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The ERISA Edit: Tri-Agencies Rewrite Short-Term Insurance Rules

Employee Benefits Alert

Excepted Benefit Rules Remain Largely Unchanged in Latest Rulemaking

On March 29, 2024, the U.S. Departments of Health and Human Services (HHS), Labor (DOL) and the Treasury (collectively the Departments) released a final rule rewriting the requirements for short-term limited duration insurance (STLDI), but stopped short of upending rules and guidance on the requirements for hospital indemnity or other fixed indemnity insurance to be considered an excepted benefit in the group and individual markets. The rule adds only new consumer notice requirements for fixed indemnity insurance. The Departments signaled, however, that they intend to revisit rules governing fixed indemnity coordination of benefits and the taxation of those benefits, which were proposed but not finalized, in future rulemaking.

The Departments asserted that the regulatory changes in the final rule were needed in large part to distinguish STLDI- and fixed indemnity-excepted benefits coverage from comprehensive health insurance coverage and to "increase consumer awareness of coverage options that include the full range of Federal consumer protections and requirements." They also stated the rule was needed to protect risk pools and stabilize premiums for individual health insurance coverage. The Departments further claimed awareness of "potentially deceptive or aggressive marketing of STLDI and fixed indemnity excepted benefits coverage to consumers who may be unaware of the coverage limits of these plans or the availability of Federal subsidies that could reduce the costs of premiums and out-of-pocket health care expenditures for comprehensive coverage purchased through an Exchange." Many commenters who opposed the rule asserted that these sales practices are not widespread within the insurance industry and could and should be addressed by stricter state oversight of insurance brokers and agents, not an all-encompassing federal regulation. Commenters also provided data to the Departments indicating that enrollment in the Exchanges was at an all-time high to counter assertions that cheaper STLDI insurance and fixed indemnity insurance were steering healthy people away from comprehensive health coverage and harming individual market risk pools.

The last several administrations have expanded and contracted the permissible duration of STLDI through agency rulemaking, with the Trump administration last issuing a rule in 2018 allowing polices, which are exempt from federal individual market consumer protections and requirements, with a term of up to 12 months and subject to renewal up to 36 months. The final rule issued last week sets a limit of three months for an initial STLDI policy, which can be extended only one month for a total policy duration of four months within a 12-month period. The final rule also updates the consumer notice that must appear on the first page of STLDI contracts and in marketing and enrollment materials. From 2004 to 2016, STLDI had a limit of less than 12 months, including extensions, but in 2016 the duration was reduced to a maximum coverage period of less than three months. The 2018 rule was upheld on appeal after being challenged as arbitrary and capricious under the Administrative Procedure Act (APA), with the U.S. Court of Appeals for the DC Circuit stating that "[w]ithout further guidance from Congress, we will not place amorphous restrictions on the Departments' authority to define such an open-ended term" as STLDI. 

The proposed rule issued last July included several amendments to regulations governing the payment and coordination of excepted benefit hospital and other fixed indemnity insurance coverage, none of which were finalized. These included a proposal to expand the type of arrangements that would fall within the "non-coordination of benefits" prohibition disallowing coordination of benefits between a fixed indemnity insurance policy and a group health plan offered by the same plan sponsor. The proposal also sought to amend regulations governing individual market policies to disallow the payment of benefits on a per-service basis and limit such payments to a fixed amount per day or other period of hospitalization or illness. With respect to both the individual and group markets, the proposal also stated that to be considered an excepted benefit, benefits could not be tied to the type of items or services rendered, the actual or estimated expenses incurred, the severity of injury or illness, or any other characteristic particular to the course of treatment received. In the preamble to the final rule, the Departments stated that they "remain concerned with practices that appear to circumvent Federal consumer protections and requirements and intend to address the [] proposals for hospital or other fixed indemnity insurance in future rulemaking, taking into account comments received on these issues." The final rule does contain a new consumer notice for policies, certificates, contracts, and marketing, application, enrollment, and reenrollment materials for hospital indemnity or other fixed indemnity insurance.

The proposed rule included sweeping changes to the tax treatment of hospital and other fixed indemnity benefit coverage purchased on a pre-tax basis and substantiation requirements for medical expense payments, which were also not finalized. The Departments "intend to address these issues in more detail in future guidance."

The new STLDI rules go into effect on September 1, 2024, for new policies issued on or after that date. The new notice requirement for hospital indemnity or other fixed indemnity insurance goes into effect on January 1, 2025.

District Court Allows Allegations of Imprudent Retention of Underperforming Retirement Investments and Excessive Recordkeeping Fees to Go Forward, in Part

On March 26, 2024, the U.S. District Court for the Eastern District of New York (EDNY) permitted significant parts of a putative fiduciary breach class action to proceed to discovery. The named plaintiff initially filed suit in 2020 against defendants Northwell Health, Inc., the Northwell Health 403(b) Plan Committee, and 10 unidentified plan fiduciaries. She amended her complaint in 2021, alleging that the plan paid excessive recordkeeping and administrative fees to its recordkeeper, Transamerica, and that the defendants breached their fiduciary duties by imprudently retaining a handful of "lackluster" investment options. In 2022, the district court dismissed the amended complaint, finding that the plaintiff had not set out factual allegations allowing the court to reasonably infer that the defendants' process of managing the plan's recordkeeping fees was flawed or that "the decision to retain each [c]halleged [f]und was the product of a flawed decision-making process." In late 2022, the plaintiff moved for leave to file a second amended complaint and, in its recent decision, the court granted the motion in part. See Gonzalez v. Northwell Health, Inc., No. 20-cv-3256 (E.D.N.Y. Mar. 26, 2024).

Under Federal Rule of Civil Procedure 15(a), a party may amend her complaint "when justice so requires." Under that Rule, the ends of justice are not met when amendment would be futile; thus, the district court assessed whether allowing plaintiff's proposed amended claims "would fail to cure prior deficiencies or to state a claim" under Rule 12(b)(6). 

The court first addressed the plaintiff's imprudent retention claims and concluded that the proposed second amended complaint adequately alleged that the defendants breached their duty of prudence by retaining one fund, the Lazard Emerging Markets Fund, but it did not contain adequate allegations as to two other funds. The court explained that although allegations of poor results alone are not sufficient to state a claim that a plan breached its fiduciary duties, "a plaintiff may allege a plausible breach of fiduciary duty based on underperformance relative to a benchmark index if the comparative underperformance is 'consistent' and 'substantial.'" As it had previously, the court found the plaintiff's allegations as to two of the funds — that the funds underperformed their benchmarks by roughly one percent on a rolling three-year trailing basis and between 0.32 percent and 1.94 percent on a rolling five-year trailing basis — were lacking. The three- and five- year averages did not measure up to the "ten-year data that is the traditional hallmark of viable claims based on underperformance relative to an index" and, in any event, the alleged underperformance was of the "modest" sort "that does not by itself plausibly signal imprudent retention." 

The proposed amended claim as to the Lazard Emerging Markets Fund, however, "squeak[ed]" by because it contained "just enough additional data" to make an imprudent retention claim plausible. Similar to the other funds, the plaintiff alleged that the Lazard Emerging Markets Fund underperformed, on average, 1.73 percent below its benchmark on a 10-year rolling retrospective basis. The court stated that, standing alone, such an allegation would not be enough to reach the plausibility threshold. But, "[a]dditional context render[ed] plaintiff's circumstantial basis for [her claim] more plausible" because she alleged that during the years 2020 and 2021, the fund was "among the worst performing funds in the emerging markets category — ranked between the 82nd and 97th percentile of emerging markets funds when measured on a ten-year-returns basis." Not just that, but the plaintiff also asserted that the comparator data was readily available to the defendants in real time during the class period. According to the court, amending the complaint to state those additional details would not be futile.

When it turned to the plaintiff's proposed recordkeeping claim, the court again looked at the data alleged in the proposed amended complaint. The plan allegedly paid Transamerica $60 in total recordkeeping fees per participant per year, whereas data gleaned from summary plan descriptions, annual participant fee disclosures, and Forms 5500 showed that comparable plans were paying half as much, even though they received "materially identical" recordkeeping services. The court declined to dive into factual disputes raised by the defendants concerning the services actually provided to the plan and its comparators, finding that "[c]hallenges to the accuracy of plaintiff's factual claims are not properly resolved at this stage of the case." Instead, taking the plaintiff's allegations as true, the court concluded that the plaintiff "plausibly alleged that defendants breached their fiduciary duties by failing 'to follow a prudent process to ensure that the Plan was paying only reasonable fees.'"

Because the plaintiff pled a viable fiduciary breach claim, the court also permitted her to "proceed with . . . dependent claims for failure to monitor fiduciaries, co-fiduciary breach, and liability for knowing participation in breaches of fiduciary duty." 

Upcoming Speaking Engagements and Events

On April 12, Joanne and Anthony will serve as facilitators for the workshop "Case Law Updates" at the 2024 NOPLG Conference in Seattle, WA.

Joanne will speak at the American Bar Association's Joint Committee on Employee Benefits (JCEB) and the American College of Employee Benefits Counsel's "ERISA: Beyond the Basics" CLE program on May 7.

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