Legislative and Regulatory Update
This information was prepared by RIC Technical Services.
July 19, 2016
2016-091
Recent Guidance on Sex Discrimination Should Prompt All
Employers to Review Terms of Health Plans Regarding
Gender Transition Benefits
by Ben Lupin and Rich Gisonny
Summary
On June 14, 2016, the Office of Federal Contract Compliance Programs (OFCCP) released a final
regulation that sets forth the requirements that covered federal contractors must meet under the
provisions of Executive Order (EO) 11246, which prohibits sex discrimination in employment. The OFCCP
rules were issued in the wake of similar guidance recently released implementing Section 1557 of the
Affordable Care Act (ACA), which is directly applicable to covered entities (entities that receive certain
federal financial assistance (FFA)).
While these nondiscrimination rules are not directly relevant to employers who are not federal contractors
nor receiving FFA, all employers need to be aware of the Equal Employment Opportunity Commission’s
(EEOC) position on discrimination with respect to transgender individuals under Title VII of the Civil
Rights Act of 1964 (Title VII), which applies to all private employers, state and local governments, and
educational institutions with 15 or more employees. It appears that the EEOC’s position is that Title VII
protects individuals from discrimination based on transgender status or gender identity.
One noteworthy question is the extent to which employers (whether Section 1557 covered entities,
federal contractors or otherwise) are required to provide health coverage for transgender surgery and
other expenses related to gender transition. What seems to be clear with respect to all three sets of rules
is that “categorical exclusions” in health coverage based on gender identity or transgender status are
prohibited. In contrast, health plan exclusions for a particular service that apply broadly to all participants,
but which may impact employees in the midst of a gender transition or based on their transgender status
may be permissible, as long as the employer can present a legitimate, nondiscriminatory basis or reason
for the exclusion. While the compliance requirements related to these various sets of rules continue to
evolve and, on some issues, are in need of further regulatory clarification, this Update reviews the impact
of these rules on employer-sponsored group health plans based on current guidance.
Key Action Items
(1) Employers should determine which one (or more) of these nondiscrimination rules are directly
applicable to them. While many employers may determine that they are not directly subject to the
Section 1557 rules nor the OFCCP rules, all private and public entities with more than 15
employees will be subject to Title VII.
(2) All self-insured group health plan sponsors (whether federal contractors, covered entities under
Section 1557 and/or employers covered by Title VII) should review their health plans to determine
if the plans categorically exclude or otherwise contain plan terms that may discriminate against
transgender employees. The plan sponsor should then review the terms with legal counsel to
determine if any plan changes are required and should also continue to monitor any additional
guidance and developing case law on the issue. Please note that for fully insured health plans,
the insurance carriers are covered entities directly subject to the Section 1557 rules and the plan
could be subject to additional requirements (e.g., relevant mandates under state insurance law).
Timing
The final OFCCP rule becomes effective on August 15, 2016. However, the OFCCP recognizes in the
preamble to the final rule and the accompanying FAQs that there has been some uncertainty among
federal contractors who may not have understood the nondiscrimination obligation under existing
guidance. The OFCCP states that some federal contractors may now need to update their benefit plans in
light of the guidance provided in the final rule, but some plan changes may be difficult to implement
immediately. To allow time to come in to compliance, the OFCCP will consider, for example, “good faith
progress” to take steps to change benefits policies and practices in this area in analyzing whether any
enforcement action is appropriate (particularly in the period immediately following the final rule’s effective
date).
The ACA Section 1557 regulations are generally effective July 18, 2016. However, to the extent the
regulations require changes to health insurance or group health plan benefit design, the applicability date
is the first day of the first plan year beginning on or after January 1, 2017.
The sex discrimination prohibitions in Title VII are currently in effect and the EEOC has not announced a
grace period for employers to bring their health plans into compliance. Therefore, an employer could be
subject to an EEOC investigation now, making it important to review any changes with legal counsel as
soon as possible. In fact, transgender discrimination under Title VII is identified as a priority in the
EEOC’s current Strategic Enforcement Plan.
