United States: The ERISA Litigation Newsletter - May 2015


This month we focus on the EEOC's proposed rules concerning wellness programs. As our colleague, Amy Covert, discusses, a recent change of position by the EEOC provides employers with opportunities to use financial incentives to maximize employee participation in their wellness programs without the risk of running afoul of the ADA. While the rules are not "final rules", the EEOC has stated that compliance with the proposed rules would be considered compliance with the ADA pending final regulations.

As always, please don't forget to review this month's rulings, filings, and settlements of interest. We highlight the First Circuit's ruling on the standard of review applicable to top hat plans, a district court ruling finding that lenders to hedge funds are not liable as ERISA fiduciaries, and settlements on mental health parity claims, excessive fee claims and employer stock fund claims. We also review several pieces of significant guidance over the past several weeks, including new California paid sick leave requirements, IRS correction requirements for elective deferral failures under EPCRS, and USDOL proposed rules defining fiduciary investment advice.


By Amy Covert**


Many companies that provide their employees with health insurance couple those plans with wellness programs that are designed to encourage employees to lead healthier lifestyles. Wellness programs are supposed to be a win-win proposition for both employers and employees—employees become healthier and enjoy a better quality of life, while employers get lower claim costs, lower rates of absenteeism and greater productivity. For that reason, employers have tried to create financial incentives for employees to participate in wellness programs.

A recent change of position by the Equal Employment Opportunity Commission (EEOC), may help to facilitate these efforts. Until recently, the agency had expressed hostility to many wellness plan designs that incorporated financial incentives for participation, claiming that these incentives unlawfully violated the Americans with Disabilities Act (ADA), over which it has jurisdiction. It even went so far as to sue three different employers over their wellness programs in 2014. The EEOC has now reversed course, however, and proposed rules that would provide employers with significant opportunities to use financial incentives to maximize employee participation in their wellness programs—without the risk of running afoul of the ADA.


Among large employers, wellness programs often take the form of health risk assessments or biometric screenings,1 which are designed to identify potential non-genetic health risk factors—such as body mass index, high cholesterol, blood pressure or glucose levels—so that employees can take steps to lessen the risks of preventable, and often catastrophic, health outcomes like diabetes, heart attack and stroke. Because of the perceived health and cost benefits associated with wellness programs, a high percentage of large employers provide financial incentives to encourage employee participation. The EEOC has for some time taken the position that Subchapter I of the ADA prohibits employers from requiring employees to undergo medical examinations unless they are "job-related and consistent with business necessity." In other words, the EEOC's position has been that health risk assessments are medical examinations that are generally prohibited under the ADA unless they are voluntary.

The EEOC previously took the position that almost any financial distinction between employees who took the health risk assessment and those who did not transformed the medical examination into an involuntary program in violation of the ADA—even though both the Health Insurance Portability and Accountability Act (HIPAA) and the Affordable Care Act (ACA) specifically permit such financial incentives.2 The agency brought three lawsuits (all in 2014) challenging employer wellness programs on the basis that each program either provided financial incentives for, or conditioned eligibility for medical benefits on, participation in the program, thus rendering them involuntary programs that violated the ADA.

The EEOC's position was opposed by Congress and the business community. The agency was criticized for taking positions in these litigations that were fundamentally inconsistent with the ACA, which encourages employers to utilize wellness programs to promote employee health and lower health care spending. Congress reacted with legislative initiatives. On March 2, 2015, Senator Lamar Alexander (R–Tenn) and Representative John Kline (R–Minn), together with a number of Republican co-sponsors, introduced the Preserving Employee Wellness Programs Act (H.R. 1189, S. 620). That Bill generally provides that wellness programs that otherwise comply with the wellness program provisions of HIPAA and the ACA will be deemed not to violate the ADA.

