Fall 2012 CAPLAW Update Newsletter

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Legal and financial information for the Community Action network

FALL 2012

After Health Care Reform Upheld, What’s Next for CAAs? By Riley Lovendale and Eleanor Evans, Esq., CAPLAW With its landmark decision in June, the U.S. Supreme Court left intact all the provisions of the 2010 federal health care reform law that affect Community Action Agencies (CAAs) as employers. Many commentators had expected the Court to specifically strike down the mandate in the law requiring all individuals to carry health insurance that meets certain minimum requirements or else pay a penalty, and possibly even to invalidate the entire Patient Protection and Affordable Care Act (ACA). However, the Court upheld the individual mandate based on it being a valid exercise of Congress’s taxing power and did not strike down the ACA. Now that the uncertainty surrounding the ACA’s constitutionality has been resolved, CAAs can focus on taking the steps necessary to comply with the ACA’s requirements. This article summarizes some of the more important items CAAs should be prepared to address in the coming years.

Continued on page 7

Inside This Issue :

Safely Using Criminal Background Information By Merrily Acher, Esq., EEO Legal Solutions Helping (and never harming) is the most basic tenet of every Community Action Agency’s mission. Like all employers, however, Community Action Agencies (CAAs) have some positions in which the job duties themselves create a risk of harm to the general public, the served population, or the agency itself. For example, accounting positions afford access to confidential financial and personnel information, thereby creating the opportunity for an unscrupulous person to Continued on page 10

Health Care Reform Update ● Using Criminal Background Checks ● NLRB Focuses on Workplace Practices ● FInancial Leadership Pilot Recap ● DAB Decision ● CAPLAW Conference Highlights

CAPLAW Board Winston A. Ross, President Westchester Community Opportunity Program Patricia Steiger, Vice President Management Consultant Gale F. Hennessy, Treasurer Southern New Hampshire Services Catherine Caputo Hoskins, Secretary Salt Lake Community Action Program David Brightbill, Director Washington-Morgan Community Action

Visit the CAPLAW Webinar Archive and view a library of FREE webinars available On Demand! Recent Webinars Include:

Jerralynn Ness, Director Community Action Serving Washington County

Spotlight on Immigrant Eligibility for Public Benefits Presented by Tanya Broder, Esq., National Immigration Law Center View the webinar

Douglas D. Rauthe, Director Community Action Partnership of Northwest Montana

Roadmap for Resolving CAA Conflicts of Interest Presented by Eleanor Evans, Esq., CAPLAW View the webinar

Leonard Dawson, Board Member Emeritus Coastal Georgia Area Community Action Authority, Inc.

Records Management 101: First Steps to a Successful Record Management Program Presented by Peggy Nagel, CAPLAW View the webinar

David Bradley, CAPLAW Coordinator National Community Action Foundation

CAPLAW Staff Anita Lichtblau, Esq. Executive Director and General Counsel Eleanor A. Evans, Esq. Deputy Director and Senior Counsel R. Allison Ma’luf, Esq. Associate Counsel Peggy Nagel Project Director, National Nonprofit Financial and Grants Management Training Program Cara Loffredo Communications Manager Ashley Billingsley Administrative Coordinator/ Executive Assistant This report contains general information and is not intended to constitute legal advice. © 2012 Community Action Program Legal Services, Inc.

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About CAPLAW CAPLAW is a nonprofit membership organization dedicated to providing the legal and financial resources necessary to sustain and strengthen the national Community Action Agency (CAA) network. For over 45 years CAAs have been fighting poverty, helping individuals become self-sufficient, building communities, and changing lives. Nationwide, approximately 1,000 CAAs leverage almost $10 billion in total funding, and provide a multitude of services, including job training, Head Start, economic development, energy assistance, and housing. Through its in-house legal and financial staff and a network of private attorneys and financial consultants, CAPLAW provides legal and financial consultations, training, and publications on a wide variety of legal and management topics. This assistance enables CAAs to operate legally and fiscally sound organizations and to promote the effective participation of low-income people in the planning and delivery of CAA programs and services, thereby enhancing CAAs’ ability to provide the nation’s poor with opportunities to improve their quality of life and to achieve their full potential. For membership information visit www.caplaw.org or call (617) 357-6915.

National Labor Relations Act by Ronald W. Taylor of the law firm Venable LLP in the Fall 2011 CAPLAW Legal Update). Additionally, the NLRB issued a decision on September 7, 2012, Costco Wholesale Corp.,2 that follows the General Counsel’s guidance. In that decision, the NLRB found that a social media policy prohibiting employees from making statements that “’damage the Company, defame any individual or damage any person’s reputation’” was overly broad and would lead employees to reasonably conclude that they must refrain from engaging in protected communications about the terms and conditions of their employment.