Background
EO 11246 prohibits federal contractors and subcontractors from discriminating against employees and
applicants because of their race, color, religion, sex, sexual orientation, gender identity or national origin.
The final OFCCP rule addresses a variety of sex–based barriers to equal employment and fair pay,
including gender identity discrimination. Along with the final regulations, which include helpful examples,
the OFCCP released a fact sheet and set of FAQs. The rules also include a “best practices” checklist as
an appendix to assist federal contractors with their compliance efforts.
The final OFCCP rule applies to a broad range of business activities including, but not limited to, any
employer that (a) holds a single federal contract, subcontract, or federally assisted construction contract or
subcontract in excess of $10,000 or (b) holds federal contracts or subcontracts that have a combined total
in excess of $10,000 in any 12-month period.
The final rule protects all employees of covered federal contractors. In other words, it is not necessary that
employees work on a federal contract to be protected by EO 11246; they only need to work for a company
that holds a covered federal contract or subcontract. This means that EO 11246 applies to all employees
of a company that has any covered federal contracts (whether being a federal contractor is the company’s
core business or not).
Final OFCCP Rules Impact on Group Health Plans
According to the OFCCP final rule, federal contractors are generally responsible for ensuring that all fringebenefit programs, including health insurance plans, offered to their employees do not discriminate on any
of the protected bases set forth in EO 11246. If a contractor wishes to deny or limit fringe benefits to
certain employees, that decision must be based on the nondiscriminatory application of neutral criteria.
Under no circumstances, however, may the cost of providing a benefit based on an individual’s gender be
used as a reason for providing unequal benefits.
Covered federal contractors must therefore ensure that their group health plans provide services to all
participants in a manner that does not discriminate on the basis of sex – including gender identity or
transgender status.
 Equal Benefits. The OFCCP rule states that federal contractors must provide equal benefits to
male, female and transgender employees participating in “fringe-benefit” plans. This prohibition of
discrimination based on sex applies broadly to all types of fringe benefits, including medical,
hospital, accident, life insurance, retirement benefits, profit-sharing and bonus plans, leave, and
other terms, conditions and privileges of employment.
 Gender Identity Protections. The final rule clarifies that the prohibition against discrimination on
the basis of sex includes discrimination based on an employee’s gender identity. In addition to the
focus in the rules on employment-based issues (e.g., which restroom an employee must be
permitted to use), the nondiscrimination requirements of EO 11246 obligate contractors to ensure
that health coverage must be made available on the same terms for all individuals for whom the
services are medically appropriate, regardless of sex assigned at birth, gender identity or recorded
gender. Among the other relevant provisions in the final rule:
o Contractors may deny or limit coverage only if it is based on the nondiscriminatory
application of neutral criteria, for example, where a service is not medically necessary, a
qualified health care provider is unavailable, or inadequate medical documentation has
been provided.
o In evaluating whether the denial of coverage of a particular gender transition service is
discriminatory, OFCCP will apply the same basic principles of law as it does with other
terms and benefits of employment (e.g., inquiring whether there is a legitimate,
nondiscriminatory reason for such denial or limitation that is not a pretext for
discrimination).
o If a covered federal contractor generally provides coverage for a particular treatment or
service (e.g., hormone replacement or mental health care, where it is medically
necessary), the contractor cannot decline to provide coverage for that same treatment
when it is deemed medically necessary for a transgender individual because the treatment
is related to his or her gender identity or transgender status. As another example, where
an individual could benefit medically from treatment for ovarian cancer, a contractor may
not deny coverage based on the individual's identification as a transgender male.
o The preamble to the rule notes that an explicit, categorical exclusion of coverage for all
care related to gender dysphoria or gender transition is facially discriminatory,
because such an exclusion singles out services and treatments for individuals on the basis
of their gender identity or transgender status.
