REPORT FROM COUNSEL
SUMMER 2001 ISSUE
Table of Contents
- EMPLOYERS MUST ENSURE HEALTH PLAN COMPLIES WITH HIPAA REQUIREMENTS
- DO YOU HAVE AN E-MAIL POLICY?
- EMPLOYEE OR INDEPENDENT CONTRACTOR?
- WEBSITES AND JURISDICTION
- ESTATE PLANNING
- IT'S SETTLED: HOMEOWNERS ARE COVERED
EMPLOYERS MUST ENSURE HEALTH PLAN COMPLIES WITH HIPAA REQUIREMENTS
By Sara A. Justers
Employers who provide their employees with group health coverage need to be aware of the requirements of the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"). This Act, which amended ERISA, the Internal Revenue Code and the Public Health Service Act, added new requirements for group health plans relating to:
- Preexisting condition limits;
- Crediting prior coverage;
- Prior coverage certification;
- Special enrollment period;
- Health status nondiscrimination; and
- Disclosure of benefit reductions/summary plan description requirements.
The rules generally apply to all health plans maintained by employers and to insurers and HMOs that offer health insurance in connection with group health plans.
Group health plans cannot apply preexisting condition limits for periods greater than 12 months (18 months for late enrollees). In addition, no preexisting condition limit can be applied in cases involving pregnancy, or to newborns or newly adopted children who become covered under the plan within 30 days of birth or placement for adoption. A "preexisting condition" means a condition for which care or treatment was recommended or received during the 6 months prior to coverage under the plan. It does not include genetic information.
Group health plans must also take into account an individual's prior "creditable coverage" when applying any preexisting condition limit. The plan must reduce the duration of its preexisting condition limit by one month for every month of prior credible coverage, so long as the individual did not have a break in coverage exceeding 63 days. Prior coverage is "creditable" if an individual is previously covered under a group health plan, health insurance policy, Medicare or Medicaid, Tri-Care, FEHBA, the Indian Health Service, or state programs. Periods of prior coverage generally must be credited without regard to the specific benefit previously provided, so long as the benefit was for the same class or category of coverage.
Group health plans must provide written certification of prior creditable coverage (and any waiting periods) to each individual when coverage ends.
The certification must identify:
- the period of creditable coverage under the plan;
- the period of creditable coverage under COBRA (if elected); and
- the waiting period (if any) imposed under the plan.
Certification must be provided:
- the time an individual ceases to be covered under the plan;
- again when an individual ceases to be covered under COBRA; and
- if the individual requests a certification within 24 months following either cessation of coverage.
A 30-day special enrollment period must be provided for employees and dependents who lose their health coverage because either their COBRA coverage terminates or they cease to be eligible for the other coverage. In addition, plans offering dependent coverage must provide a 30-day special enrollment period for individuals who become dependents because of marriage, birth, adoption, or placement for adoption.
HIPAA prohibits group health plans from imposing discriminatory rules regarding eligibility, premiums, and contributions based on health related factors. However, a plan may provide discounts or rebates or modify copayments or deductibles for individuals who adhere to health promotion/disease prevention programs. Plans may also establish lifetime limits on benefits or on a specific benefit, so long as the limits are nondiscriminatory.
The sponsor of a group health plan must also provide participants with detailed information in summary plan descriptions identifying the insurers responsible for plan administration and financing. In addition, the sponsor must provide a summary description of material reductions and covered services or benefits within 60 days of any such reduction.
Although the insurer or HMO is required to provide a plan that complies with HIPAA requirements and to provide the required certifications, the Internal Revenue Service can impose penalties on employers who sponsor a noncomplying plan. Therefore, it is crucial that employers work closely with their carriers to ensure full compliance with HIPAA.
DO YOU HAVE AN E-MAIL POLICY?
By Sandra L. Maass
Recently a federal court again held in the case of Fraser v. Nationwide Mutual Insurance Company, that an employer's decision to retrieve and to read an employee's e-mails that were already in computer storage did not violate any federal or state wiretap laws. Once the recipient has viewed the e-mail, the court found that none of the laws apply to subsequent viewings whether authorized or not by a third party accessing it from some form of computer storage.
More specifically, the court held that the "Stored Communications Act" was not violated because federal and state laws are triggered only when the interception of an e-mail occurs "in the course of transmission." The court specifically found that wiretap laws do not cover retrieval of an employee's e-mail from "post-transmission storage." An employee's strong expectation of privacy with respect to communication in the course of transmission significantly diminishes once the transmission is complete and stored. The court did caution employers that it considered an employer's retrieval of an employee's e-mail from the employer's file server ethically questionable, although not legally actionable under the ECPA [Electronic Communications Privacy Act of 1986].