In apparent recognition of the criticisms and legislative developments, the EEOC has now changed course. On April 16, 2015, it released a long awaited proposed rule that provides guidance on "voluntary" employee wellness programs

Overview of the EEOC's Proposed Rule3

The EEOC's proposed rule sets forth safe harbor limits on the levels of financial incentives an employer can provide to encourage (but not coerce) participation in health risk assessments and other wellness program offerings. Other provisions of the rule define what constitutes a bona fide "wellness" program, describes specific notice requirements to participants about the medical information requested, and addresses how the confidentiality of medical information will be protected.

Under the proposed rule, a wellness program is considered an employee health program under the ADA when it is "reasonably designed to promote health or prevent disease." The program must not be overly burdensome, a subterfuge for violating the ADA or other laws prohibiting employment discrimination, or highly suspect in the method chosen to promote health or prevent disease.

Under the safe harbor, the proposed rule permits employers to offer incentives of up to 30% of the total cost of an employee-only health plan (including both the employer's and the employee's contributions) for participation in a wellness program. The additional cost for participant and spouse or family coverage may not be taken into account, even if the wellness incentives are offered to spouses and/or dependents. In addition, the incentive can either be styled as a "reward" or a "penalty."

Tips for Designing Wellness Programs

As a result of the EEOC's proposed rule, employers now have significant leeway to design their wellness programs to bolster employee participation without fear of running afoul of the ADA. When reviewing the design of their wellness programs, employers should consider revising their plans to utilize penalties rather than rewards as incentives to boost employee participation rates, especially if reward-based programs have only resulted in lukewarm levels of participation. The social science around human behavior is very compelling that people, in general, are far more responsive to sticks than they are to carrots. Previously, because of the EEOC's apparent greater hostility to penalties or surcharges than to rewards (even though there is no economic difference), most employers structured their wellness program incentives as rewards. Given the EEOC's newly adopted acknowledgment that rewards and penalties are opposite sides of the same economic coin, employers should be able to significantly increase the level of employee participation in their wellness programs—without changing the fundamental economics of such plans—simply by recasting the incentives as penalties.

Employers can also drive up participation rates by increasing the amount of the incentive. Given the EEOC's previous position that almost any financial penalty rendered a wellness program involuntary, many employers were cautious about setting the incentive level at more than a de minimis amount. Now that the EEOC has provided safe harbor guidance for a 30% cap on incentives, employers should consider increasing their incentives to the maximum threshold. Clearly, the greater the reward or penalty for compliance/noncompliance, the more likely it is to grab an employee's attention and thereby drive greater participation in the wellness program. Employers should be cognizant that the 30% cap applies to the employee-only cost and applies to all of an employer's wellness programs combined. Additionally, employers should ensure that the aggregate penalty would not cause the coverage under the plan to exceed the 9.5% "affordability" threshold under the ACA.

Employers should also be sure that their wellness program is a part of a group health plan. The safe harbor proposed rule applies only to group health plans and by tying it to the health plan, state laws such as "smokers' rights laws" can be preempted by ERISA.

In designing the program, employers must ensure that reasonable accommodations are provided to allow sufficient participation in the program for individuals with disabilities. For example, there should be an alternative to a biometric screen that requires a blood draw for hemophiliacs.

To ensure that the program is voluntary under the proposed rule, employers may not (i) require participation in the wellness program, (ii) deny or limit health coverage for employees who choose not to participate, or (iii) take any adverse employment action or retaliate against, interfere with, coerce, intimidate or threaten employees who do not participate or fail to achieve desired health outcomes.

Employers should also be sure to comply with the notice and confidentiality requirements. With respect to the notice requirement, employers should review all plan communications, including the summary plan description and open enrollment materials, for compliance with the proposed rule. The rule requires that the notice to employees clearly set forth what medical information will be obtained; how the medical information will be used; who will receive the medical information; the restrictions on its disclosure; and the methods the employer uses to prevent improper disclosure of medical information. To further protect employee privacy and ensure confidentiality of medical information, the proposed rule requires that any medical information collected through an employee wellness program be provided to an employer only in aggregate terms that do not disclose the identity of specific individuals taking part in the program. Employers should likewise make sure they have their HIPAA firewalls in place to maintain the confidentiality of personal health information.

