Compliance September 23, 2016

Court Rejects Wellness Program Sponsor’s Motion to Dismiss

The court found the program was subject to ADA scrutiny, but also that the wellness plan was lawful under the ADA because it concluded the employee's decision whether to participate was voluntary under that statute.
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A federal court rejected Orion Energy System’s argument that the insurance safe harbor provision in the Americans with Disabilities Act (ADA) immunizes wellness plans from ADA scrutiny.

In the lawsuit, the Equal Employment Opportunity Commission (EEOC) argued that Orion required Wendy Schobert to submit to medical testing as part of a wellness program or pay 100% of the premium for the employer-provided health insurance. EEOC contended that this violated the ADA’s prohibition against involuntary medical exams.

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However, Orion contended that its wellness plan was covered by the ADA’s so-called “insurance safe harbor,” and thereby was excused from ADA compliance except if it operated as a subterfuge. Orion also argued that the plan was lawful under the ADA because it was voluntary.

The U.S. District Court for the Eastern District of Wisconsin rejected Orion’s safe harbor argument, and held that the plan was subject to ADA review. The court concluded that EEOC’s recently issued regulations on the ADA’s safe harbor provision were within EEOC’s authority, and further held that the safe harbor provision did not apply even without regard to the new regulations. However, the court found that the wellness plan was lawful under the ADA because it concluded that the employee’s decision whether to participate was voluntary under that statute.

The EEOC also charged in the lawsuit that Orion violated the federal law by firing Schobert when she objected to the program. The court held that there were issues of fact regarding whether Schobert was fired because of her opposition to the wellness plan, and indicated that the case would be set for trial.

In a separate EEOC challenge to an employer’s wellness program, the U.S. District Court for the Western District of Wisconsin found Flambeau, Inc.’s requirement that employees complete a health risk assessment and biometric test falls within the ADA’s “safe harbor,” which provides an exemption for activities related to the administration of a bona fide insurance benefit plan. According to the court opinion, the information gathered through the wellness program was used to identify the health risks and medical conditions common among the plan’s enrollees. Except for information regarding tobacco use, the health risks and medical conditions identified were reported to Flambeau in the aggregate, so that it did not know any participant’s individual results, indicating that it was not using the wellness program to discriminate against any employees.

The opinion in EEOC v. Orion Energy Systems, Inc. is here.

Compliance September 23, 2016

Costly Actuarial Errors Alleged in New Provider Lawsuit

Plaintiffs in a newly filed lawsuit argue inaccurate liability valuations have resulted in costly pension plan management mistakes. 

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Plaintiffs in the latest example of retirement plan litigation claim a contracted pension actuary failed to accurately assess forward-looking pension liabilities, resulting in more than $100 million in alleged damages.

UPMC is a Pennsylvania non-profit corporation, organized and operated for charitable purposes and recognized by the Internal Revenue Service (IRS) as exempt from federal income taxation pursuant to Section 501(c)(3) of the Internal Revenue Code. UPMC operates health care facilities in and around Pittsburgh, Pennsylvania; the organization is also the parent and supporting organization for numerous other non-profit health care providers, each existing as a separate and distinct corporate entity,

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Plaintiff UPMC Altoona is one such subsidiary of UPMC, court documents show. Until July 1, 2013, the Central Pennsylvania Health Services Corporation (CPHSC), also a non-profit Pennsylvania corporation, owned 100% of the membership interest in Altoona, which was then known as Altoona Regional Health System. Other than its membership interest in Altoona, CPHSC owned no other material assets or interests, according to plaintiffs.

On July 1, 2013, CPHSC merged into Altoona; UPMC acquired Altoona Regional Health System; which was immediately re-named “UPMC Altoona.” As part of the acquisition of Altoona, UPMC agreed to acquire all of Altoona’s outstanding assets and liabilities, including its pension and benefit plan debt. UPMC is currently the sole corporate member of Altoona.

The plaintiffs allege that, from 2002 through February 2015, defendant CBIZ Benefits & Insurance Services served as actuarial consultants for UPMC Altoona’s two largest pension benefit plans (an individual actuary and the CBIZ parent corporation are also named in the suit).

