Human Resources News & Insights

Dealing with Obamacare: Beware of potential ERISA pitfalls

The healthcare reform law has left employers with a lot of important decisions to make. But further complicating matters is a tricky section in the Employee Retirement Income Security Act (ERISA).  

Section 510 of ERISA prohibits employers from punishing employees for exercising — or attempting to exercise — their rights under a benefit plan. It also prohibits employers from making moves to interfere with employees’ ability to obtain a benefit they’d otherwise become entitled to.

The penalties for violating this section of ERISA can include reinstatement, restitution and back pay.

The link to Obamacare

So what does all of this have to do with healthcare reform?

It’s possible some of the workforce realignment initiatives many companies are adopting in an attempt to circumvent Obamacare requirements or penalties, or reduce their liabilities under the law, could be found to be in violation of Section 510 of ERISA — if an employee can make a compelling enough case that such initiatives were implemented to interfere with their access to benefits they would’ve otherwise been entitled to.

As you may have heard, many organizations are reducing the work hours of employees to avoid having to count them as full-time equivalent employees under the reform law.

Reason: When the healthcare law is fully implemented, once an employer reaches 50 full-time equivalent employees it’ll be forced to provide at least 95% of those workers with health insurance coverage or pay a significant penalty.

Right now it’s unclear how this Section 510 of ERISA and Obamacare will mesh, especially in a courtroom, but it’s something employers need to be thinking about.

If employees (who will most likely be helped by an attorney) can make a case in court that a decision to reduce their work hours, and thus deny them access to health coverage, was done in a discriminatory or retaliatory way, the employer may be subject to expensive penalties.

Changes OK to avoid tax exposure

In general, federal laws (and the courts) allow businesses to organize their operations as they see fit to mitigate tax obligations and penalties.

Therefore, it’s reasonable to believe that realigning your workforce by reducing hours or full-time equivalent staff to avoid Affordable Care Act (ACA) liabilities would be permissible under this umbrella.

It’s when employers frame businesses decisions in a way that makes it seem like their intent is to interfere with employees’ benefits that they expose themselves to trouble.

In other words, companies can make changes to avoid tax liabilities — but not to deny employee benefits.

It seems like a simple distinction, but it’s an important one to make — especially in communications relating to changes in business operations.

To help employers achieve both their goals of managing costs and avoiding ERISA trouble, attorneys and experts in employment law Craig Martin and Nary Kim, of the Chicago-based firm Jenner & Block, recently shared these four tips for employers in an article published by CFO Magazine:

  1. All levels of management should be coached to consistently communicate only the business need behind organizational changes. (In other words, communications shouldn’t lean toward: “We need to reduce workers’ hours so they don’t qualify for insurance coverage.”)
  2. Internal, external and public communications should all mirror each other in that they only touch on the business need to make organizational changes.
  3. Sensitive internal communications should be created in a way that triggers attorney-client privilege protections.
  4. Avoid sweeping changes to workforce hours. In other words, don’t make changes that affect large tiers or segments of your workforce. If anything, when economically necessary, it’s likely best to enact policies that cap hours for new hires only.

Common violations

While it’s not yet clear exactly what kind of organizational changes precipitated by the ACA will send employees running to their attorneys, you can look at what currently triggers ERISA litigation and extrapolate from those cases what may cause problems moving forward.

Here are some of the more common employer actions that have triggered ERISA Section 510 violations, according to the Houston-based employment law attorneys at Tran Law Firm LLP:

  • Taking steps to stop an employee from attaining group healthcare benefits.
  • Laying off older employees because they cost more to insure.
  • Firing an employee because his or her illness would result in higher costs for an employer’s group health plan.
  • Firing an employee because the he or she has a sick family member covered (or about to be covered) under a group health plan.
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