NLRB Focuses on Workplace Practices By Anita Lichtblau, Esq., CAPLAW The National Labor Relations Board (NLRB) has recently focused on several common workplace practices that it found violate the rights of workers under Section 7 of the National Labor Relations Act (NLRA) to communicate with each other concerning the terms and conditions of their employment. In its decision, Banner Health System d/b/a/ Banner Estrella Medical Center,1 issued on July 30, 2012, the NLRB found that a hospital’s blanket policy and practice of asking employees interviewed during internal investigations not to discuss the matter with their coworkers while the investigation was ongoing constituted an unlawful violation of the employees’ right to engage in protected “concerted activities” under the NLRA. The NLRB said that the hospital should have determined on a case-by-case basis whether such an instruction was necessary. In order to justify such a prohibition on employees discussing a matter under investigation with other employees, the employer must show that it has a legitimate business justification that outweighs employees’ Section 7 rights. The employer’s generalized concern with protecting the integrity of the investigation was not enough; the employer was required to show in a specific investigation that witnesses needed protection, evidence was in danger of being destroyed, testimony was in danger of being fabricated, or there was a need to prevent a cover-up. This decision comes after the NLRB’s General Counsel issued guidance on January 24, 2012 (Memorandum OM 1231) and on May 30, 2012 (Memorandum OM 12-59) interpreting the NLRB’s prior decisions and predicting the NLRB’s approach to employer’s social media policies. In the guidance, the General Counsel discusses how overly broad confidentiality and nondisparagement terms may illegally interfere with employee’s Section 7 rights to discuss the terms and conditions of their employment. (Also see a June 2012 CAPLAW e-Bulletin about the May guidance and the article Nonprofits Beware: Your Employees’ Blogs, Facebook Posts and Twitter Tweets May Be Protected by the “The employer’s generalized concern with protecting the integrity of the investigation was not enough...”

Viewed together, these decisions and guidance make it apparent that the NLRB is looking critically at practices that many employers have routinely followed in the past to determine their impact on employees’ right to engage in concerted activities. All employees, not just those in a union, have such rights. An employer would be wise to review its policies and practices in a wide variety of areas, but certainly including social media policies and internal investigations, to ensure that they do not interfere with such rights, either directly or implicitly. In the social media context, CAPLAW recommends that you look at the sample language that the NLRB approved in its May 2012 guidance and have your policy reviewed by a knowledgeable attorney. Providing specific examples of activities that are not prohibited by a policy is helpful to defending against a claim of an unlawful practice under the NLRA. In the context of an internal investigation, consultation with an attorney is also advised, as well as the drafting of an internal memo setting forth the justifications described by the NLRB in Banner Health if an instruction not to discuss the matter is given to employees who are interviewed. “Viewed at together, these decisions and guidance make it apparent that the NLRB is looking critically at practices that many employers have routinely followed in the past to determine their impact on employee’s right to engage in concerted activities. ”

(See end notes on page 13)

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CAPLAW Update Newsletter, Fall 2012 | 3

FINancial management

CAPLAW’s New Financial Leadership Team Training is a Success! By Peggy Nagel, CAPLAW On July 26th, CAPLAW sponsored a new training experience “Powering Up your Financial Leadership Team” in conjunction with the North Carolina Community Action Association. This full-day workshop provided select teams of Community Action Agency (CAA) executive directors, chief financial officers, resource development directors, and board leaders from North Carolina with an opportunity to explore innovative ways to work together to analyze their organization’s financial health from the perspective of the whole entity, rather than program-by-program, and to better match their financial resources with their mission and the needs of their community. The hands-on workshop offered tools and strategies to improve communication, facilitate strategic thinking and promote joint problem solving. Each CAA leadership team participating in the pilot program committed to building a financial dashboard tailored to their organization. In advance of the training, each CAA shared with Michael Anderson of the Nonprofits Assistance Fund, its most recent audited financial statements and information about its financial decision making processes. With Michael’s assistance, in conversations prior to the workshop session, teams began the process of developing meaningful financial dashboards for their CAA. These customized dashboards were then used during the workshop by the teams to analyze their financial situation. “...teams began the process of developing meaningful financial dashboards for their CAA. These customized dashboards were then used during the workshop by the teams to analyze their financial situation.”

On the day of the workshop, Kay Sohl of Kay Sohl Consulting first lead the teams through a discussion of financial leadership roles within CAAs and the key financial and program information needed for each CAA to set financial 4 | CAPLAW Update Newsletter, Fall 2012

goals and think strategically about their organization’s long term sustainability. Michael then presented the participating CAAs with their customized dashboards, and Kay and Michael both led the teams through a series of discussions focused on using their dashboards to think critically about financial and programmatic choices that would enhance their CAA’s sustainability. The discussions centered on the CAA fully understanding its business model, i.e., the relationship between a CAA’s investment in program, management, and fundraising and the income earned or contributed as a result. The CAA also identified factors critical to its long term financial sustainability, including program services provided, size and composition of the CAA workforce, strengthening capacity by building infrastructure, and setting targets for available cash and unrestricted net assets. At the end of the session each team set a goal for using the tools and training presented to implement successful financial decision making and strategies in their organization. Starting in fiscal year 2013, CAPLAW in partnership with the Community Action Partnership plans to replicate this financial leadership team model on a regional basis by creating a series of interactive trainings for boards, board financial committees and executive staff to analyze their organization’s financial health and create dashboards and tools tailored to their organization. These customized financial dashboards are intended to help CAA leaders work together to effectively build financially healthy organizations.


