonal) must be eligible for family leave benefits.
• The Private Plan must provide a weekly paid benefit amount that is greater than or equal to the benefit provided by the MAPFML program administered by the Department.
• Benefits must include, at a minimum:
  • A minimum of 26 weeks of paid leave during the benefit year to provide care to a family member, as defined by MAPFML, with a serious health condition suffered while on active duty in the armed forces;
  • A minimum of 12 weeks of paid leave during the benefit year if their spouse, child, or parent is a current member of the Armed Forces (including the National Guard and reserves) and is on covered active duty or notified of an impending call or order to covered active duty;
  • A minimum of 12 weeks of paid leave during the benefit year to provide care to a family member, as defined by MAPFML, with a serious health condition; and
  • A minimum of 12 weeks of paid leave during the benefit year to bond with a child during the first 12 months after a child’s birth, or the first 12 months after adoption or foster placement of a child under the age of 18.
• The Private Plan must provide job protection while the employee is on qualified leave.
• The Private Plan must provide for continued employer contributions to employment-related health insurance benefits, if any, at the level and under the conditions coverage would have been provided if the employee had continued working continuously for the duration of qualified leave.
• The Private Plan must allow for leave to be taken intermittently or on a reduced leave schedule, with the weekly benefit amount being prorated.
• The Private Plan must specifically state that all presumptions shall be made in favor of the availability of leave and the payment of leave benefits.

Medical leave benefits: the following minimum terms are required in order for a Private Plan to meet Private Plan exemption for medical leave benefits:

• All employees (full-time, part-time, permanent, or seasonal) must be eligible for medical leave benefits.
• The Private Plan must provide a weekly paid benefit amount that is greater than or equal to the benefit provided by the MAPFML program administered by the Department.
• A minimum of 20 weeks of paid medical leave must be available per benefit year if an employee is unable to work due to a serious health condition.
• The Private Plan must provide job protection while the employee is on qualified leave.
• The Private Plan must provide for continued employer contributions to employment-related health insurance benefits, if any, at the level and under the conditions coverage would have been provided if the employee had continued working continuously for the duration of qualified leave.
• The Private Plan must allow for leave to be taken intermittently or on a reduced leave schedule, with the weekly benefit amount being prorated.
• The Private Plan must specifically state that all presumptions shall be made in favor of the availability of leave and the payment of leave benefits.

Importantly, any exempt Private Plan must also provide benefits to those employees who are no longer employed with a business, so long as they otherwise meet the financial eligibility requirements of the MAPFML (i.e., the Private Plan covers unemployed former employees who apply for benefits for family leave for up to 26 weeks after separation from employment, or until they obtain other employment, whichever is sooner).

The Private Plan must contain the following rights and protections for employees:

• The right to an appeal to the Department if their application for benefits under the Private Plan is denied (NEW: the Regulations require that the appealing individual also provide a copy of the appeal to the employer or covered business entity maintaining the Private Plan);
• The right to job protection during any leave taken; and
• Protections against retaliation from taking leave or exercising other rights under the MAPFML.

There is an annual application and approval process (UPDATED). 

The application consists of many questions and requires the calculation and submission of many data points.  The application must generally be approved in advance of the quarter prior to the quarter in which it will take effect, with the exception of Quarter 2, 2019 (i.e. October 1 to December 31, 2019), in which case an exemption may be effective on October 1, 2019 so long as it is approved by December 20, 2019.   Exemptions must be renewed annually.  The Department has the right to audit any approved Private Plan to ensure compliance with MAPFML and all other all state and federal law applicable to the Private Plan and require periodic reporting.

The Regulations provide several clarifications to the application process.  Applications for exemptions are accepted on a rolling basis and will be effective no earlier than the quarter immediately following the date of approval.  Applications may be submitted no more frequently than once per quarter.  If an application is denied, an applicant may request supplementary review by the Department. 

Private Plan Amendment and Termination (UPDATED)

The draft regulations provided that an employer must notify the Department in writing at least 30 days before any proposed changes to the terms or conditions of an approved Private Plan; these requirement are intact in the final Regulations.

