Tag Archives: tax

Key Misunderstanding on Oklahoma Option

Most critics and supporters of the Oklahoma option (OKO) have one thing in common: a misunderstanding about the applicability of the Employee Retirement Income Security Act (ERISA). In part, this misunderstanding is widespread because it hasn’t yet garnered the attention of tax authorities and attorneys, and those of us who aren’t tax attorneys are reluctant to engage this subject because we fear we will be misinterpreted as giving tax advice.

Let me be absolutely clear—nothing in this article should be construed as tax advice, as I am not qualified to offer such advice.

But the ProPublica and NPR journalists who assume ERISA must govern the taxation of OKO benefits simply because it governs the taxation of Texas nonsubscription (TXNS) benefits[1] aren’t qualified, either.

Put simply, ERISA’s governance of OKO workplace injury claims has yet to be demonstrated in any way, and it was certainly not confirmed by rulings in 2015 by two federal judges for the Western District of Oklahoma who considered the jurisdiction of federal courts over OKO-based claims and appeals processes..

There was never any intent in the Oklahoma legislation to have ERISA govern the OKO, and the term “ERISA” never appears—not once!—in the language of the Oklahoma law. Even more importantly, two-and-a-half years after passage, there is zero case law to support any claim that ERISA applies to OKO.

These revelations may be counterintuitive for industry insiders and regulators, but what should be intuitive is that state and federal court systems are in charge of ruling on state and federal laws. Consultants, employers, employees, investigative journalists, insurance carriers, brokers, attorneys, ivory tower experts, doctors and conference debaters don’t get to make such calls. The only ones whose opinions matter are the judges in a position to make these determinations, and the only two judges known to have had the opportunity to consider any issue concerning the relationship between the OKO and ERISA concluded that the judges did not have jurisdiction over cases where the employer sought to have ERISA govern employee appeals of decisions regarding occupational OKO claims.

In April 2015, Judge Joe Heaton of the U.S. District Court for the Western District of Oklahoma issued an order regarding ERISA’s applicability to the occupational accident components of OKO plans in the case of Cavazos v. Harrah Nursing Center (aka Marsh Pointe) that, in part, reads:

“Marsh Pointe alleges … that, pursuant to the Oklahoma [Employee] Injury Benefit Act, it has elected to be exempt from the Administrative Workers’ Compensation Act and become a ‘qualified employer’ by meeting certain requirements including the adoption of a written benefit plan. That well may be. Nonetheless, the case [filed by the plaintiff] arose ‘under the workmen’s compensation laws’ of the State of Oklahoma. As such, it may not be removed to any district court of the United States.”

Judge Heaton’s ruling was a narrow one, aimed only at determining whether the federal court could exercise jurisdiction over the case before it. That case had been removed by the employer to federal court from the Oklahoma Workers’ Compensation Commission (OWCC), based on the assertion that ERISA ought to govern the employee’s pursuit of a claim against her employer’s OKO plan. The court held that, regardless of whether ERISA applied to certain aspects of the OKO plan, the employee’s claim arose under Oklahoma’s WC laws and, therefore, a specific federal jurisdictional statute (28 USC §1445(c)) prevented removal of the case to federal court. Judge Heaton sent the matter back to the OWCC, and his order made it crystal clear that such cases cannot be removed to the federal court system.[2] In other words, ERISA (a federal law) does not give federal courts jurisdiction over the occupational accident claims of employees whose injury benefit plans are governed by the OKO (a state law)—no matter how frequently ERISA is referred to in an employer’s benefit plan and regardless of whether ERISA applies to other aspects of that benefit plan.

The Cavazos case was the first real opportunity we had to see whether removal of such claims to the federal courts was possible. Then, in September, Judge Stephen Friot (from the same Western District Court of Oklahoma) followed Heaton’s logic in Vasquez v. Dillards, our second opportunity to see whether federal court involvement in the OKO claims process was available. The decision read:

“The court concludes that the [Oklahoma Employee Injury Benefit Act] is part of Oklahoma’s statutory scheme governing occupational injuries and workplace liability; in other words, the OEIBA is part of Oklahoma’s statutory scheme governing workmen’s compensation.”