DAB Determination The DAB based its decision to uphold ACF’s disallowance on the following:

• The HHS uniform grants administrative requirement

that “[a]ll procurement transactions be conducted in a manner to provide to the maximum extent practical open and free competition”3 made applicable to the Head Start program by the Head Start regulations;4

• The HHS uniform grants administrative requirement

Lack of Competition and Credit Card Interest Payments Result in Head Start Disallowances Beaver County Head Start, No. 2441 (2012) By Peggy Nagel and Anita Lichtblau, Esq., CAPLAW Earlier this year,1 the U.S. Department of Health and Human Services (HHS) Departmental Appeals Board (DAB) upheld a $20,245 disallowance by the Office of Head Start of the Administration for Children and Families (ACF), for claims by Beaver County Head Start (BCHS) for a building management contract awarded without open competition and for payment of interest on unpaid credit card balances.

Background ACF disallowed BCHS’s expenditure of $19,000 for a building management contract for a Head Start facility BCHS had recently acquired. ACF determined that BCHS “did not properly obtain at least two oral quotations” for the contract, in violation of an HHS grant administrative regulation requiring open competition in procurement transactions. BCHS did not deny it failed to conduct any competitive selection process. It justified the lack of competition by asserting that competitive bidding was neither possible nor “practical” because of the existing financial obligation BCHS owed to the real estate development company it used and was thus not required to follow the HHS uniform grants administrative requirements.2 In addition, ACF determined that BCHS paid interest expenses totaling $1,425 on unpaid credit card balances. ACF disallowed the expenses, noting that, pursuant to the federal cost principles, costs incurred for interest on credit card debt are not permitted to be charged to the Head Start program. BCHS did not address ACF’s disallowance of interest charges in its appeal.

giving ACF the authority to disallow funds if a grantee has materially failed to comply with the terms and conditions of an award5; and

• Federal cost principles for nonprofits providing that “costs incurred for interest on borrowed capital, temporary use of endowment funds, or the use of the non-profit organization’s own funds, however represented, are unallowable6,”made applicable to the Head Start program by the HHS uniform grants administrative requirements.7

The DAB concluded that BCHS failed to comply with the HHS uniform grants administrative requirement requiring competition8 in awarding the management contract because, as BCHS conceded, it permitted no competition for the contract and did not consider awarding the contract to any other company or individual. The DAB found that the requirement to consider more than one potential contractor in awarding a procurement contract is clear from the language in the HHS uniform grants administrative requirement requiring procurement transactions to be conducted through “open and free competition” with “bids and/or requests for proposals” and awards to be made “to the bidder or offeror whose bid or offer is responsive to the solicitation and is most advantageous to the recipient, price, quality and other factors considered.”9 Significantly, relying on case law, the DAB held that “[w]hile the grantee ‘is free to select from a wide range of bidding methods, it may not select a process that does not give a fair and open chance to qualified bidders or a process that provides advantages or information to one bidder without according the same to all bidders.’”10 Because BCHS admittedly made no effort to consider or solicit other potential contractors, it failed to comply with the HHS uniform grant administrative requirements when it awarded the sole source contract to manage the Head Start facility.11 In addition, the DAB found that BCHS’s argument that its debt to the real estate development company precluded soliciting bids or otherwise considering other contractors was unavailing. Nothing in the regulations suggests that a pre-existing, unrelated debt to one bidder justifies awarding a contract to that bidder as a sole source. Furthermore, the argument that an existing financial obligation to the real estate development company precluded open competition for the management contract Continued on page 12

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Action Foundation. Recipients of the Robert M. Coard Scholarship, Carla Flynn of Opportunities, Inc. in Oklahoma and Chris Macy of Central Missouri Community Action, were also recognized during the opening ceremony for their tremendous leadership potential within the Community Action field.

Sustainability and Innovation at the 2012 CAPLAW Training Conference By Misha Rahmen, CAPLAW Over 430 Community Action professionals convened at CAPLAW’s 2012 National Training Conference June 5-7 in San Diego to fine-tune their skills, explore strategies for sustainability and innovation, and prepare to tackle future challenges. Pre-conference workshops offered insight into cost allocation practices, improving employee relations, and economic development. The pre-conference tour started with Community Action Partnership Program Manager and San Diego native Juana Dueñas guiding participants through some of the city’s most underserved communities, past Chicano Park’s celebrated murals into the Diamond Neighborhoods. At the Jacobs Center for Neighborhood Innovation, Community Coordinator Lefaua Leilua relayed the nonprofit foundation’s history of community development through entrepreneurship. Home Start Team Leader Kate Bedwell discussed an array of financial education and stabilization programs offered onsite at the Financial Opportunity Center, one of four recent additions to the Local Initiatives Support Corporation’s (LISC) national network. From there, participants ventured to Balboa Park, where a visit to the iconic Lily Pond and Botanical Garden was capped with lunch in the San Diego Museum of Art’s outdoor Sculpture Court Café.

“...honestly felt it was the best conference I ever attended.”

The conference opened with welcoming remarks from local CAA representatives and continued with remarks from key players in Community Action including: Jeannie Chaffin, Director of the Office of Community Services (OCS) within Administration for Children and Families (ACF) at the U.S. Department of Health and Human Service (HHS), John Wagner, Interim Director of the California Department of Community Services and Development, and David Bradley, Executive Director of the National Community 6 | CAPLAW Update Newsletter, Fall 2012

The 2012 conference workshops featured local experts from California and star speakers from years past who led a variety of new training opportunities, including: a new sustainability workshop track; a networking opportunity for state associations; and extended pre-conference workshop options. Some workshop highlights included an interactive multi-media presentation focused on helping CAAs improve the way they conduct workplace investigations by John Polson, Esq. of the nationwide employment law firm Fisher & Phillips LLP; CAA-specific examples prepared by Joel Kaleva, Esq. of the Montana based law firm Crowley Fleck PLLP to explain the importance of properly setting executive compensation; and practical, useful tools offered by Jean Block of Jean Block Consulting that may be used by CAAs to equip and motivate board members in fundraising ventures. Conference attendees also had the privilege of hearing from keynote speaker Marielena Hincapié, Executive Director of the National Immigration Law Center. Drawing from her experience as a child of immigrant parents, Ms. Hincapié delivered an emotional speech on current immigration issues, including: the difficulties faced by many CAAs serving low-income immigrant populations; what the legal and political immigration debate means for the future of the U.S.; and her vision for our increasingly diverse country. One attendee remarked that Ms. Hincapié’s speech gave “a new immigrant perspective for all America.” Attendees also had an opportunity to re-connect with colleagues and enjoy the San Diego sun during a waterside networking reception, accompanied by the sounds of the Cuban band Combo Libertad. Finally, Acting ACF Assistant Secretary, George Sheldon, and CAPLAW’s own Executive Director, Anita Lichtblau, concluded the conference by addressing the obstacles that lay ahead for CAAs and the continuing need for training opportunities like the National Training Conference to help navigate a new and often complicated landscape.

“Exceptional, again...I always leave with a couple new things in each training...”

CAPLAW’s board and staff thank all those who attended this year’s conference, as well as the many presenters and volunteers who helped make it a success. We would also like to acknowledge and thank our sponsors and exhibitors, without whom the conference would not have been possible. We hope you will join us next year in our home town of Boston for CAPLAW’s 2013 National Training Conference from June 19 - 21!

The ACA specifies that a SBC must meet detailed content requirements and the following formatting and language requirements: (1) it must be presented in a uniform format, (2) it must use language the average plan enrollee would understand, (3) it cannot exceed four double-spaced pages, (4) its printed fonts may not be smaller than 12-point, and (5) it must be provided in a culturally and linguistically appropriate manner. SBCs may be distributed on paper or electronically; however, if they are distributed electronically, a paper copy must be made available upon request. Visit the U.S. Department of Labor’s Affordable Care Act webpage for resources on SBCs, including frequently asked questions (FAQs), templates, instructions and related materials. If there is a material modification to coverage terms that would affect an SBC’s content, the plan or insurer must provide notice of that modification to plan participants at least 60 days before the change is implemented. A material modification is any modification to coverage that an average plan participant would consider to be an important change in the terms of the plan. For example, a material modification could include an enhancement or reduction in covered benefits or services provided.

Health Care Reform (continued from cover)

2012 Items 2012 Form W-2 Reporting The ACA requires employers to report the aggregate cost of applicable employer-sponsored health insurance on employees’ Form W-2s.1 This reporting is only for informational purposes and does not cause pre-tax health care coverage to become taxable. Each CAA that provides health insurance for its employees should modify its payroll system to record the aggregate cost of employer-sponsored health coverage provided to each employee in 2012 and report that cost on the 2012 Form W-2s that will be issued in January 2013. To assist employers in doing so, the IRS has released Notice 2012-9, which specifies three methods for calculating the reportable costs of health care coverage. Employers are not required to use the same method for every plan, but must use the same method for all employees who participate in a particular plan.

Summary of Benefits and Coverage and Uniform Glossary The ACA requires group health plans and health insurers to provide a summary of benefits and coverage (SBC) and a uniform glossary of coverage and medical terms for each plan.2 Coordinate with your insurance carrier (or your plan’s third-party administrator if your plan is self-insured) to prepare and distribute these documents by your CAA’s next open enrollment period; calendar year plans will need to distribute SBCs at the end of 2012. Group health plans that willfully fail to provide SBCs to plan participants can be fined up to $1,000 for each plan participant who does not receive an SBC.

Medical Loss Ratio Rebates The ACA requires health insurers to provide medical loss ratio (MLR) rebates to fully insured health plans if the insurers do not spend required amounts on reimbursing clinical services or on health care quality improvement activities.3 Insurers began sending out the first round of MLR rebates in August. The U.S. Department of Labor has issued Technical Release No. 2011-04, which details how group health plans subject to ERISA4 should handle MLR rebates. Depending on the circumstances, the rebates may be considered “plan assets” under the Employee Retirement Income Security Act of 1974 (ERISA). If the rebates are considered plan assets, the employer must either: (1) use them to pay premiums on behalf of plan participants or issue refunds to participants within three months of receipt; or (2) direct the plan’s insurer to apply them toward payment of future participant premiums or toward benefit enhancements. The IRS has also published Medical Loss Ratio FAQs addressing the potential tax consequences of MLR rebates. Because the rules about MLR rebates are complex, CAAs receiving rebates should consult with a CPA or attorney who is well-versed in those rules about how best to handle the rebates.