For the first time, the Regulations include the following additional requirements for employers who wish to terminate an approved Private Plan:

• Benefits and benefit eligibility under an approved Private Plan must be maintained for all covered individuals until the effective date of termination or non-renewal of the approved Private Plan.
• An employer or covered business entity that does not intend to renew its approved Private Plan at the effective date of termination must notify covered individuals and the Department no later than 30 calendar days prior to the effective date of termination.
• An employer or covered business entity that does not renew an approved Private Plan must continue to provide paid leave benefits under the same terms and conditions of the Private Plan for the entire duration of the leave for a claim that began prior to the effective date of termination.
• Note: Under these new provisions, employers may not simply let a Private Plan lapse. Rather, advance notice of non-renewal must be provided to both the workforce and the Department, and any claims beginning prior to the termination date remain the responsibility of the Private Plan.  It is not clear which claims “begin prior to the effective date of termination”; does “begin” refer to accrual, submission, approval, or something else?  What if an approved claim is extended?  It is also not clear whether the converse is true (i.e. are claims beginning prior to a Private Plan approval date the responsibility of the Commonwealth?). 

Self-insured Private Plans must be bonded (UPDATED). The amount varies by the size of the workforce.  For every 25 employees covered by a business, MAPFML requires a surety bond value of:

• $19,000 for qualifying family leave plans
• $51,000 for qualifying medical leave plans
• $70,000 for qualifying plans for both family and medical.

The Department recently clarified that businesses seeking a Private Plan exemption may complete their application prior to submitting proof of bond coverage.  An exemption application will not be denied solely because the business has not yet provided the Department with proof of bond coverage.  Late last week, the Department posted a bond form for self-insurers as well as remittance instructions.  

The Regulations also provide that the surety company issuing the bond must be authorized to transact business in the Commonwealth.

Fully-insured Private Plans must be covered by policy issued by a Massachusetts licensed insurance company.

To our knowledge, no fully-insured products are currently available, but we have heard that certain carriers are considering entering the market. 

There are penalties for noncompliance (UPDATED).

The Department has reserved the right to withdraw approval of a Private Plan for a variety of reasons. The list of reasons was modified in the Regulations and now includes, but is not limited to:

1. Failure to pay benefits;
2. Failure to pay benefits timely and in a manner consistent with MAPFML;
3. Failure to maintain adequate bond coverage;
   • NOTE: Proposed regulations had also required employers to “maintain an adequate security deposit”, but that requirement was removed from the Regulations.
4. Misuse of Private Plan trust funds;
   • NOTE: It is still unclear what the Department means by “Private Plan trust funds”.  Does this signal a trust requirement?  Additional guidance would be welcome.
5. Adverse changes to the financial condition or licensure status of the employer or covered business entity, Private Plan insurer, or surety company responsible for a bond;
   • NOTE: This is a new provision appearing for the first time in the Regulations.
6. Failure or refusal to respond to requests for information or to submit reports, records, or other information that may be required by the Department; and
7. Failure to comply with M.G.L. c. 175M, these regulations, or other state or federal law applicable to the Private Plan. 
   • NOTE: This provision has been revised to include the phrase “other state or federal law applicable to the Private Plan.”  This revision is somewhat troublesome in that it gives the Department the authority to determine what state or federal laws may be applicable to the Private Plan and whether those laws have been violated, and to withdraw approval on the basis of such violation. 

An employer or covered business entity that fails to maintain a Private Plan as approved by the Department or that has its approval withdrawn may be assessed a penalty of up to the then-current contribution rate (currently, 0.75 percent of its total payroll) for the period it failed to maintain the approved Private Plan, and may also be required to repay to the Commonwealth’s trust fund in the total amount of benefits paid to covered individuals who received benefits from the trust fund.

The Regulations, unlike the draft regulations, clarify that the above penalty shall also apply to an employer or covered business entity that fails to maintain or renew a Private Plan approved by the Department for the future payment of leave benefits scheduled to begin on January 1, 2021.  An employer or covered business entity that fails to maintain or renew a Private Plan exemption approved prior to January 1, 2021 may be responsible for retroactive contributions to the trust fund.

• NOTE: This new provision appears to require employers seeking a Private Plan exemption as of January 1, 2021 to maintain the exemption from the date the employer first receives and exemption through January 1, 2021.  We believe that this provision, along with the revised renewal and termination provisions described in this post, are meant to keep employers from using the Private Plan exemption for the sole purpose of avoiding employer medical leave contributions for the period October 1, 2019 through December 31, 2020. 

Recordkeeping Requirements (NEW).  The Regulations include, for the first time, a record retention requirement.  Employers and covered business entities with approved Private Plans must retain all reports, information, and records related to the approved Private Plan, including those related to all claims for benefits made under the Private Plan, for three years, and must furnish same to the Department upon request.