The case before Judge Friot was a bit different procedurally, but it came to the same result. In the Vasquez case, the employee received an adverse decision from her employer regarding her claim for benefits under the employer’s OKO plan. She then sought review by the OWCC as provided for in the Oklahoma statute. The employer removed the case to federal court, contending that the company’s plan was governed by ERISA and, therefore, that ERISA pre-empted state law on the issue and that the federal court had exclusive jurisdiction. The employee moved to remand the case to the OWCC. Judge Friot sided with the employee and remanded the case, which was to be expected post-Cavazos. The ruling in Vasquez (which features a more detailed discussion than the one provided by Judge Heaton in Cavazos) concludes that 28 USC §1445(c) (the same jurisdictional statute relied upon by Judge Heaton) barred removal of the case to the federal court, even if, as Judge Friot specifically presumed for purposes of his ruling, the “plan under which [the employee files] claims may be … an ERISA plan.”

The explicit—and antiquated—language from the 1974 ERISA law indicates that ERISA doesn’t apply to “workmen’s compensation.” ERISA’s authors recognized a long tradition of federal deference to individual states on workers’ compensation issues. While the OKO is different from traditional workers’ compensation, in the only cases known to address the issue thus far, the federal court system has concluded that it cannot exercise jurisdiction over the on-the-job injury claims of OKO employees.

Die-hard ERISA champions, as it turns out, can cling just as stubbornly to obsolete ideas as can workers’ compensation stakeholders. But OKO supporters don’t need to win such folks over; the law is already on the side of progress. The OKO clearly seeks to stand on its own, and it doesn’t want ERISA as a crutch. Being free from ERISA has advantages beyond tax implications. The OKO clearly sits much closer to traditional workers’ compensation than does TXNS—and, as such, OKO may be regularly accepted as a replacement in the state’s important oil and gas industry. In both Texas and Oklahoma, the larger energy companies almost always require traditional workers’ comp to be held by contracted companies. That won’t change in Texas, but it very well could in Oklahoma. Moreover, these federal court orders should provide solace to the Sooner State because they suggest the oversight and development of this new creation will be the responsibility of Oklahomans.[3]

[1] See “Inside Corporate America’s Campaign to Ditch Workers’ Comp,” an installment in the Insult to Injury series.

[2] The court remanded the case just two days after it was removed without seeking briefs from either party.

[3] To date, all three branches of the Oklahoma state government have actively or tacitly supported the OKO. At worst, the state has adopted a wait-and-see approach to this new alternative. At best, Oklahomans—sans attorneys—are eager to discover whether the incredibly promising early gains made possible through the OKO are sustainable over the long term.

At WorkersCompensationOptions.com, we’re convinced the gains are sustainable. There’s nothing theoretical about our promise of delivering superior care to employees at reduced costs to employers. We’re already doing it in Oklahoma, and we at WCO are proud to be part of this long overdue transformation.

Expect More Cyber Turbulence in 2016

In February 2015, Anthem, the nation’s second-largest health care insurer, disclosed losing records for 80 million employees, customers and partners. That was followed a few weeks later by Premera Blue Cross admitting it lost records for 11 million people.

Then in July 2015, the U.S. Office of Personnel Management began a series of mea culpas. OPM ultimately conceded that hackers swiped sensitive personnel records for 21.5 million federal employees, contractors and their family members. Anthem, Premera Blue Cross and OPM were among the high-profile breaches in a year when the Identity Theft Resource Center counted more than 750 publicly disclosed data leaks.

ThirdCertainty asked three IDT911 experts — Brian Huntley, Eduard Goodman and Victor Searcy — for their 2016 prognostications. (Full disclosure: IDT911 underwrites ThirdCertainty.)

Wire fraud and politics 

Brian Huntley, IDT911 Chief Information Security Officer
Brian Huntley, IDT911 Chief Information Security Officer

 

Huntley: In the coming year, fraud and theft will plague the merchant payments and ACH wire transfer systems. Small and medium-size businesses are especially vulnerable. If enough SMBs get victimized, it could result in a public outcry about the inherent vulnerabilities in these systems, especially as consumers and small business owners come to realize there is minimal regulatory protections in these types of cases.

This being an election year, U.S. presidential candidates will focus on cyber war strategy and armament. Armchair quarterbacking of the 2015 U.S.-China cybersecurity agreement will arise as the centerpiece of this debate. We could see the U.S.-China cyber accord ascend as the basis for peer agreements between other nation states.

Meanwhile, the search will continue in different industries for an information security control framework that is akin to what the financial services sector has in the Federal Financial Institutions Examination Council’s (FFIEC) Information Security Guidelines and the health care sector has in the Health Insurance Portability and Accountability Act (HIPAA) of 1996.

Data tranfers and children’s privacy

Eduard Goodman, IDT911 Chief Privacy Officer
Eduard Goodman, IDT911 Chief Privacy Officer

 

Goodman: U.S. companies with a European presence will encounter a tremendous amount of uncertainty in 2016 with respect to Europe’s stricter Safe Harbor data privacy rules, relating to the sensitive data transfers to businesses in the U.S.

European regulators can be expected to harass the likes of Facebook and Google. And the threat of sanctions for noncompliance with Europe’s tougher Safe Harbor standards could easily filter down to many smaller companies, as well.

In another area, the recent hacking of toy maker VTech and Hello Kitty parent company SanrioTown.com signals that the theft of children’s information could become a worrisome new trend. As children obtain earlier access to social media, smartphones and Web-enabled toys, details of their personal information and preferences are rapidly becoming part of the greater data ecosystem.

As a result, we will see more breaches that involve the theft of information for individuals under the age of 18. Hopefully, we also will see more public dialogue about the concept of preserving children’s privacy, whether it be school record data, health information or data files containing images, video and audio recordings.

Taxpayers targeted—once again

Victor Searcy, IDT911 Director of Fraud Operations
Victor Searcy, IDT911 Director of Fraud Operations

 

Searcy: One of the most pervasive identity theft scams involves the filing of a faked federal tax return using an ill-gotten Social Security number. Sadly, this will continue to be true again in 2016.

In the 2010 and 2011 tax seasons, the Internal Revenue Service paid out $8.8 billion of taxpayer money to identity thieves. And statistics pulled from a sampling of customers assisted through IDT911’s Resolution Center in 2014 show a 120% increase in tax fraud victims in 2014 and another 134% increase in 2015.

We expect this number to grow again in 2016. It can take months for a victim to sort out the mess with the IRS. Worse, there is little stopping criminals from using a victim’s Social Security number and other personal information in other scams.

IDT911 stats show that 16% of tax fraud victims also were victims of financial identity theft; 12% of customers experienced multiyear tax fraud; and 16% were victims of both federal and state tax fraud.

Captives: Congress Shoots, Misses

In late December, Congress put together a last-minute “tax extender” package that, among many other things, made some changes to section 831(b) of the Internal Revenue Code. That section allows “small” captive insurance companies to elect to exempt from income tax all of their insurance income.

These small captives have been widely used in recent years by owners of large, privately held businesses to allegedly add to their existing insurance coverages while enjoying immediate income tax reductions. Further tax benefits could include conversion of ordinary income to capital gains and a potential estate transfer benefit, depending on the ownership of the captive.

Congress has changed those benefits a bit, by eliminating any estate planning benefits, starting in 2017. But Congress failed to address the true levels of abuse that this code section has spawned and, indeed, may have made things worse.

These “enterprise risk” or “micro” captives are primarily used as a form of tax shelter, notwithstanding the pious claims of captive managers that they are meeting legitimate insurance needs. While such needs certainly may exist in some clear cases, the vast majority of entrepreneurs forming these captives care much more about the tax benefits than any increased insurance coverage.

The IRS knows this and has stepped up both audits of individual companies and larger, promoter audits of captive managers in an effort to crack down on captives that are being formed without the intent to form an insurance company. In addition, the IRS is well aware that unscrupulous captive managers create vastly inflated “premiums” payable by the operating company to the captive to maximize the tax benefits of owning such a small captive. These premiums often bear no relation to third-party market costs, nor can they be justified by a reasonable actuarial analysis of the actual risk being insured by the captive.

Another abuse is found in captive managers’ offering the new captive owner what the IRS would call a sham “pooling” arrangement, to comply with certain “risk distribution” requirements of court cases and revenue rulings.

There are many cases pending in the Tax Court that attempt to corral these abuses. Their outcome is, of course, uncertain.

So the Treasury Department went to the Senate Finance Committee in early 2015, hoping to obtain legislation that would gut section 831(b) (and put a lot of captive managers out of business).

Instead, the department got legislation that only stops these captives from being used as estate planning tools.

The legislation also increased the annual allowable premium paid to such captives, from $1.2 million to $2.2 million, indexed for inflation. The reasons for this failure have a lot to do with Sen. Chuck Grassley of Iowa, who has long wanted an increase in premium to benefit certain farm bureau captives in his state. He needed some revenue offset to allow for the increase, and, by closing this “estate planning loophole,” he can claim that tax revenues will increase.

That claim may be doubtful (only about 1% of taxpayers end up being subject to the estate tax), and captive managers now have a new, higher goal of $2.2 million for the “premiums” to be paid to these small captives.