Patient-Centered Outcomes Research Trust Fund Fee The ACA imposes a new fee on health insurers and on sponsors of self-insured health plans to finance the Patient-Centered Outcomes Research Trust Fund. The trust fund was established under the ACA to assist the health care community in making informed health decisions by funding research on the effectiveness, benefits, and harms of different treatment options.5 The new fee, which will be imposed for plan years ending on or after October 1, 2012 and before October 1, 2019, is a multiple of “average number of lives covered” under a plan. Until October 1, 2013, the fee is $1 times the “average number of lives Continued on page 8

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Health Care Reform (continued from page 7)

covered,” and for plan years ending on or after October 1, 2013 and before October 1, 2014, the fee is $2 times the “average number of lives covered.” After that point, the fee will be assessed on the basis of national health expenditure data release by the U.S. Department of Health and Human Services. The fees are collected like a tax, and must be reported on IRS Form 720. If your CAA’s health plan is not self-insured, your insurance carrier will most likely build the fee into the premiums it charges. However, if your CAA sponsors a self-insured plan, your CAA will need to determine which method to use in calculating the average number of lives covered. Proposed U.S. Department of Treasury regulations detail the different methods for fee calculation. A CAA with a self-insured plan should consult with a CPA or attorney who fully understands these rules in order to determine which method to use in calculating the fee.

Written Notice Regarding Exchanges, Tax Credits, and Contributions As of March 1, 2013, employers must provide their employees with a notice containing certain information about the relevant health insurance exchange. These statebased insurance exchanges, which will become operational by 2014, will be competitive, consumer-centered health insurance marketplaces for consumers to compare and buy insurance. They will offer a wide range of customer assistance tools – including information about prices, quality, and physician and hospital networks. Plans offered in the exchanges will be required to provide at least a basic level of comprehensive benefits. Individuals and small employers (with fewer than 100 employees) will be eligible to purchase health insurance through the exchanges starting in 2014. Starting in 2017, states may permit large employers to purchase insurance through their exchanges. This notice must be provided in accordance with U.S. Department of Labor regulations, which have not yet been issued. CAAs should stay tuned for those regulations.

2013 Items

2014 Items

Medical Flexible Spending Accounts (FSAs)

Automatic Enrollment in Health Coverage

The ACA sets a $2,500 limit on employee salary reduction contributions to medical flexible spending accounts (FSAs).6 Earlier this year, the IRS published Notice 2012-40, which provides guidance on this new limit, including the following:

The health care reform law requires employers with 200 or more full-time equivalent employees (based on a 30hour work week) that sponsor one or more health plans to automatically enroll new full-time employees in a health plan. In addition, employees must be given adequate notice of this automatic enrollment process and an opportunity to opt out.7

• The $2,500 limit applies for plan years beginning on

or after January 1, 2013 and will be indexed for costof-living adjustments for plan years beginning after December 31, 2013.

As long as plans apply the new limit for plan years beginning on or after January 1, 2013, their plan documents may be amended to reflect the new limit at any time before December 31, 2014.

• If a plan provides a grace period (of up to two

months and 15 days after the end of a plan year) during which employees may incur and submit expenses for reimbursement, unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for a particular plan year will not count against the $2,500 limit for the next plan year.

• Individuals employed by more than one employer

may contribute up to $2,500 per year to each employer’s health FSA, as long as the employers are not members of the same controlled group.

The ACA does not specify when the automatic enrollment provision becomes effective, and the U.S. Department of Labor has indicated that employers are not required to institute automatic enrollment until it issues regulations on that topic.8

Employer “Play or Pay” Mandate Beginning in 2014, the employer “play or pay mandate” will become effective. Employers with 50 or more full-time equivalent employees will be required to “play” – that is, to provide affordable coverage meeting minimum standards of coverage and affordability – or pay a penalty to the Internal Revenue Service. The penalty is the lesser of: (1) $3,000 a year for each full-time employee who purchases insurance through a state exchange and receives a tax credit or costsharing reduction, or (2) $2,000 a year for each full-time employee, excluding the first 30 full-time employees. The IRS recently issued Notice 2012-58, which offers employers options for determining which employees, such as variable hour or seasonable employees, are FTEs and how employers may qualify for a safe harbor alternative. The cost of providing health insurance to employees is an allowable cost under the federal cost principle circulars and may be charged to a CAA’s federal grants.9 There is currently

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The U.S. Department of Treasury recently issued Notice 2012-59, which is substantially similar to guidance issued by the U.S. Departments of Labor and Health and Human Services relating to the 90-day limit on waiting periods for employer-provided health coverage. Using examples, the notice explains how an employer can comply with the 90day waiting period limitation, particularly with respect to employees who work less predictable schedules.

Prohibition on Pre-Existing Condition Exclusions For plan years beginning on or after January 1, 2014, group health plans may not exclude anyone with pre-existing health condition from coverage. Currently, this prohibition only applies to individuals under age 19 with a pre-existing condition. no guidance as to whether the penalty payments would be considered allowable costs under the circulars. However, the Supreme Court’s decision holding the individual mandate to be a tax provides a strong argument that the employer mandate payments should be considered taxes10 – which are allowable costs under the circulars11 – rather than penalties – which are not.12

Nondiscrimination Requirements The ACA prohibits non-grandfathered, fully-insured plans from discriminating in favor of highly compensated individuals (HCIs) relating to plan eligibility and benefits.13 Non-grandfathered plans are plans adopted after March 23, 2010 (the date the ACA was enacted) or plans that implemented certain modifications after the law was enacted. For purposes of these nondiscrimination requirements, HCIs are defined as: (1) an individual who is among the highestpaid 25 percent of employees participating in the health plan; (2) one of the highest paid officers in the organization; and (3) a shareholder who owns more than 10 percent of the value of the employer’s stock. Under rules in effect prior to enactment of the ACA, all self-insured plans, whether grandfathered or not, are prohibited from discriminating in favor of highly compensated individuals. CAAs with non-grandfathered or self-insured plans should ensure that those plans do not discriminate in favor of HCIs. In all likelihood, this will require “testing,” a series of calculations performed on demographical employee data provided by the employer. Third-party administrators, CPA firms and other employee benefits consultants often provide testing services.