Employers must be sure to comply with the feedback requirement of the proposed rule. Under the proposed rule, a wellness program must be "reasonably designed to promote health or prevent disease" – that is, designed with an eye toward improving employee health rather than to shift costs of health care from the employer to targeted employees based on their health status. Conducting a health risk assessment or a biometric screening for the purpose of alerting employees of health risks of which they may not be aware would meet the rule's standard. If, on the other hand, the employer does not provide any follow-up information or advice to employees, the wellness program would not be reasonably designed to promote health or prevent disease because the employee would never have received the feedback necessary to take corrective action.

Finally, employers should ensure that their wellness program does not impose an overly burdensome time commitment, require unreasonably intrusive procedures or place significant costs for medical examinations on employees. For example, if an employee had to take a biometric screening at one particular location that was a 6 hour drive from an employee's work location, the EEOC would likely view that requirement as overly burdensome and not within the proposed regulations' safe harbor.

View from Proskauer

The EEOC has stated that compliance with the proposed rule would be considered compliance with the ADA pending final regulations. Accordingly, wellness programs that comply with the proposed rule should have safe harbor protection from challenge by the EEOC, at least until the rules are finalized. Therefore, employers currently designing their wellness programs for the 2016 open enrollment period would be well advised to adhere to these guidelines unless and until further guidance is forthcoming. While the proposed rules are not perfect, they are a vast improvement over the EEOC's prior position and offer employers plenty of opportunity to make effective use of incentives going forward.


First Circuit Reviews Top Hat Plan Benefits Denial for Abuse of Discretion

By Lindsey Chopin

The First Circuit recently applied an abuse of discretion standard of review to a claim for top hat plan benefits. Plaintiff Robert Niebauer, a former executive of Crane, brought a claim for executive severance plan benefits and a claim under ERISA section 510 for interference with his rights to benefits. The district court granted summary judgment in favor of Crane on both claims, finding that the denial was not arbitrary or capricious, and there was no adverse employment action to support his interference claim. On appeal, Niebauer argued that the district court erred and that it should have followed decisions from the Third and Eighth Circuits holding that top hat plans are unilateral contracts subject to ordinary contract principles and that determinations made under such plans should be reviewed de novo. The First Circuit declined to consider whether such a categorical rule for top hat plans should apply. Instead, it ruled that the distinction between top hat and other plans has no meaning where, as here, the plan grants discretion to the plan administrator. According to the Court, the grant of discretion, even under ordinary contract principles, confers a reasonableness standard equivalent to the deferential review standard ordinarily applied under ERISA. The Court also refused to find a conflict-of-interest based on Crane's alleged desire to retaliate against Niebauer, ruling that such retaliatory intent is properly treated under ERISA section 510. The Court thus affirmed the lower court's finding that the decision was supported by substantial evidence and therefore was not an abuse of discretion. However, the Court vacated the district's dismissal of Niebauer's section 510 claim because it found that the district court improperly applied an abuse of discretion standard of review to that claim. The case is Niebauer v. Crane & Co., 2015 WL 1787931 (1st Cir. Apr. 21, 2015).

Court Finds Lenders to Hedge Fund Not Liable as ERISA Fiduciaries

By Adam Scoll

A federal court recently dismissed ERISA breach of fiduciary duty claims asserted by Delphi Beta Fund, LLC, a hedge fund, against two of its bank lenders, because there was no precedent for applying ERISA's fiduciary duties to a third party lender to a hedge fund. See Delphi Beta Fund, LLC v. Univest Bank and Trust Co., 2015 BL 89360 (E.D. Pa. Mar. 27, 2015).