Additional open questions 

In addition to the issues highlighted above, the Regulations left many Private Plan questions unanswered, including:

• With respect to contributions to the Commonwealth’s trust fund, the Regulations allow employers to deduct different percentages from the wages or qualifying payments of different groups of covered individuals, so long as the maximum percentage is not exceeded.  Can businesses also vary employee contributions towards a Private Plan?  What if the variance discriminates in favor of highly paid employees?
• If an employer or covered business entity collects worker contributions, how should the money held prior to payment of benefits?
• Many businesses would strongly prefer offering an insured Private Plan to a self-insured Private Plan, but insurance products are not yet available.  What is the process for switching from a self-insured Private Plan to a fully-insured Private Plan once fully insured options become available?  May employers use money collected under the fully-insured Private Plan to pay premiums for the insured Private Plan?  May an employer make the switch midway through an approved year?
• Individuals denied benefits under a Private Plan may appeal to the Department.  If the individual disagrees with the Department’s decision on appeal, the individual may then appeal to a district court in the Commonwealth.  If, however, an employer or covered business entity disagrees with the Department’s decision on appeal, does the employer or covered business entity have any further appeal rights? 

What to do now

The Private Plan exemption is an intriguing option for many companies.  However, companies wishing to use the Private Plan Exemption need to consider a number of factors, including:   

• Cost of providing the benefits.  Since this is a new benefit for most companies, future utilization is hard to predict.  However, given the generosity of the MAPFML benefits, take-up could be higher than expected.  Since benefits can run up to $850 per week and can last for many weeks, there is a risk that costs will accumulate quickly.
• Cost of purchasing the bond or insurance.  The MAPFML rumor mill (don’t quote us!) says that bonds will cost roughly 2% of the face value; if that bears out, by way of example, the cost of a medical-leave-only private plan for 100 employees will cost about $4,080.  Insurance premium rates are unknown at this time.
• Whether mandated Private Plan features are acceptable to the employer.  In particular, employers must cover certain former employees and cede appeals to the Department. 
• Administrative burdens.  Does the employer have the resources to take on the Private Plan administration?
• • Application and renewal.  Employers and covered business entities will need to file for the exemption and renew it annually. 
• • Supporting documentation.  Employers and covered business entities must attach to the application documentation that will support the request for an exemption. At least one attachment must be uploaded.  While it is unclear what exactly the Department is looking for, we presume that the Department expects a plan document, summary or policy that explains the terms and conditions of the Private Plan.
• • Claims processing.  At this time, many employers and covered business entities seeking to use the Private Plan exemption are hoping that, by January 1, 2021, vendors will have stepped up and offered either insurance products or third party administrator services that include claims administration.  If no products become available, however, employers will need to administer claims themselves.  One challenge is that MAPFML has very specific definitions, certifications and procedures that do not exactly align with customary procedures under, say, existing short term disability products.  In any event, the process is likely to be cumbersome. 
• What to do with the money.  If an employer or covered business entity wishes to collect worker contributions towards the Private Plan, it is still not entirely clear how the money should be held, or whether the collection of employee contributions raises ERISA concerns (we address these issues in our prior post).   
• Tolerance of legal risk.  While we hope that the Commonwealth will hold Private Plans to a “good faith compliance” standard, at least in the early days of the MAPFML’s implementation, the Department has given itself broad auditing authority and the ability to impose steep penalties.  Employers and covered business entities adopting Private Plans could experience rigorous auditing practices and penalties for small errors from the get-go. 

Employers and covered business entities that consider all factors and decide to use the Private Plan exemption should begin preparing now. 

• Prepare a plan, summary or policy memorializing the terms of the Private Plan.
• Submit the application.  Although the exemption for Q2 2019 (October 1-December 31) may be filed as late as December 20, 2019, we do not recommend waiting that long, especially given the respite provided by the implementation delay.  Rather, we recommend that employers submit applications well in advance of October 1, in order to secure the exemption.  In addition, if for any reason an exemption is rejected, an early application will give employers adequate time to request supplementary review by the Department. 
• Work with internal and/or external payroll to calculate and collect employee contributions, if applicable under the employer’s Private Plan design. 
• Purchase a surety bond, once the products become available, and provide evidence of the bond to the Department. 
• Confirm that key team members will be available to implement MAPFML over the summer and early fall.
• Prepare and distribute employee notices by September 30, 2019.  The Private Plan exemption does not exempt employers and covered business entities from this requirement.  Notice forms are available on the Department website.
• Keep an eye out for additional guidance and clarifications from the Department over the summer.
• Continue to check our blog for future updates. 

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