ACA Section 1557
Prior to the issuance of the OFCCP rule, the Office of Civil Rights (OCR) of the Department of Health and
Human Services (HHS) issued final regulations implementing ACA Section 1557. This provision prohibits
covered entities from discriminating on the basis of race, color, national origin, sex, age or disability in
health programs and activities receiving federal financial assistance (FFA). Generally, “covered entities”
subject to the Section 1557 rule are health programs and activities that at least in part receive FFA, as well
as insurers participating in a state exchange or federally facilitated exchange and any health program
funded by HHS. For more information on the final Section 1557 rules, please see LRU 2016-065.
For employers determining whether they are a covered entity under the Section 1557 rules, there is an
open issue as to what constitutes “FFA” under those rules. In the final regulation, OCR defines FFA to
include:
“Federal financial assistance the Department provides or otherwise makes available includes
Federal financial assistance that the Department plays a role in providing or administering,
including all tax credits under Title I of the ACA, as well as payments, subsidies, or other funds
extended by the Department to any entity providing health-related insurance coverage for payment
to or on behalf of an individual obtaining health-related insurance coverage from that entity or
extended by the Department directly to such individual for payment to any entity providing healthrelated insurance coverage.”
In addition to the definition contained in the final regulation for FFA, the OCR has further defined the term
“FFA” through a FAQ on its website. That definition states that FFA for purposes of civil rights complaints
handled by OCR include: (i) health care providers participating in CHIP and Medicaid programs, (ii)
hospitals and nursing homes (recipients under Medicare Part A), (iii) Medicare Advantage plans (e.g.,
HMOs and PPOs) (recipients under Medicare Part C), (iv) Prescription Drug Plan sponsors and Medicare
Advantage drug plans (recipients under Medicare Part D), (v) human or social service agencies, and (vi)
insurers who are participating in the Marketplaces and receiving premium tax credits. So, for example, it is
clear that a hospital who is sponsoring a group health plan for its employees and is receiving payments
from Medicare is considered to be receiving FFA and will therefore be a covered entity under Section
1557.
However, it is uncertain whether an employer sponsoring a group health plan becomes a “covered entity”
under Section 1557 merely because the employer receives certain payments from the federal government
that are used to defray the employer’s cost of providing a specific benefit under a plan. For example,
further clarification is needed on whether an employer sponsoring a retiree health plan that includes
prescription drug coverage where the employer receives the retiree drug subsidy (RDS) becomes a
“covered entity” for Section 1557 purposes merely because the employer receives the retiree RDS as an
incentive to continue to provide prescription drug benefits to Medicare-eligible retirees. While such an
employer is clearly receiving payments from HHS, it is unclear whether this category of payment would be
considered FFA under the terms of the Section 1557 rule because the group health plan is not receiving
any payments. The issue is raised in a footnote to the final regulation that reads as follows:
“…with regard to the liability of the legal entity that an employer creates to administer its employee
health benefit plan, i.e., a group health plan, we proposed to analyze questions related to the
application of Section 1557 on a case-by-case basis consistent with longstanding principles of
nondiscrimination law. We will ask, for example, whether the group health plan itself receives
Federal financial assistance, such as through receipt of Medicare Part D payments. If it does not,
we will evaluate the group health plan's relationship with the employer in assessing whether
Section 1557 applies to the group health plan. We noted that a group health plan may be a
covered entity under this rule if the group health plan receives Federal financial assistance, as it
operates a health program or activity by virtue of its provision or administration of the employee
health benefit program“.
Furthermore, even if receipt of the RDS would cause the employer to be considered a covered entity,
further clarification is needed to determine if the Section 1557 rules apply only to the prescription drug
coverage to which the RDS relates, or to the entire retiree health plan, or to all group health plans
sponsored by the employer receiving RDS.