Elimination of Annual Limits on Health Coverage Starting with plan years beginning on or after January 1, 2014, plans will no longer be allowed to impose annual limits on the dollar value of health benefits provided under the plan. For plan years beginning on or after September 23, 2011 but before September 23, 2012, annual limits on coverage may not be less than $1.25 million. For plan years beginning on or after on or after September 23, 2012 but before January 1, 2014, those limits may not be less than $2 million.

Limitations on Cost-Sharing The ACA limits the amount of cost-sharing allowed in nongrandfathered health plans. (Cost-sharing means amounts plan participants are required to pay – in the form of deductibles, co-pays, and co-insurance, for example – in order to receive benefits under a plan.) After 2014, costsharing limits on non-grandfathered plans will increase by a specific premium adjustment percentage instead of simply being adjusted for inflation as they are now.

Additional Employer Reporting Requirements For calendar years starting with 2014, employers that sponsor self-insured plans must file an annual return with the IRS certifying whether their full-time equivalent employees had the opportunity to obtain minimum essential coverage. These employers will also need to report other information about the health insurance coverage they provide and to provide related statements to their employees. The first of these reports will need to be filed in 2015. In the case of fully insured plans, health insurance issuers will bbe responsible for these reports.

Prohibition on Excessive Waiting Periods For plan years beginning on or after January 1, 2014, the ACA provides that waiting periods for employer-provided health coverage may not be longer than 90 days.14 This requirement applies to full- and part-time employees and their dependents who are eligible for coverage under an employer’s plan.

Continued on page 12

CAPLAW Update Newsletter, Fall 2012 | 9

group, or men over women. Studies have generally shown that employers’ use of criminal background information disproportionately and unintentionally purges otherwise qualified African-American, Latino, and male candidates from the applicant pool. In specific cases, the EEOC uses simple statistical tests to figure out if the selection rates for the minority group, compared to other groups, could have occurred by chance. In many cases, these statistical tests can help employers show that their criminal background screening does not, in fact, have an adverse impact on any protected group. If, however, these tests show statistically significantly adverse impact in the selection rates of the minority and non-minority groups, Title VII requires the employer to demonstrate that the criterion is “job related and consistent with a business necessity.” Whether a criminal record criterion is “job related and consistent with a business necessary” involves consideration of several factors:

• The nature and gravity of the offense or conduct;

Background Checks (continued from cover)

steal and misuse it for personal gain. Likewise, positions involving even limited driving create substantial liability risks for employers and their insurance carriers. As a result, employers from both the nonprofit and for-profit sectors have used criminal background information to screen out candidates who, because of their past criminal conduct, may expose others to any increased risk harm in their performance of certain jobs. In April 2012, the EEOC clarified the impermissible and permissible use of criminal background information in employment decisions, cautioning against the use of automatic, blanket disqualifications based on a candidate’s criminal history.1 Since the EEOC’s release of this enforcement guidance, CAAs have become understandably concerned that their compliance with state and/or federal criminal background check laws, their state’s licensure requirements, and their own internal safety policies could constitute unlawful discrimination and land them in trouble with the EEOC. This article will explore the risks of overbroad criminal background exclusions, as well as the remedy of “targeted screening” and “individualized assessments.” When done properly, CAAs can balance their objective of full equal employment opportunity compliance with the overarching necessity of avoiding harm to the populations they serve.

EEO Risks of Automatic Disqualifications By now, most everyone knows that Title VII prohibits employers from intentionally discriminating against employees because of their race, gender, ethnicity, religion, etc. Title VII, however, also prohibits employers from using a test or hiring criterion (e.g., no felonies, good credit) that disproportionately screens out any racial or ethnic 10 | CAPLAW Update Newsletter, Fall 2012

• The time that has passed since the offense, conduct and/or completion of the sentence; and

• The nature of the job held or sought. In many cases, analysis of these factors will help the employer show that the criminal background criterion is “job related and consistent with a business necessity.” For example, as the EEOC Guidance recognizes, federal law excludes applicants with specified crimes over the past 10 years from working as an airport screener, with equivalent requirements for federal law enforcement officers, child care workers in federal agencies or facilities, bank employees and port workers, among numerous others. In these situations, employers must comply with these federal criminal background check requirements. Likewise, though the EEOC claims that that Title VII “preempts” (or trumps) conflicting state laws, its recent enforcement guidance suggests that the EEOC will defer to state childcare certification standards so long as the state’s standards are narrowly tailored to be job related and the employer’s screening practices are not more restrictive than these standards require.