Beta Fund is a hedge fund that consists partly of ERISA-covered pension plans as investors, and allegedly was holding ERISA "plan assets" by virtue of the ERISA plan assets regulation's "Look-Through Rule" (meaning, here, generally that "benefit plan investors" owned 25% or more of the equity interests in the fund). Beta Fund's deceased former manager, William Spiropoulos, allegedly engaged in certain troublesome loan transactions with the Defendant banks, Univest Bank and Trust Co. and MileStone Bank, in connection with certain loans granted to Pheasant Run Hotel, LLC, a portfolio company of Beta Fund. Beta Fund asserted that, by virtue of the Look-Through Rule, Beta Fund was over the "ERISA 25% limit" and holding ERISA "plan assets." Accordingly, Beta Fund contended that it was an ERISA fiduciary to ERISA-covered plans invested therein and had standing to assert ERISA breach of fiduciary duty and prohibited transaction claims against Univest and MileStone arising out of the Spiropoulos loan transactions.

The court ruled that the defendant banks were not ERISA fiduciaries and did not engage in non-exempt "prohibited transactions." In so ruling, the court found that Beta Fund failed to provide any precedent for applying ERISA's fiduciary duties to a third party lender to a hedge fund, and stated that if it accepted Beta Fund's argument, "virtually anyone dealing with Beta Fund could be charged with ERISA's fiduciary duties." In the court's view, neither bank had any "control" over Beta Fund, nor did the banks do anything other than enter into a typical loan with Spiropoulos regarding construction of a hotel project and then act in accord with its contractual remedies.

The court accordingly held that, since neither bank was acting as an ERISA fiduciary to Beta Fund, they could not have breached any ERISA fiduciary duty to Beta Fund, nor could they have engaged in a non-exempt "prohibited transaction" under Section 406(b) of ERISA (which prohibited transaction rules are only applicable to ERISA fiduciaries). Beta Fund's claim that the banks assisted in a "prohibited transaction" under Section 406(a) of ERISA (which may be applicable to non-fiduciaries) also failed because such a claim requires "knowing participation" by the banks, which was not sufficiently alleged in the pleadings.

MHPA Class Action Settlement

By Madeline Chimento Rea

A federal district court in Washington recently granted preliminary approval to a $6 million settlement of a mental health parity class action suit against Regence Blueshield. Plaintiffs claimed that defendants routinely excluded and limited coverage of the essential therapies to treat children with developmental disabilities. A fairness hearing is scheduled for September 11, 2015. The case is K.M. v. Regence Blueshield, No. 13-1214 (W.D. Wash. Apr. 22, 2015).

Ameriprise Agrees to Pay $27.5 Million to Settle Fiduciary Breach and Prohibited Transaction Claims

By Joseph Clark

Defendants Ameriprise Financial, Inc., the fiduciary committees of the Ameriprise 401(k) plan, and individual committee members agreed to settle a lawsuit brought by a class of participants in the Ameriprise 401(k) plan for $27.5 million. In the lawsuit, plaintiffs alleged: (i) fiduciary breaches associated with (a) using an affiliate as a recordkeeper and failing to ensure recordkeeping fees and expenses were reasonable and (b) including proprietary and high cost investments in the 401(k) plan; and (ii) prohibited transactions associated with Ameriprise's receipt of compensation from the 401(k) plan as a result of these fiduciary breaches.

In addition to the payment of $27.5 million, the settlement agreement calls for a three-year settlement period during which defendants will conduct a competitive RFP bidding process for recordkeeping and investment consulting services. Among other things, defendants also agreed that during the settlement period they will refrain from receiving compensation for administrative services provided to the 401(k) plan other than reimbursement of direct expenses as permitted by ERISA. Defendants also agreed to pay fees to the plan recordkeeper on a flat fee or fee per participant basis only.

The case is Krueger v. Ameriprise Financial, Inc., D. Minn. Case No. 11-cv-02781.