Third party administrators (TPAs) of self-insured health plans are not categorically exempt from the scope
of the requirements imposed under Section 1557. However, understanding that TPAs often do not have
any responsibility for, or control over, self-insured health plan designs, OCR states in the preamble to the
final rule that it has adopted procedures for its processing of complaints against TPAs. Specifically, when
reviewing a discrimination complaint brought against a TPA, OCR will determine whether responsibility for
the decision or other action alleged to be discriminatory rests with the employer plan sponsor or with the
TPA. If the discriminatory conduct is related to the administration of the plan (e.g., timing of claim
processing), then OCR will process the complaint against the TPA (assuming the TPA is a covered
entity). If, however, the conduct is related to a decision or action by the employer, and if OCR has
jurisdiction over the employer (i.e., the employer, such as a hospital or other health care entity, receives
FFA and thus is a covered entity under Section 1557), then OCR will proceed with an enforcement action
against the employer. If OCR does not have jurisdiction over the employer (as would be the case with most
employers who sponsor self-insured health plans, but who do not receive FFA), OCR has indicated that it
will refer the issue to the EEOC for review as to whether the employer’s action violated Title VII.
Title VII of the Civil Rights Act of 1964
Many employers are neither federal contractors nor “covered entities” under the Section 1557 rules, but are
subject to the requirements of Title VII. Sexual orientation and gender identity are not expressly addressed
as protected categories in Title VII. Nevertheless, the EEOC has expanded its definition of “sex
discrimination” under Title VII to include these classes and there is a growing body of case law supporting
the extension of Title VII protection to transgender individuals. To that end, the EEOC has provided
guidance that intentional discrimination based on transgender status is prohibited.
While this guidance does not specifically address the terms of an employer’s group health plan, it is
important to note that the EEOC appears to be in agreement with OFCCP and OCR that a categorical
exclusion of transgender health coverage is prohibited under Title VII and the EEOC has recently settled a
discrimination case against an employer that categorically excluded transgender benefits. The consent
decree in that matter provided that, as of January 1, 2016, “the employer’s health benefits plan will not
include any partial or categorical exclusion for otherwise medically necessary care based on transgender
status.”
While it appears a categorical exclusion of transgender benefits in group health coverage is prohibited
under Title VII according to the EEOC, in light of the fact that some courts have ruled that Title VII’s sex
discrimination protections do not extend to sexual orientation or gender identity, and since the EEOC hasn’t
issued definitive guidance on its position regarding employer’s obligations in this regard (e.g., the extent to
which group health plans must cover transgender and gender identity services under Title VII’s
requirements beyond a categorical exclusion), it is recommended that all employers review the current
terms of their health plans with legal counsel and determine whether an exclusion or limitation on benefits
that could be used by transgender individuals would be problematic under Title VII.
Recently, the American Civil Liberties Union (ACLU) filed a lawsuit in California federal district court
alleging that a large hospital system violated both Title VII and Section 1557 of the ACA by categorically
excluding gender reassignment benefits in its self-insured health plan, and thus denying a transgender
employee’s coverage for gender reassignment treatment services. This appears to be the first lawsuit filed
in the wake of the final regulations implementing Section 1557 (and the litigation is noteworthy because it
asserts the EEOC’s apparent position on health benefits for transgender employees under Title VII). In
light of the prominence that transgender and gender discrimination issues are receiving nationwide, more
lawsuits are likely to follow.
Regardless of the outcome of these cases, the issue seems likely to come before the U.S. Supreme Court
at some point in the future. It is expected that the outcome will have a major impact on the level of
protection required under Title VII for transgender employees.
What is the Actual Impact on Employer Group Health Plans?
Under the OFCCP rule and the Section 1557 rule, employers cannot categorically exclude medical
services related to gender transition (whether through an explicit exclusion of all transgender-related
services or by labeling all gender transition-related services as “experimental” or
“cosmetic”). Unfortunately, neither HHS nor OFCCP provide a definition of what qualifies as “services
related to gender transition,” although HHS says it intends to interpret the rule broadly to include hormone
therapy, psychotherapy (e.g., for gender dysphoria) and even surgical treatment.
In addition, employers cannot deny or limit benefits (or impose special cost-sharing requirements) for
medically necessary, gender-specific benefits, simply because the covered individual identifies himself or
herself as being of a gender for whom the care would not normally be appropriate, or because of the
gender under which the person is identified on the health plan’s census. For example, the plan may not
provide coverage for medically appropriate testosterone replacement for a male diagnosed with low
testosterone but deny coverage for a transgender employee transitioning to a male who needs
testosterone as a medically necessary part of the transition.
While the current application of these rules (and whether the EEOC will seek to enforce similar standards
as subject to Title VII) is far from clear, the OFCCP and Section 1557 rules also indicate that a health plan
does not have to cover any particular procedure or treatment as long as the treatment is based on “neutral,
nondiscriminatory standards that govern the circumstances in which it will offer coverage to all its enrollees
in a nondiscriminatory manner.” Additional guidance will likely be necessary for employers to confidently
implement changes to the terms of their health plans.
There may also be a concern with limits or exclusions for transgender-related medical expenses for
employers subject to the Mental Health Parity and Addiction Equity Act (MHPAEA) because of the manner
in which that law applies to nonquantitative treatment limitation. Under the MHPAEA, a group health plan
(or health insurance coverage) may not impose nonquantitative treatment limitations for mental health or
substance use disorder benefits in any specified classification unless certain conditions are met. More
specifically, under the terms of a group health plan, any processes, strategies, evidentiary standards, or
other factors used to apply the nonquantitative treatment limitation to mental health or substance use
disorder benefits in the specified classification must be comparable to (and applied no more stringently
than) the processes, strategies, evidentiary standards, or other factors used in applying the limitation to
medical/surgical benefits in the specified classification. As a result, employers are also well-advised to
take compliance with MHPAEA into consideration when making plan design and administration decisions
regarding transgender-related medical services.
An employer sponsoring a group health plan may choose to avoid any allegations of transgender-based
discrimination by adding to or revising the terms of its health coverage for transgender benefits on a
nondiscriminatory basis (and by removing any categorical exclusions applicable to transgender
employees). Many of the major health insurers and TPAs have established medical management
guidelines for transgender services (e.g., in order to qualify for coverage for gender reassignment surgery,
the individual must satisfy the insurer’s/TPA’s protocols for counseling, hormone therapy, etc.).
However, there may be some employers that will not want to cover gender transition services or
transgender benefits under their health plans (possibly due to the uncertainty of whether courts will agree
with a broad interpretation of Title VII’s protection or due to either cost implications or religious or
ideological beliefs). Those employers will need to weigh compliance with the law against the potential
liability associated with regulatory agency enforcement and/or litigation. In addition to the potential legal
obligations, employers would be well-advised to consider both the employee relations and public relations
implications of health plan decisions that will impact transgender employees.
We expect many employers will move toward providing coverage for gender transition-related medical
services in their self-insured group health plans, subject to medical management protocols that should help
mitigate the cost impact to the plan. Many TPAs and insurers are already suggesting that plans add this
coverage for 2017. In addition, TPAs and insurers may begin asking for written assurances from plan
sponsors that their plan design passes nondiscrimination under the Section 1557 regulations and may
even seek indemnification in the event HHS determines there is a discriminatory plan design.
The issue of health coverage for transgender employees is getting more and more interest from both the
government and the courts, and we expect additional guidance will be issued over time. Given the
prominence of this issue, it is strongly suggested that employers discuss their options and obligations with
legal counsel before taking any action.
This update has been prepared for Willis Towers Watson associates. It is for informational purposes only and may not be used or
relied upon as legal advice.
© 2016 Willis Towers Watson. All rights reserved.