In particular, the judge found there was no legal violation when accessing of the e-mail occurs after it has been received by the intended recipient. The court noted that "Interception of a communication occurs when transmission is interrupted, or in other words, when the message is acquired after it has been sent by the sender, but before it is received by the recipient."
Finally, the court concluded that e-mail compares perfectly with voice mail and courts have held that accessing a voice mail violates wiretap laws only when it occurs prior to the intended recipient of the voice mail having a chance to listen to it for a first time when it is simply received from storage. Thus, if a third party obtains access to the recipient's personal voice mailbox and retrieves a saved voice mail message after the recipient has heard the message, there can be no interception in violation of the wiretap laws.
The lesson to be learned: employers need to develop and implement policies and procedures setting forth employee privacy expectations in electronic media, and the company's monitoring rules for all employee communications sent and received by employees using electronic media in the work place.
EMPLOYEE OR INDEPENDENT CONTRACTOR?
Classifying a person as an employee rather than as an independent contractor has wide-ranging legal consequences. For example, an employer generally must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment taxes, while hiring an independent contractor requires no such duties. Likewise, an employee might be entitled to benefits such as pensions, insurance, sick leave, and vacation pay while an independent contractor would have no such expectations.
How do you determine whether a worker is an employee or an independent contractor?
In answering this question, our courts focus on the relationship between the worker and the business, generally, and issues of control and independence, in particular. Even these issues get broken down into narrower inquiries relating to behavioral control, financial control, and the type of relationship the parties have.
Behavioral control refers to the when, where, and how of working. A court is more likely to find an employer-employee relationship when it finds that the employer controls factors such as: what tools or equipment will be used, what workers are hired to assist with the work, where supplies or services are purchased, who will perform specific tasks, and in what sequence the work will be done. Training a worker to perform services in a particular manner also indicates an employer-employee relationship.
Financial control entails the right to make decisions on the business aspects of a job. Employees are more likely than independent contractors to have expenses reimbursed and are less likely to have a significant investment in facilities used in the work. Employees have less freedom to seek out personal business opportunities. Guaranteed payment of a regular wage for a specified time period is usually a sign of employee status, while only an independent contractor will be in the position to realize a profit or a loss.
Other aspects of the worker's relationship with a business can also help to separate employees from independent contractors. Of course, how the parties themselves describe the relationship in any written contracts carries some weight. Employees are more likely to receive benefits like insurance, a pension plan, vacation pay, and sick leave. Hiring a worker with an expectation of carrying on a relationship indefinitely, instead of for a specific project, is evidence of an employer-employee relationship. If a worker's services go to the heart of the business's activity, as opposed to being at the periphery of the business, it is more likely that the arrangement will have the kind of direction and control that characterize how employers and employees operate.
What the parties call themselves is a factor, but courts are not bound by such labels if the facts point to a different conclusion. The substance of a relationship is most important when determining whether a worker is an employee or an independent contractor.
WEBSITES AND JURISDICTION
Before a nonresident person or business entity can be sued in a given state, the defendant must have taken some action that indicates a submission to the authority of that state's courts. Traditionally, this has meant "minimum contacts" with the state. The laws that set these ground rules are called "long-arm statutes," a term that describes the reach of the courts into other states. The term, like the body of court decisions on the subject, may need modernizing in the age of the Internet.
The issue of long-arm jurisdiction has been adapted previously to technological advances in business, and courts again are setting new standards for its use when a plaintiff attempts to bring an out-of-state defendant into court on the basis of the defendant's website activity. These cases fall at various places along a spectrum. At one end are "passive" websites, which are akin to advertisements in national magazines or newspapers. They allow no real interaction between a business and potential customers. By themselves, passive websites will not subject their creators to jurisdiction wherever the site can be seen.
Midway along the spectrum are websites that allow some interaction by permitting the exchange of information between the site owner and users in another state but where the interaction falls short of transacting business. In such circumstances, the nature and level of information exchange will govern the jurisdiction issue.
For example, a New York bank was allowed to sue a competitor based in another state for trademark infringement in a New York court. The defendant's website allowed customers in any state to apply for loans online. Customers also could "chat" online with a representative or send e-mailed questions to which they would get a response within an hour. It was ruled that this Internet commercial activity brought the defendant within the jurisdiction of New York. However, while this online activity was both significant and clearly commercial in nature, there was some doubt as to whether customers actually could complete transactions online.
In a case at the opposite end of the spectrum from passive websites, a Texas eyewear company was permitted to sue an out-of-state company in Texas because the defendant was effectively carrying on business in Texas by means of its website. This decision was clear-cut because users of the defendant's website could purchase sunglasses on the website with order forms containing credit card and shipping information. The outcome was not affected by the fact that the computers hosting the defendant's website were not located in Texas.
Businesses with websites can limit their susceptibility to the jurisdictional reach of courts in other states by: (1) using a "clickwrap agreement" in which website customers agree that any litigation will occur in the courts of a designated state; (2) including a disclaimer that the company will not sell its products to customers in a particular state or states; or (3) disabling a website so that it will not handle orders or shipments for such states.
ESTATE PLANNING
New Rules for IRA Withdrawals
New rules have been adopted as to the calculation of mandatory withdrawals from an Individual Retirement Account (IRA). The general rules are still in effect that funds deposited in an IRA are tax deferred until withdrawals are made and that such withdrawals must begin by April 1 of the year following the IRA owner's attainment of age 70 ½. The changes that have been implemented allow the owner greater flexibility and control over the rate of withdrawal from the IRA, resulting in greater tax deferral.
The primary change is that the beneficiary upon whose life expectancy the amount of annual distributions will be based need no longer be designated as of the date on which distributions must begin (April 1 of the year following the owner's attainment of age 70 ½). Under the old rules, the amount of each year's distribution would be based on the joint life expectancies of the owner and the beneficiary named as of the required beginning date, and, after the owner's death, would be based on that beneficiary's life expectancy. Even if the owner had later named a younger beneficiary, that beneficiary's longer life expectancy would not affect the distribution calculation. Under the new rules, the owner need not choose a beneficiary at age 70 ½.
The amounts of minimum withdrawals that must be made each year while the owner is still alive are based on a single schedule of life expectancies that will apply to nearly everyone. The new schedule, known as the "Uniform Table," is based on the joint life expectancies of the owner and a designated beneficiary who is 10 years younger than the owner. An exception to the use of the table applies if the owner's spouse is the sole designated beneficiary. In that case, if the spouse is more than 10 years younger than the owner, the minimum amount that must be withdrawn is based on the joint life expectancies of the owner and the spouse. Thus, this exception is to the owner's advantage because it applies only if the required distribution will be less than that called for by the table.
After the IRA owner dies, the minimum withdrawals are based on the life expectancy of the oldest named beneficiary as of December 31 of the year following the owner's death. This means that an IRA owner can replace a beneficiary with a younger one and the amount of withdrawals that must be made after the owner's death will be based on the younger beneficiary's life expectancy.
Even though the pressure will now be off in the sense that there is no age 70 ½ deadline for designating a beneficiary, the IRA owner still needs to make that decision, or possibly alter a prior decision, and any such step should be made only after consultation with a qualified advisor.
IT'S SETTLED: HOMEOWNERS ARE COVERED
When the temperature in James's and Jane's basement dropped below freezing, an underground pipe leading from a well to the house froze and burst, saturating the ground beneath the foundation of the house. Soon, one corner of the house settled about three feet, causing a "twisting" of the house and a variety of serious problems. When the couple filed a claim for the damages under their homeowners insurance policy, the insurer denied coverage.
The policy was an "all risks" policy, meaning that it covered all perils not specifically excluded by the policy language. The insurance company relied on an exclusion in the policy for "settling, shrinking, bulging, or expansion, including resultant cracking of pavements, patios, foundations, walls, floors, roofs, or ceilings." There was no dispute that the house had "settled," but James and Jane argued, and the court agreed, that the term "settled," as used in the exclusion, meant a gradual sinking of a structure resulting from the natural condition of the soil, to which practically every building is subjected. In the case at hand, the settling was caused by an abrupt, unexpected event: the burst pipe. This was an incident that James and Jane reasonably expected to be covered, in light of the terms of the policy.
The court looked not just at the language in the "settling" exclusion itself but also at its larger context in the policy. The exclusion was one of eight in a paragraph that dealt only with exclusions entailing natural or environmental concerns, including basic wear and tear. It was reasonable for the homeowners to interpret the "settling" exclusion as referring to the "natural" settling of a structure and not to a condition attributable to an external, sudden cause such as the burst water pipe.
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