Settlement Reached in Stock-Drop Case

By Joseph Clark

A class of former LandAmerica Financial Group employees agreed to a $5 million settlement of stock-drop claims arising from LandAmerica's 2008 bankruptcy, and have submitted the agreement for court approval. LandAmerica filed for bankruptcy following the 2008 collapse of its title insurance subsidiary. The complaint alleged that certain LandAmerica directors and officers breached their fiduciary duties by, among other things, (i) imprudently investing in LandAmerica stock even though they knew that its title insurance subsidiary was backed by inherently risky subprime mortgage loans, and (ii) concealing the truth about LandAmerica's deteriorating condition. The value of LandAmerica stock in the company's 401(k) plan fell from just over $28 million to $76,552.

The case is Borboa v. Chandler, E.D. Va Case No. 13-cv-00844.

New California Paid Sick Leave Requirements Effective July 1, 2015

By Mary Bresnan

Beginning July 1, 2015, California employers will be required to grant paid sick leave to nearly all California employees in compliance with California's new paid sick leave law, the Healthy Workplaces, Healthy Families Act of 2014. The law applies to all employers who employ at least one employee who works in California for at least 30 days in a given year, and covers any such employee, including part-time, temporary, and/or seasonal employees. The law includes rules regarding accrual rates, carryover of unused time, usage, payment (including amounts and timing), notices to employees, workplace posters, recordkeeping and retaliation.

For more information on the requirements of the new California law, please refer to our California Employment Law Blog.

You may also learn more about the law and how to manage implementation in our upcoming webinar on April 29, 2015.

IRS Relaxes Correction Requirements for Elective Deferral (But Not After-Tax Contribution) Failures under EPCRS

By Damian A. Myers

Less than a week after issuing significant modifications to the Employee Plans Compliance Resolution System (EPCRS) (as described in our March 31, 2015 blog), the Internal Revenue Service (IRS) further modified EPCRS through the release of Revenue Procedure 2015-28. The new guidance provides welcome relief (provided certain requirements are met) from the current standard (or safe harbor) EPCRS correction method for elective deferral failures, which has been widely viewed as providing affected participants with a windfall. Also, in an effort to facilitate the adoption of automatic contribution arrangements and prompt correction of failures, the IRS has established favorable safe harbor correction methods for elective deferral failures.

The most recent restatement of EPCRS, Revenue Procedure 2013-12, provides a standard correction method for elective deferral failures under 401(k) and 403(b) plans. An elective deferral failure occurs when the plan administrator fails to correctly implement a participant deferral election or automatic deferral. The current standard correction method for elective deferral failures requires a plan sponsor to make a qualified nonelective contribution (QNEC) to the plan on behalf of affected participants to compensate the participants for their missed deferral opportunity. In general, this QNEC is equal to the sum of 50% of the amount the affected participant would have deferred from pay had the elective deferrals been properly implemented (40% in the case of a failure to implement an after-tax election), plus 100% of the matching contributions the affected participant would have received, plus earnings.

Although the mantra of EPCRS is to put affected participants in the same position they would have been in had a failure not occurred, the current standard correction method is generally considered to provide a windfall in the sense that participants benefit from a "free" allocation of elective deferrals (albeit 50% of what they elected) without having to actually reduce their salary. Recognizing that the standard correction is often costly for plan sponsors, Rev. Proc. 2015-28 provides for new, relaxed safe harbor correction methods for elective deferral failures.

Interestingly, the new correction methods described in Rev. Proc. 2015-28 do not apply to failures to implement deferrals of after-tax employee contributions. For purposes of EPCRS, "elective deferrals" means pre-tax elective deferrals and separate rules are provided in Appendix A for after-tax employee contribution deferrals (although the original standard correction method is the same except for the QNEC required (50% versus 40%) for the missed contributions). The modifications to Appendix A in Rev. Proc. 2015-28 do not mention after-tax employee contributions. Perhaps future guidance will expand the new correction methods to include after-tax employee contribution failures.