“In this capacity, defendants represented that they were experienced, qualified, and capable in the actuarial valuation of pension benefit plans,” the complaint suggests. “Each year, defendants prepared actuarial valuations of the plans’ benefits to allow Altoona to fund the plans in compliance with regulatory requirements; to certify the funded status of the plans in order to allow for the plans’ operation and administration; to file PBGC premiums; and to account for the plans in its financial statements in accordance with generally accepted accounting standards.”

CBIZ was paid substantial fees to perform this work, plaintiffs add, yet “during the course of this engagement, from at least July 1, 2008 through February 2015, defendants failed to adhere to actuarial standards of practice and consequently materially erred in valuing the obligations and liabilities of Altoona’s pension benefit plans for funding, compliance, and accounting purposes … Defendants’ multiple errors caused the Altoona Plans’ Projected Benefit Obligation (PBO) to be falsely stated on Altoona’s balance sheet at $240 million. In fact, Altoona’s PBO was then $373 million: Defendants had understated the liability by approximately $132.5 million.”

NEXT: Details from the complaint 

The complaint also points out that “UPMC was induced to purchase Altoona in reliance upon the actuarial valuations prepared by defendants for the plan year ending June 30, 2012, which understated Altoona’s pension expense for that year—and consequently vastly overstated Altoona’s profitability for the same period as measured by its Earnings Before Interest Depreciation and Amortization—by at least $18 million.”

Thus, according to the complaint, defendants’ failure to value the Altoona Plans in accordance with actuarial standards of practice materially changed Altoona’s overall financial picture such that, had the true state of affairs been known, UPMC likely would not have acquired Altoona, or in the very least, would have negotiated and structured a different deal for Altoona. “Now, UPMC owns an entity, Altoona, whose obligations are substantially greater than UPMC had bargained for,” plaintiffs suggest.

Beyond these claims, plaintiffs argue CBIZ is responsible for keeping Altoona from freezing its pension plan at a prudent point: “Under ERISA and the Internal Revenue Code, when the plan’s funded ratio … drops below a certain level, the plan must be completely frozen such that no new participants may join; no new benefits may be earned; and payment of certain other benefits is prohibited. Here, for example, it is likely that the two Altoona Plans, Bargaining and Non-Bargaining, should have been fully frozen by October 1, 2011 and October 1, 2012 respectively, if correct actuarial valuations had been used instead of CBIZ’s wholly inaccurate ones.”

Important to the complaint, plaintiffs assert that the defendants knew their actuarial services would serve as key components of UPMC’s decisionmaking with regard to the Altoona acquisition as well as the subsequent management of the pensions in question.  Also important, plaintiffs claim they had no way of discovering the problems “because the errors were the result of erroneous assumptions and methodologies undisclosed in the GAAP and Funding Reports prepared by defendants.”

“In fact, Altoona and UPMC only learned of the errors when another CBIZ actuary … reviewed the funding calculation for the plans after [defendant Jon Ketzner] retired. Specifically, sometime in November 2014 defendant Ketzner informed UPMC Treasury Department employee Erin Klinger that the estimated contribution required to be made to the plans in order to eliminate PBGC variable rate premiums, due in March 2015, was $6.5 million. Around February 2015, Klinger called defendant CBIZ-B&I to confirm the Plans’ PBGC funding contribution. By that time, Ketzner had retired. On March 6, 2015, Alvin Winters notified Klinger that the plans’ actual contribution necessary to eliminate PBGC variable rate premiums for the year was $66.6 million, $60 million more than Ketzner had estimated. Shortly thereafter, on March 11, 2015, Winters disclosed to UPMC the errors he had discovered in Ketzner’s assumptions and methodology.”

CBIZ general counsel Mike Gleespen shared the following response with PLANSPONSOR: “We have defenses that will be presented at the appropriate times, and we plan to vigorously contest the litigation.   We can’t comment on the allegations in the complaint or on facts of the matter because we don’t want to prejudice the proceedings against UPMC and UPMC Altoona.”  

The full text of the complaint is available here.

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