It is also clear that this new legislation will have no effect on the current robust enforcement actions underway by the IRS. The issues of inflated premiums, sham pooling arrangements and lack of substance in the alleged insurance transaction remain in force and subject to serious scrutiny.

It is unlikely that Congress will bother to look at this code section again any time in the near future.

As a result of this new legislation, section 831(b) captives can generally no longer be owned by the entrepreneur’s spouse, children, grandchildren or trusts benefiting them. (Details about how the legislation achieves this change can be found in other sources).

Perhaps as many as half of all existing micro captives were formed with estate planning in mind. These captives will have to change their ownership or dissolve before the end of 2016. Tax professionals should review all captives owned by their clients to ensure that they remain complaint with the changes in the law. Relying on the captive managers may not be sufficient.

Why to Self-Fund Health Benefits

The passage of the Affordable Care Act in 2010 continues to redefine the employer-sponsored healthcare market. Increased regulatory and fiduciary responsibilities, employer mandates and rising medical premiums have forced employers to evaluate all cost-effective strategies for providing health benefits to employees. One strategy, self-funding, remains an attractive alternative to the traditional fully insured and association-style health plans.

In a self-funded environment, the employer will assume the role of the insurer and agree to pay the medical claims incurred by the plan’s members and dependents. A good percentage of self-funded plans will also use reinsurance and captive risk tools to provide protection from both large individual claims and the plan’s collective utilization.

While self-funding has gained momentum as a result of healthcare reform, it is not a new concept. In 1999, a Kaiser Family Foundation (KFF) study reported that 44% of employer-sponsored healthcare was self-funded. That number has now reportedly grown to 61% in 2014.

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Why Is Everyone So Interested?

Health benefits continue to be one of the greatest expenses for employers. This fact, compounded with the continual rate increases (with little to no justification), leaves employers feeling stuck in an endless cycle. Some also may feel that their employees are a generally healthy group that is a good candidate to self-fund.

Many turn to self-funding because of:

  • Lower fixed costs-The majority of the expense is incurred in the payment of actual medical claims, increasing the margin for savings when the plan performs well.
  • Improved transparency-An increase in premiums is easier to swallow if the employer can get an accurate understanding of its claims experience. Self-funded health plans provide employers with a tremendous amount of data. Accurate claims data strengthens the group’s ability to effectively control spending on claims.
  • Control of the plan design-Self-funded health plans are in a better position to adjust benefits and control increased provider costs. Unlike fully insured products, a self-funded plan design can be structured to meet the specific needs of the group and not an insurer’s overall population.
  • Tax savings-Fully insured premiums continue to jump to accommodate new provisions as a result of the ACA. Self-funded plan sponsors avoid items like the new Health Insurance Industry Tax, which will increase from 2% to 5% in coming years.

With the increased interest comes new strategies and opportunities as the self-funding marketplace evolves. Self-funded plan sponsors are reaping the benefits of evolving provider network and cost containment strategies. Meanwhile, employers that have yet to make the transition see obstacles lessen because of changes in the reinsurance and captive markets.

What Does This Mean for Employer Groups?

Self-Funded Feasibility Studies Are a Must

There is a strong likelihood that every corporation or public entity with 1,000 employees or more has at least heard about self-funding. However, depending on the number of employees on your health plan, it is quite possible that you have not evaluated self-funding, at least in a thorough way.

A deeper look into the composition of employers participating shows us that group size typically has a direct correlation on whether a self-funded strategy is being used. According to the 2014 KFF study, the breakdown of corporations self-funding is:

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Historically, size has mattered. While all groups with more than 200 employees have a responsibility to evaluate the method as an alternative, those employer groups in the less-than-200 range are seeing more opportunity to make the transition. Lessening participation thresholds to lease competitive provider networks and new reinsurance and captive products are creating total-cost scenarios where the right employer can realize the advantages of self-funding. It can still be a challenge when certain market dynamics are present (i.e., lack of claims data, available provider network options, pending legislative actions, etc.), but more and more companies are finding success.

One More Step

The large insurance companies have noticed the changing market, as well, of course, and have introduced a number of bundled plans that look like self-funding. These products are typically entirely owned by one entity, like an insurance company or trust, and allow the employer to participate in a pre-determined portion of any surplus when the group experiences lower-than-expected claims. These products are attractive because they pull together under one brand all the component vendors of a self-funded health plan (i.e., claims administrator, network, reinsurance, etc.). These products can be a great first step for employers weary of self-funding through their own independent health plan. The products will allow them to gain insight into their claims performance while alleviating some of the additional work associated with the wholly owned approach.

For those groups already in these products, it may be time to evaluate taking that next step and realizing the benefits of a wholly owned approach. Reinsurance policies with specific advance and monthly aggregate accommodation can give these employers the ability to still limit their maximum exposure, lower their plan’s fixed costs and keep all of the savings when the plan performs well.

With the tools available today, any employer group in a packaged, shared funded or full ASO model plan is a candidate to complete the transition to a self-funded plan. While the packaged, branded approaches employed by some of the major insurance companies may work for a season, deconstructing the bundled product may be the next step in the employer’s long-term strategy.

Fine-Tuning Your Self-Funded Plan

There are many companies that have been enjoying the benefits of self-funding for years. As a result of the ACA, however, these employers have had to react to escalating medical costs, expensive specialty drugs and increased regulatory and fiduciary responsibilities.

For instance, self-funded health plans typically “lease” provider networks from a large insurance company. But, in 2010, the ACA removed lifetime and annual maximums from health plans, and the number of high-dollar claims has increased substantially. The networks provide discounts on fees, but the question is how important they are given the increasingly large charges they are being applied toward.

Self-funded health plans are adept in using different types of analytics both to measure historical data and to predict outcomes. This has empowered these health plans to fine tune their plans and integrate various cost-containment strategies.

Is Your Work Comp Doctor a P.O. Box?

Are your workers’ compensation medical doctors treating injured workers from a P.O. Box? That may sound ludicrous, but most workers’ compensation data suggests just that. The rendering physician’s address is a P.O. Box.

In the past, documenting only the provider’s mailing address was acceptable because that and a tax ID were all that were needed to pay bills and file 1099s. Now, having more complete data has become profoundly important.

Data on providers is scrutinized to determine medical performance, claim cost and outcome. Accurate analysis relies on the data-complete data. Rendering physicians must be documented on the bill so that their performance is accurately tied to the correct injured worker and claim in the data. Including the 1) treating physician’s name, 2) physical location and 3) NPI number of the rendering provider on each bill lets analytics tell us who are the best and why. When those three little data elements are missing, so is any useful information for medical management.

When the data contains group or facility demographics without the rendering physician’s name, the actual treating physician cannot be linked to the claim. Performance cannot be logically averaged among all the providers in the group. Obviously, not every treating provider is equally gifted or competent.

The HCFA (Health Care Finance Administration) standardized form has a box to document the rendering provider’s name and NPI (National Provider Identification). That box must be used.

Sometimes, the name of the provider is documented on the billing form but is not captured in the OCR (optical character recognition) process, whereby the data on the bill is translated to a digital form.

Even when bills are submitted electronically, that data element, while present, may not be forwarded. The digital bill is usually handed off to a bill review service that analyzes the appropriateness of the charges and passes its conclusions on to the payer. Rarely is all the information from the HCFA billing form passed on to the payer. The provider information that is handed off may be just the billing address and tax ID.

Sometimes, the name and NPI of the rendering physician are omitted simply because it has always been done that way. No one has thought to change the procedure.

In other words: Retrieving definitive provider demographics might be a simple matter of requesting it!

Sometimes, though, the reason accurate data is missing may be more sinister. The Centers for Medicare and Medicaid Services (CMS) requires the rendering physician name and NPI number on bills submitted to Medicaid and Medicare. CMS simply withholds payment on bills without that information. But those standards are not applied in workers’ compensation. The frequent result is bad or misleading data, but it can be even worse.

Unfortunately, omitting the name and NPI of the rendering physician is sometimes deliberate. This could be strategic or actual fraud. Some large multi-specialty medical groups and multi-location practices deliberately omit such information because they want the anonymity for their individual practitioners. They want to avoid measurement of their providers’ performance. They do not want individuals identified, not even by the location in which they practice. All the providers in the group treat from a P.O. Box and under the group NPI number.

Some providers deliberately obfuscate the data so they can stay under the radar to overbill. They submit different addresses and even different NPI numbers on their bills. The practice is clearly fraudulent because CMS expects that one physician or other medical provider is assigned one NPI. Providers who commit fraud also circumvent CMS.

The solution

Regardless of the reason for bad medical provider data, payers can correct the problem by demanding more. Often, the solution is as simple as asking the bill review service for more complete data. Further upstream, it might be as simple as requiring all providers in a network to include the name and NPI of the actual treating physician on the HCFA billing form.

All you require is the 1) rendering physician’s name, 2) physical location and 3) NPI number with every bill. With that information, the best and worst providers can be identified, and the fraudulent ones exposed.