The new correction methods, and the conditions that must be met to use them, are described below.

  1. Elective Deferral Failures for Plans with Automatic Contribution Features. If a plan administrator fails to implement automatic contributions when there is no election otherwise (including automatic escalation of elective deferral contributions), or fails to implement an affirmative election to contribute more than the automatic contribution rate, no QNEC equal to 50% of missed elective deferrals is required if the following conditions are met:

    • The failure does not extend beyond 9-1/2 months after the end of the plan year in which the failure first occurred.
    • Elective deferrals at the correct rate begin no later than the first payroll date following the period described above, or, if earlier, the first payroll date following the end of the month after the plan administrator receives notice of the failure from an affected participant.
    • The plan administrator sends a notice to affected participants within 45 days after the correction. This notice must include an explanation of the error and how it was corrected, a statement that a contribution has been made to compensate for missed matching contributions, a statement that the participant is able to increase his or her election to make up for missed deferrals, and contact information in the event the participant has questions.
    • A QNEC for missed matching contributions, plus earnings, is made no later than the end of the second plan year following the year in which the failure first occurred. If no affirmative investment election has been made, earnings may be determined based on the default investment option, provided that any losses cannot offset the QNEC.
    It appears this safe harbor correction method is limited to elective deferrals that are tied to implementing an automatic contribution arrangement, whether an election is made or not. In other words, an election to opt-out of the automatic contribution rate in favor of a higher rate before or shortly after any deferral is made is subject to the safe harbor correction method. However, a failure based on an election to change the automatic contribution rate one year after automatic contributions commenced would not likely be eligible. In that case, the safe harbor correction methods described below or the original standard correction must be used.

    This new correction method is available for eligible elective deferral failures occurring on or before December 31, 2020. The IRS will consider whether the correction method should be extended at a later date.
  2. Elective Deferral Failures Unrelated to Automatic Contributions. The new guidance provides for two relaxed safe harbor correction methods for elective deferral failures unrelated to automatic contributions. Where the elective deferral failure persists for three or fewer months, no QNEC for the missed elective deferrals is needed provided the plan administrator timely corrects the failure and meets notice requirements similar to that described above. Although this correction method is more favorable than the standard correction, plan administrators should be aware that the new guidance did not make any modifications to Appendix B of Rev. Proc. 2013-12, which contains a special rule for brief elective deferral failures. Under that special rule, if the elective deferral failure only occurs during the first three months of a plan year, no QNEC for the missed elective deferrals is necessary (a QNEC for missed matching contributions, plus earnings, is still required). The special rule does not include a notice requirement.

    Where the elective deferral failure extends beyond three months, but not beyond the end of the second plan year following the plan year in which the error occurred, the failure may be corrected by making QNEC equal to 25% of the missed deferral (plus any missed matching contributions and earnings). This correction method is available if the correction is timely implemented and the plan administrator meets the notice requirements described above.

    By reducing the QNEC required for the correction, the IRS is making it easier for plan sponsors to implement corrections and, thereby, incentivizing employers to adopt automatic contribution arrangements and to promptly correct elective deferral failures as they occur. The timing and notice conditions do not appear to be onerous, so overall, these modifications are certainly welcome. Rev. Proc. 2015-28 does not supersede Rev. Proc. 2013-12, so plan administrators should ensure compliance with Rev. Proc. 2013-12, subject to the modifications described above and in Revenue Procedure 2015-27, when implementing any correction.