The Remedy of Targeted Exclusions and Individual Assessments Although the EEOC strongly disfavors automatic disqualifications, it allows employers to establish “targeted exclusions” for particular positions regarding specified criminal conduct within a defined time period. For example, the Head Start Act2 and regulations3 require grantees or delegate agencies to conduct a criminal record check prior to employment and to compel current and prospective employees to sign a declaration disclosing (a) all pending and prior criminal arrests and charges related to child sexual abuse, (b) all convictions related to other forms of child abuse and neglect; and (c) all convictions for violent felonies.4 Although the Head Start regulations also require employers to assess the relevancy of an arrest, a pending

criminal charge or a conviction, the initial information gathered closely resembles a lawful “targeted exclusion” given its focus on avoiding a specific harm posed by the job duties themselves: child sexual abuse, child abuse and neglect, and violent crime. As the Head Start example shows, numerous federal and state laws require CAAs to perform criminal background checks for certain positions. Nevertheless, “targeted exclusions” need not derive from federal or state law in order to be “job related and consistent with a business necessity.” On the contrary, so long as the CAA narrowly tailors the “targeted exclusion” to specific positions to avoid foreseeable harm, the targeted exclusion stands on reasonably safe ground. For example, residential plumbers, “cable guys” and weatherization technicians enter people’s homes to perform their work. This access alone creates numerous risks associated with hiring someone with certain criminal propensities into this position—e.g., burglary, rape, even identity theft. For that reason, a CAA could reasonably develop a narrowly tailored criminal background screen to weed out applicants whose criminal convictions strongly suggest any increased opportunity for recidivism while on the job and by extension, any increased risk of harm to others. Likewise, CAAs with elderly clients could develop a targeted screen for criminal convictions related to theft, violence, and fraud, in light of the opportunity to harm posed by the job duties themselves and the serious consequences to a vulnerable population. By contrast, if a CAA automatically disqualifies every applicant with any type of drug conviction for all positions (even the janitor), the EEOC will likely find that this exclusion is substantially overbroad and is not “job related and consistent with a business necessity.” Even with a valid “targeted exclusion,” however, the EEOC’s guidance requires an “individualized assessment” of the relevancy of the arrest, pending charge or conviction. The EEOC also encourages employers to evaluate the:

• the facts or circumstances surrounding the offense or conduct;

• the number of offenses for which the individual was convicted;

• age at the time of conviction, or release from prison; • evidence that the individual performed the same type of work, post-conviction, with the same or a different employer, with no known incidents of criminal conduct;

• the length and consistency of employment history before and after the offense or conduct;

• rehabilitation efforts, e.g., education/training; • employment or character references and any other information regarding fitness for the particular position; and.

• whether the individual is bonded under a federal, state, or local bonding program.

In the end, CAAs must place safety first, especially given the risks to the populations they serve and the magnitude of the organization’s liability if a recidivist perpetrates a crime on the job. Although the EEOC’s new guidance cautions employers to avoid overbroad reliance on criminal background information to screen out otherwise qualified applicants, the nature of CAAs work presents a mighty strong case for validating targeted screens. Nevertheless, even with the EEOC’s new enforcement guidance, CAAs will continue to make tough decisions regarding particular applicants. And when decisions get tough, the best defense is always good documentation demonstrating a thoughtful, deliberative hiring decision. (See end notes on page 13)

Position/ Job Duties:

Access: What access would the employee have to: money; confidential information of employees or third parties that could be used in identity theft; or vulnerable populations like young children or the severe elderly? Opportunity: What opportunities to offend or re-offend would the job duties themselves pose? Would the employee enter people’s homes? How much supervision would be provided in the position? Risk: What is the worst thing an employee could do to others in this position?

Nature: What logical nexus does the criminal criminal convictions: conviction have to the risk you’re trying to avoid? For example, a conviction for embezzlement bears a direct relationship to the risk of financial theft associated with accounting, payroll, and fundraising positions, whereas a conviction for vandalism long ago has no direct bearing on that kind of job.

Evidence of Rehabilitation: How long ago did the most recent conviction occur? How old was the applicant when the crime occurred? Has the applicant been involved in a treatment or rehabilitation program? What is the applicant’s track record since the conviction? CAPLAW Update Newsletter, Fall 2012 | 11

Head Start Disallowance

Health Care Reform

raised additional questions about the allowability of the $19,000 charged to Head Start funds. BCHS’s explanation of the contract suggested that only a portion of the amount was paid to the contractor for management of the building; the balance was repayment of a loan the contractor had made to BCHS. Therefore, the DAB found, the $19,000 charged to the Head Start grant for the building management contract substantially exceeded the value of the services BCHS received and may have been unallowable under the federal cost principles, which require a cost be reasonable for the performance of the grant.12 A cost is “reasonable” if “it does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the costs.”13

Wellness Programs

(continued from page 5)

The DAB cited as further evidence of BCHS’s failure to comply with the open competition requirement in this procurement transaction that the real estate development company in question was owned by BCHS’s attorney and board member. By contracting with a company managed by its own attorney without open competition, BCHS failed to also comply with the HHS uniform grants administrative requirement that a grant recipient “shall be alert to organizational conflicts of interest as well as noncompetitive practices among contractors that may restrict or eliminate competition or otherwise restrain trade.”14 Lastly, the DAB dismissed BCHS’s argument that the competition requirement15 in the HHS uniform grants administrative requirements did not apply because of amount of money at issue was small. The DAB explained that there is no threshold restriction in the HHS uniform administrative requirements and that the requirement applies to all procurement transactions, regardless of amount.

Lessons Learned • CAAs should be careful when determining that

competition is not necessary for a procurement, even for what they may consider to be a relatively small sum of money. To the “maximum extent practical” is not the same as when it is convenient or financially advantageous.

• CAAs must constantly be alert to staff or

organizational conflicts of interests in their procurement processes and they must not elevate their own organization’s financial interest above the federal requirement for open competition.

• CAAs should understand that all costs, including

seemingly minor ones like interest on an unpaid credit card account, must be regularly reviewed to determine if they may be paid for using federal grant funds.

(See end notes on page 13) 12 | CAPLAW Update Newsletter, Fall 2012

(continued from page 9)

Starting in 2014, employers will be able to offer discounts of up to 30 percent of the cost of individual or family health care premiums for employees who participate in a wellness program or meet certain health targets. The discount could increase to 50 percent if the U.S. Departments of Health and Human Services, Labor and Treasury deem it appropriate. Existing regulations permit employers to give a discount of up to 20 percent.

More Information For more information and updates on regulatory guidance, visit www.healthcare.gov, which contains information for individuals and employers, including an interactive timeline, the full text of the legislation, and an insurance finder tool, which provides a variety of insurance options depending on a person’s state of residence, age and circumstances. The site also includes a useful web page with resources for employers. Other useful federal government sites with resources on compliance with the ACA include: the site of the Center for Consumer Information and Insurance Oversight, which oversees the implementation of ACA provisions related to private health insurance; the Department of Labor’s Affordable Care Act page; and the IRS page on Affordable Care Act Tax Provisions. Find additional health care resources on CAPLAW’s website. (See end notes on page 13)

Article End Notes After Health Care Reform Upheld, What’s Next for CAAs? 1. Patient Protection and Affordable Care Act (ACA), P.L. 111148, Section 9002 (amending 26 U.S.C. § 6051(a)(14)). 2. ACA, Section 2715(d)(4) (amending 42 U.S.C. § 300gg-15). 3. ACA, Section 2718 (amending 42 U.S.C. § 300gg-18). 4. Group health plans subject to ERISA are those sponsored by entities other than state or local governments or churches. 5. ACA, Section 937 (amending 42 U.S.C. § 299b-37).

2. 42 U.S.C. § 9843a(g)(3) 3. 45 C.F.R. § 1301.31(b)(2) –(3) 4. Id.

NLRB Focuses on Workplace Practices 1. 353 NLRB 93 (July 30, 2012). 2. 358 NLRB 106 (September 7, 2012).

Lack of Competition and Credit Card Interest Payments Result in Head Start Disallowances

6. ACA, Section 9005 (amending 26 U.S.C. § 125).

1. Beaver County Head Start, Decision No. 2441, February 14, 2012

7. ACA, Section 1511 (amending Fair Labor Standards Act (FLSA), 29 U.S.C. § 218a).

2. 45 C.F.R. § 74.43.

8. See U.S. Department of Labor FAQs About Affordable Care ACA Implementation Part V and Mental Health Parity Implementation. 9. See 2 CFR Part 230, App. B, ¶ 8.g.(2) (OMB Circular A-122, which applies to nonprofits) and 2 CFR Part 225, App. B, ¶ 8.d.(5) (OMB Circular A-87, which applies to state, local and tribal governments). 10. See National Federation of Independent Business v. Sibelius, 567 U.S. __, 132 S. Ct. 2566, 2595 – 98 (2012). 11. See 2 C.F.R. Part 230, ¶47a; see also 2 C.F.R. Part 225, App. B, ¶40. 12. See 2 C.F.R. Part 230, App. B, ¶16. See similar provision in 2 C.F.R. Part 225, App. B, ¶16. 13. ACA Section 2716 (stating group health plans shall satisfy the requirements of section 105(h)(2) of the Internal Revenue Code). The Obama Administration estimates that the majority of group health plans will be non-grandfathered by 2014. 14. ACA, Section 2708 (amending 42 U.S.C. § 300gg-7).

3. 45 C.F.R. § 74.43. 4. 45 C.F.R. § 1301.10(a). 5. 45 C.F.R. § 74.62(a)(2). 6. 2 C.F.R. Part 230, App. B, ¶ 23. (OMB Circular A-122). 7. 45 C.F.R. § 74.27. 8. 45 C.F.R. § 74.43. 9. 45 C.F.R. § 74.43. 10. Value Behavioral Health, Inc. v. Ohio Dept. of Mental Health, 966 F. Supp. 557, at 569 (S.D. Ohio 1997). 11. 45 C.F.R. § 74.43. 12. 2 C.F.R. Part 230, App. A ¶ A.2. 13. 2 C.F.R. Part 230, App. A ¶ A.3. 14. 45 C.F.R. § 74.43. 15. 45 C.F.R. § 74.43.

Safely Using Criminal Background Information 1. Enforement guidance on the consideration of arrest and conviction records in employment decisions under Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C § 2000e et seq., No. 915.002, 4/25/12.

CAPLAW Update Newsletter, Fall 2012 | 13