EEOC's Proposed Wellness Regulations Add Burdensome Notice Requirement; Still Prohibit Mandatory HRAs

By Stacy Barrow, Emily Erstling and Damian A. Myers

On April 16, 2015, the Equal Employment Opportunity Commission (EEOC) released proposed regulations covering wellness programs that involve disability-related inquiries or medical examinations. The release of the proposed regulations follows months of EEOC enforcement actions against employers alleging that wellness programs sponsored by the employers violated the Americans with Disabilities Act (ADA) despite compliance with 2013 regulations jointly issued by the Department of Labor (DOL), the Department of the Treasury (Treasury) and the Department of Health and Human Services (HHS) that permitted such programs under ERISA and the Affordable Care Act (ACA). With a few notable exceptions (described below), the proposed regulations are somewhat consistent with the existing DOL guidance on employer-sponsored wellness programs. However, the EEOC has requested comments on multiple topics that could significantly alter the regulatory requirements.


ERISA prohibits group health plans and group health insurance issuers from discriminating against covered individuals based on a health factor. An exception to the nondiscrimination rule allows premium discounts or other rewards (including avoidance of a penalty) in return for participation in wellness programs. The DOL, Treasury and HHS jointly issued regulations related to the wellness program exception to the nondiscrimination rule in 2006, and these regulations were updated in 2013 following the passage of the ACA (the 2013 regulations are referred to as the "DOL regulations" in this blog post).

The DOL regulations describe two types of wellness programs – participatory programs and health-contingent wellness programs (which are further divided into activity-only and outcome-based programs). Participatory programs are those programs that either do not provide a reward or do not require that a participant complete an activity or satisfy a condition related to a health factor in order to receive an award. Because participatory programs are not based on a health factor, they do not implicate HIPAA's nondiscrimination rule as long as they are available to all similarly situated individuals regardless of health status. Examples of participatory programs include: reimbursement of gym membership; reimbursement of cost of smoking cessation programs without regard to whether employees quit; reward for attending a monthly health education seminar; and completion of a health risk assessment (HRA) without any further action (educational or otherwise) required by employees as a result of issues identified by the questionnaire.

Health-contingent wellness programs require individuals to complete an activity or satisfy a standard related to a health factor in order to receive an award. These programs must satisfy four requirements to be nondiscriminatory under ERISA: (i) eligible individuals must be able to qualify once per year; (ii) the maximum incentive amount is 30% of the self-only cost of coverage (taking into account both the employee and employer share of the cost), or if covered dependents can also participate, 30% of the cost of the coverage the employee is enrolled in; (iii) the program is reasonably designed to promote health or prevent disease and (iv) the program is available to all similarly situated individuals. DOL regulations provide more detail on each of these requirements.

Since their release, the DOL regulations have served as a guide for employers establishing wellness programs. However, during a meeting in May 2013, the EEOC stated that wellness programs could violate regulations under the ADA and recognized that guidance regarding the interplay between the ADA and wellness programs was needed. However, before issuing regulations or other guidance under the ADA, the EEOC initiated a number of enforcement actions against employers. Some of these actions were brought against employers that established programs that were in compliance with existing DOL regulations. Due to the apparent conflict between the EEOC's position on wellness programs and the DOL regulations, employers and other stakeholders advocated for specific EEOC guidance.

EEOC's Proposed Regulation

The ADA requires employers to provide reasonable accommodations to enable disabled individuals to have equal access to fringe benefits and prohibits employers from requiring medical examinations or requesting medical information for the purpose of making disability-related inquiries. However, the ADA provides an exception to this rule allowing voluntary medical exams (or requesting voluntary medical histories) which are part of an employee health program, including wellness programs. The EEOC's proposed regulations focus on the ADA exception for voluntary programs that involve disability-related inquiries or medical exams.

The EEOC's apparent concern is that incentives or rewards under wellness programs may be so valuable that eligible individuals are economically coerced into participating, thereby violating the ADA requirement that the program be voluntary. Therefore, the proposed regulations provide that a wellness program will be considered to be voluntary if it meets the following requirements:

  • It does not require employees to participate;
  • It does not condition coverage under a group health plan on participation in the program;
  • It does not penalize non-participation (other than the failure to receive the reward); and
  • When it is part of a group health plan, employees receive a notice that describes the medical information that will be obtained and the purposes for which it will be used and explains the restrictions on disclosure of the information.

In addition to the EEOC's voluntary requirement, the EEOC proposed regulations diverge from the DOL regulations in important respects. First, in contrast to the DOL regulations, which do not restrict the size of reward under a participatory wellness program, the proposed EEOC guidance seeks to extend the 30% maximum award to participatory wellness programs that require employees to answer a health questionnaire with disability-related inquiries or take medical examinations. This would mean, for example, that the reward for participating in a biometric screening program (that does not base the reward on the result of the screening) would be capped at 30% even though there is no maximum under the DOL regulations. The EEOC's rationale for this proposal is that, in the EEOC's estimation, participatory programs rarely offer incentives in excess of 30%. However, this rule prohibits employers from requiring employees to complete an HRA in order to be eligible to participate in the plan, a practice that is permitted under DOL rules as long as the results of the HRA are not used to determine eligibility.

A second difference relates to how the proposed regulations apply the 30% limit in general. The EEOC proposed regulations set the maximum reward at 30% of the self-only cost of coverage (taking into account both the employee and employer share of the cost). The DOL regulations allow a reward to be a maximum of 30% of the cost of family coverage if the wellness program is extended to covered dependents. Additionally, the ACA allows the DOL to increase the 30% limit to 50%, and the DOL has done so by expanding the 30% limit by an additional 20% to the extent that the additional percentage is in connection with a program designed to prevent or reduce tobacco use. The EEOC regulations do not contain similar flexibility. Nevertheless, the DOL-approved limit of 50% for tobacco-based programs remains acceptable as long as the program does not involve a medical exam or disability-based inquiry.

Finally, when the wellness program is part of a group health plan, the EEOC regulations require that employers provide a detailed notice to participants separate from other notices already required under the HIPAA. The notice must explain what medical information will be obtained, who will receive the information, how the information will be used, the restrictions on disclosure of the information and the methods the covered entity will employ to prevent improper disclosure of the medical information. The DOL regulations do not contain similar notification requirements. The EEOC's proposed notice requirement will likely be a burden on employers, as the notice requires more detail than standard HIPAA notices and must be tailored for each wellness program.

Although the proposed regulations are a step in the right direction toward existing DOL regulations, the EEOC has requested comments on a number of topics that could significantly alter the regulations. For example, the EEOC has requested comments on whether additional protections are needed for low-income individuals. This would include placing restrictions on programs that could result in unaffordable coverage if a reward is not obtained. For this purpose, affordability would be based on the standard established under the ACA. Additionally, the EEOC has requested comments regarding the definition of "voluntary", including whether changes are necessary to reconcile the proposed regulations with DOL regulations.

Overall, the EEOC's release of proposed regulations is a welcome development for employers sponsoring wellness programs, particularly given the EEOC's recent practice of bringing enforcement actions in the absence of guidance. Given the wide-range of comments requested, the final regulations could be significantly different than the proposed regulations. Employers should review their current programs in light of the EEOC guidance and consider summiting comment letters if the proposed EEOC requirement could require significant changes.

To read this Newsletter in full, please click here.


* Originally published in Bloomberg, BNA. Reprinted with permission.

** Amy Covert is a partner in the New York office of Proskauer Rose LLP, where she defends plan sponsors and fiduciaries in all types of ERISA litigation.

[1] A health risk assessment is typically a questionnaire that employees complete on their own, while biometric screenings typically take the form of third party administered tests, such as a blood draw, that elicit the desired health information. For purposes of this article, I will refer to both as "health risk assessments."

[2] HIPAA prohibits discrimination on the basis of health status. Following changes made by the ACA, the Department of Health and Human Services, the Department of Labor, and the Department of the Treasury released final regulations on nondiscriminatory wellness programs under HIPAA.

[3] This article assumes that the reader is already familiar with the proposed rule and is not intended to provide a detailed summary of its provisions.

The ERISA Litigation Newsletter - May 2015

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Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions