Effective for plan years that begin on or after September 23, 2010, annual plan limits are being phased out. The minimum annual limit is $750,000 in the upcoming plan year. The Department of Health and Human Services is taking the position that the restriction on annual limitations applies to Health Reimbursement Arrangements, other than Retiree-only HRAs and HRAs that are integrally tied to another group health plan (e.g., that reimburse only for a deductible, co-payment or other cost sharing in the group health plan, have no carry-over from one year to the next, and do not reimburse for any other, more general, medical expenses).

Because HRAs are not generally designed to reimburse $750,000 in medical expenses per participant, if the HRA is to continue it must apply for a waiver of the annual limit. The waiver application must be filed not less than 30 days before the first day of the year or, for plan years beginning after September 22, 2010 and before November 2, 2010, not less than 10 days before the beginning of the plan year. Therefore, a HRA with an October 1 plan year must file TODAY!

Instructions for the waiver are in the following notice.

http://www.hhs.gov/ociio/regulations/patient/ociio_2010-1_20100903_508.pdf
 

Pursuant to the Patient Protection and Affordable Care Act ("PPACA"), the Internal Revenue Service, the Department of Labor, and the Department of Health and Human Services (the “agencies") recently issued interim final rules for health plans and insurance issuers relating to: (1) preexisting condition exclusions, lifetime and annual limits, rescissions, and patient protections; and (2) claims, appeals, and review procedures.

Preexisting Condition Exclusions. Under the new rules, no group plan or issuer (except grandfathered plans that are individual insurance coverage) may impose a preexisting condition exclusion (including any exclusionary waiting period) for any enrollee under age 19 in plan years beginning on or after September 23, 2010, and any enrollee (regardless of age) in plan years beginning on or after January 1, 2014. The definition of "preexisting condition" includes any denial of coverage based on a preexisting condition (i.e., not just benefits related to the condition). As of the applicable effective date, plans and issuers must provide coverage on a prospective basis for individuals denied coverage based on a preexisting condition, and for benefits related to preexisting conditions that are currently excluded under a health plan. The rules also prohibit any limitation or exclusion based on information related to an individual's health status (e.g., such as a condition identified as result of a pre-enrollment questionnaire or physical examination).

Lifetime and Annual Limits. Effective for plan years beginning on or after September 23, 2010, all group plans and issuers (with the exception of certain account-based health plans and grandfathered plans that are individual insurance coverage) are prohibited from imposing lifetime or annual limits on the dollar value of "essential health benefits" (including at a minimum those benefits listed in PPACA Section 1302(b)). Until further guidance is issued, the agencies will take into account the consistent application of good faith reasonable interpretations of the term "essential health benefits" as applicable to the lifetime and annual limit prohibitions.

In an effort to provide transitional relief, the rules do permit plans and issuers to impose the following "restricted annual limits" ("RALs") in plan years beginning before January 1, 2014:

For plan years beginning on or after --                                Restricted Annual Limit

September 23, 2010 but before September 23, 2011         $ 750,000
September 23, 2011 but before September 23, 2012         $ 1.25 million
September 23, 2012 but before January 1, 2014                 $ 2 million

The rules clarify that the RALs are minimums for plan years beginning before January 1, 2014, so plans or issuers may impose higher limits or no limits. Generally, grandfathered plans that impose new limits or reduce the amount of an annual limit (in existence as of March 23, 2010) will lose grandfather status. Note, a grandfathered plan with an existing lifetime limit (as of March 23, 2010) and no existing annual limit, may impose a new annual limit (subject to the applicable RAL minimum) and retain grandfather status by eliminating the existing lifetime limit.
 

Certain limited benefit plans or policies (i.e., "mini-meds") may be eligible for a waiver program, in cases where annual dollar limits fall below the RAL minimums, and compliance would result in a significant decrease in access to benefits or a significant increase in premiums for enrollees or policyholders. HHS Guidance on the waiver application process is expected to be issued in the near future.

Lifetime Limit Notice. Individuals who have lost coverage because of reaching lifetime limits, and who would otherwise be eligible for coverage, must be given notice that the lifetime limit no longer applies. If such individual is no longer enrolled in the plan or policy, he or she must be given notice of the opportunity to enroll (during a special 30-day enrollment period) no later than the first day of the first plan year beginning on or after September 23, 2010. Model language is available at http://www.dol.gov/ebsa/lifetimelimitsmodelnotice.doc .

Rescissions. Effective for plan years beginning on or after September 23, 2010, all group plans are prohibited from rescinding coverage except in the case of fraud or an intentional misrepresentation of material fact. If such rescission is permitted, plans and issuers must provide participants with 30 days notice prior to the date coverage is rescinded. The term "rescission" means any cancellation or discontinuance of coverage that has retroactive effect. Note, retroactive cancellation of coverage due to nonpayment of premiums or contributions does not constitute a "rescission" under the rules.

Patient Protections. For plan years beginning on or after September 23, 2010, all new group plans and issuers that use provider networks must comply with the following rules relating to patient protections:

Choice of Health Care Provider. If an enrollee is required to designate a primary care provider ("PCP") under a plan or policy: (i) the plan or issuer must permit the enrollee to designate any PCP who is available to accept the enrollee; (ii) the plan or issuer must permit a child-enrollee to designate an in-network pediatrician as his or her PCP (if available to accept the child); and (iii) if a plan or issuer covers obstetrics/gynecological care, the plan or issuer must not require preauthorization before an enrollee seeks services from an in-network OB/GYN provider. Notice of changes required by the choice of provider rules must be provided when the plan or issuer provides an enrollee with an SPD or other summary of benefits. Model language is available at http://www.dol.gov/ebsa/patientprotectionmodelnotice.doc.

Coverage of Emergency Services. If a plan or issuer covers emergency care in a hospital, the plan or issuer may not require prior authorization for services even if the health care provider is out of network. In addition, plans must not impose coinsurance rates or copayments for out of network emergency services in excess of the amounts that would have otherwise been required for services provided in network. Out of network providers, however, may bill participants for any remaining balance after the plan or policy pays, provided the plan or policy complies with certain cost-sharing requirements.

Claims, Appeals and Review Procedures. For plan years beginning on or after September 23, 2010, all new plans and issuers must comply with the new rules related to internal claims and appeals and external reviews of adverse benefit determinations, including rescissions of coverage. These new procedural requirements add to the existing claims and appeals procedures currently required under ERISA, and requires that plans or issuers: (1) notify claimants as soon as possible, but no later than 24 hours after receipt of an urgent care claim; (2) provide claimants with any new or additional evidence that arises in connection with the claim; (3) ensure that claims are processed in a manner that avoids any conflict of interest; (4) ensure notices are culturally and linguistically appropriate, and contain certain required information; (5) strictly adhere to the required internal claims and appeals procedural requirements; and (6) continue to provide coverage pending the outcome of an internal appeal. A claimant is deemed to have exhausted administrative remedies if a plan or issuer fails (even if the failure is de minimis) to strictly adhere to the new internal claims and appeals procedural rules, and may immediately pursue external review. All new plans and issuers (applies only to the insurance issuer for insured plans) must comply with either a state or the Federal external review process, whichever is applicable under the rules. In certain cases, claimants may be permitted to simultaneously proceed with both the internal appeals process and expedited external review.

New individual health insurance issuers are subject to all the internal claims and appeals rules that apply to group plans and issuers, and must adhere to three additional standards: (1) decisions on initial eligibility are subject to internal claims and appeals procedures; (2) only one level of review is permitted for determinations of individual health coverage; and (3) all claims and notice records must be maintained and made available upon request for at least 6 years.

Most of the rules discussed above are effective for plan years beginning on or after September 23, 2010. Employers that maintain group health plans, and insurers that maintain group or individual policies, should evaluate and determine the extent to which current plan or policy provisions may need to be updated to comply with the new rules by the applicable effective date.
 

Self-insured group health plans are not subject to the New York State Insurance Department's existing external appeals process for claims denied by insurers. However, a new interim enforcement rule issued by the Employee Benefits Security Administration requires that self-insured plans put external review procedures in place by the first day of the first plan year that begins on or after September 23, 2010 -- January 1st, for health plans with a calendar plan year. These rules (EBSA Technical Release 2010-1) require the group health plan to hire at least three independent review organizations (IROs) to make decisions with respect to the claims when an external appeal is requested.

The rules contain important requirements governing the selection of an IRO and the way the IRO functions. For example, an IRO cannot be hired or compensated based on the likelihood it will agree with the plan's prior decision. In addition, claims must be rotated among the IROs to ensure independence. The contracts with the IRO must contain specific terms detailing the IRO's responsibilities, such as timing and response criteria with respect to standard and expedited external appeals. In conducting the review, the IRO may not give any deference to the group health plan’s prior determination. The entire process, from the date or the request for external review to the final determination, must take no longer than 45 days. An expedited process must be available for decisions that: can seriously jeopardize the life or health of the claimant; would jeopardize the claimant's ability to regain maximum function; or relate to admission or emergency services and the claimant has not been discharged.

The group health plan has responsibilities, too. For example, the plan must quickly evaluate whether the claim is eligible for external review, and provide the documents and information that form the basis for the original denial.

Group health plans must quickly adopt procedures that are compliant with the EBSA Technical Release. IROs are already soliciting this business from self-funded group health plans. Remember, ERISA compels plan administrators to prudently select and monitor its service providers, including IROs. A group health plan sponsor should evaluate and document the qualifications of any IRO it considers hiring, and enter into fully compliant contracts, including business associate agreements, with such providers.
 

One consequence of losing grandfathered plan status in an employment-based group health plan is the requirement that specified preventive services must be covered on a "first dollar" basis. This means that the specified preventive care services may not be subject to a deductible, co-payment, or other cost-sharing requirement. The agencies jointly responsible for enforcing the Patient Protection and Affordable Care Act ("Affordable Care Act") -- the Internal Revenue Service, the U.S. Department of Labor Employee Benefit Security Administration, and the Department of Health and Human Services -- jointly published interim final regulations ("Regulations") relating to the coverage of preventive care services on July 19, 2010. The Regulations apply to new plans and to non-grandfathered group health plans for plan years beginning on or after September 23, 2010 (January 1, 2011, for calendar year plans).  Key aspects of the Regulations are explained below.

Preventive Care Services

The Affordable Care Act requires that group health plans and health insurance issuers provide first dollar coverage for:

• Evidence-based items or services that are highly rated by the U.S. Preventive Services Task Force. The regulations list those recommended items and services as of July 14, 2010. The list details 44 items, including such services as screenings for diabetes, blood pressure, cervical, colorectal and breast cancer, certain sexually transmitted diseases, and many services related to pregnancy and childbirth.
• Immunizations recommended for routine use in children, adolescents and adults by the Centers for Disease Control and prevention, which the regulations define to include such routine childhood vaccines as Measles, Mumps, Rubella, Hepatitis A and B, Tetanus, Diphtheria, Pertussis, and Inactivated Poliovirus, as well as adult immunization for HPV, Meningococcal, Influenza and Zoster, among others.
• Evidence-informed preventive care and screenings for women, infants, children and adolescents that are contained in guidelines supported by the Health Resources and Services Administration.

A complete list of required preventive services and items required under the Regulations is available at http://www.HealthCare.gov/center/regulations/prevention.html. If additional preventive care services and items are added to the list, the Affordable Care Act requires that there be a minimum interval of one year between the date the recommendations are issued and the plan year in which first dollar coverage must be provided. If a preventive service or item is dropped from the list, the plan may drop the coverage, or impose cost-sharing, with 60 days advance notice to the enrollee.

A group health plan or issuer may provide additional preventive care services beyond those contained in the current requirements, with or without cost-sharing, in its discretion.

If the preventive care recommendation or guideline does not specify how, or how often, the service or item is to be delivered, the Regulations permit the health plan or issuer to use reasonable medical management techniques to determine coverage limitations, such as the frequency, method, treatment, or setting in which the recommended preventive service will be available without cost-sharing.

When Preventive Care is Provided with Other Services

The Regulations recognize that many preventive care services are rendered in connection with other services in an office visit, and contain guidance regarding how the "first-dollar" rule applies in those circumstances. The standard rule is, if the preventive service is billed separately, cost-sharing may be imposed with respect to the office visit. In cases where the preventive service is not billed separately (or, in capitation or similar payment situations, there is no separate tracking of the individual encounter data), the following rules apply:

• If the primary purpose for the office visit is the preventive service, no cost-sharing may be imposed for the office visit; and
• If the primary purpose of the visit is not the preventive service, the health plan may impose the applicable cost-sharing requirements to the office visit.

In-Network vs. Out-of-Network Preventive Services

The Regulations specify that a health plan that differentiates between services provided by in-network providers and those available from out-of-network providers is not required to provide coverage for recommended preventive services and items delivered by an out-of-network provider. If such services are delivered by an out-of-network provider, they may be subject to the cost-sharing requirements of the health plan.

The Economic Impact of First Dollar Preventive Services

One of the key considerations employers face regarding whether to maintain grandfather status in a health plan is the cost effect of first-dollar preventive services (see the June, 2010, BS&K Employee Benefit Information Memorandum to determine what plan changes affect grandfather status). The federal Office of Management and Budget has determined that these regulations are economically significant because they are likely to have an annual effect on the economy of $100 million in any one year. For non-grandfathered group health plans, because preventive care expenses that were previously paid out-of-pocket will be covered by group health plans and issuers, the demand for these services will likely increase, and the cost of these services will likely result in higher premiums. Your insurer, insurance broker, or health plan actuary may be able to estimate the actual cost to any particular group health plan.
 

The emergency jobless benefits bill that cleared Congress today does not revive the COBRA subsidy for involuntary terminations. The subsidy expired with respect to terminations after May 31st.
 

During the debate on health care reform, proponents of the legislation stressed that employees who were happy with the health benefits currently provided by their employers would be able to keep them. To that end, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act ("PPACA"), provides that group health plans existing as of March 23, 2010 (the date that PPACA was enacted) are not subject to certain provisions of PPACA. PPACA referred to such plans as "grandfathered plans," and directed that regulations be issued to define what constitutes a grandfathered plan and what changes to such a plan might result in the loss of grandfathered plan status. On June 14, 2010, the Department of the Treasury, the Department of Labor and the Department of Health and Human Services jointly issued interim final regulations regarding grandfathered plan status.  The regulations further define what a grandfathered plan is and what changes to a plan will result in the loss of grandfathered plan status. The regulations are effective for plan years beginning on or after September 23, 2010.

Significance of Grandfathered Plan Status

A grandfathered plan is not subject to a number of the provisions of PPACA, including the preventative care mandate, certain nondiscrimination requirements, mandatory internal and external appeals rules, and restrictions on pre-authorizations for OB/GYN, pediatric and emergency care services. However, grandfathered plans are subject to many of the most significant PPACA requirements, including the tax penalties on employers for failing to provide affordable health coverage, restrictions on annual and lifetime limits, adult children coverage to age 26, limits on waiting periods, and the prohibition on pre-existing condition exclusions.

Definition of Grandfathered Plan

Under PPACA and the regulations, a grandfathered plan is coverage provided under a group health plan in which an individual was enrolled on March 23, 2010. The regulations make clear that the grandfathered plan rules apply separately to each benefit package made available under a group health plan. Thus, if an employer's group health plan offers three different coverage options (e.g., an HMO, a PPO and a high deductible health plan), the grandfathered plan rules apply separately to each coverage option. Thus, the loss of grandfathered plan status for one of the options does not affect the grandfathered plan status of the other two options, even though all three options are components of the same group health plan.

Changes that Will Not Result in Loss of Grandfathered Plan Status

The regulations and their preamble list a number of changes that will not affect a plan's grandfathered status. Most importantly, the enrollment of new employees or new beneficiaries in a plan after March 23, 2010 will not affect a plan's grandfathered status. However, the regulations include anti-abuse rules designed to prevent employers from circumventing the grandfathered plan rules by transferring employees from one plan to another without a bona fide business reason or through a merger, acquisition or similar business transaction (if the principal purpose of the transaction is to cover new employees under a grandfathered plan).

An increase in the premium for a coverage option does not result in the loss of grandfathered plan status, although a decrease in the share of such premium paid by the employer may (see below). In addition, changes made to a plan to comply with Federal or State legal requirements, voluntary changes to comply with the provisions of PPACA, and a change in third party administrators for a self-funded plan generally will not result in the loss of grandfathered plan status.

Changes that Will Result in Loss of Grandfathered Plan Status

The changes listed below will result in an immediate loss of grandfathered plan status. Once grandfathered plan status is lost, it cannot be regained.

New Policy or Contract of Insurance -- Grandfathered plan status will be lost if the employer enters into a new policy or contract of insurance after March 23, 2010. However, the renewal of an existing policy or contract will not result in the loss of grandfathered plan status.

Elimination of Benefits -- The elimination of all or substantially all benefits to diagnose or treat a particular condition will result in loss of grandfathered plan status. For example, a plan that eliminates benefits for cystic fibrosis would no longer be a grandfathered plan, even if the change affects relatively few individuals.

Increase in Co-insurance -- Any increase in a co-insurance requirement (measured from March 23, 2010) will result in loss of grandfathered plan status.

Increase in Deductible or Out-of-Pocket Limit -- An increase in a deductible or out-of-pocket limit will result in the loss of grandfathered plan status, if the total percentage increase (measured from March 23, 2010) exceeds a "maximum percentage increase" (essentially, the medical inflation rate determined under the regulation, plus 15%).

Increase in Co-payments -- An increase in a co-payment amount will result in the loss of grandfathered plan status, if the increase (measured from March 23, 2010) exceeds the greater of $5 (increased by medical inflation) or the maximum percentage increase (as defined above).

Decrease in Employer Contribution Rate -- A decrease in the employer's contribution rate (based upon cost of coverage) for any tier of coverage for any class of similarly situated individuals by more than five percentage points below the contribution rate for the coverage period that includes March 23, 2010 will result in the loss of grandfathered plan status. Essentially, this means that, to maintain grandfathered plan status, an employer must continue to pay the same percentage (subject to the five percentage point allowance) of the total cost of coverage that it was paying on March 23, 2010.

Change in Annual Limits -- The imposition of a new annual limit or a reduction of an existing annual limit will result in the loss of grandfathered plan status.

Notice Requirements

In order to maintain its grandfathered plan status, a group health plan must disclose to participants and beneficiaries that it is being treated as a grandfathered plan. An appropriate notice must be included in any plan materials provided to participants and beneficiaries describing the benefits provided under the plan (e.g., summary plan descriptions, benefit booklets, and open enrollment materials). The regulations provide model language which, if included in the appropriate documents, will be deemed to satisfy the notice requirement.

Recommended Actions

Employers should keep the grandfathered plan rules in mind when considering any changes to their group health plans. While PPACA and the regulations allow certain changes to be made without loss of grandfathered plan status, many changes (particularly changes to a plan's cost sharing provisions) may result in the loss of grandfathered plan status and the application of all of PPACA's requirements. Employers will need to weigh the benefits of maintaining grandfathered plan status against the need or desirability of plan changes that may jeopardize such status. For many employers, the loss of grandfathered plan status may be inevitable. In fact, the Federal government estimates that, by 2013, only 55 percent of all large employer plans and 34 percent of all small employer plans will remain grandfathered.

 

Effective for plan years that begin after September 23, 2010, the recently-enacted health reform legislation ("Health Reform") generally requires group health plans and health issuers that provide dependent coverage for children to continue to make such coverage available to an adult child until the child reaches age 26. Health Reform also modifies the Internal Revenue Code ("Code") to extend the income exclusion for medical care reimbursements under an employer-provided accident or health plan to an employee's eligible children who have not attained age 27 as of the end of the taxable year. In Notice 2010-38 ("Notice"), the Internal Revenue Service ("IRS") provides employers with helpful guidance regarding the federal income tax issues associated with extending medical coverage to an employee's eligible adult children.

Background

The extension of health coverage to adult children until age 26 is among the first provisions to take effect under Health Reform. Plans that operate on a calendar year basis (including self-insured plans and so-called "grandfathered" plans) will be required to make such coverage available effective January 1, 2011. The coverage must be made available regardless of the child's marital status, but (until 2014) generally need not be provided to an adult child who is eligible to enroll for coverage under a group health plan of the child's employer.

Prior to Health Reform, health coverage generally could be extended tax-free to a child of an employee only if the child was the employee's "dependent," as defined under Section 152 of the Code. In many cases, adult children cannot qualify as a dependent under Code Section 152 because they cannot satisfy applicable age, support, residency or other requirements of Code Section 152. As a result, an employer that provided coverage to an adult child generally was required to include the fair market value of the health coverage provided to the child in the employee's income.

As further explained below, the changes to the Code made by Health Reform and the guidance provided in the Notice clarify the circumstances under which adult children may now be eligible for tax-free health coverage, regardless of whether they are considered a dependent of the employee under Code Section 152.
 

Tax-Exemption For Health Care Coverage Provided to Adult Children

The Health Reform legislation amended Section 105(b) of the Code to provide that employer-provided reimbursements for expenses incurred by an employee for the medical care of an employee's child (as defined under Section 152(f)(1)) of the Code) who has not attained age 27 as of the end of the taxable year ("Eligible Adult Child") are excluded from the employee's gross income. For this purpose, the end of the taxable year is the employee's taxable year and employers may assume that an employee's taxable year is the calendar year. Under Code Section 152(f)(1), an employee's child is an individual who is the son, daughter, stepson, or stepdaughter of the employee and includes both a legally-adopted individual of the employee and an individual who is lawfully placed with the employee for legal adoption by the employee. Child also includes an "eligible foster child," defined as an individual who is placed with the employee by an authorized placement agency or by judgment, decree, or other order.

Although the amendment to Code Section 105(b) is clearly a response to the Health Reform extension of coverage to adult children under the age of 26, the provisions are not exact parallels. For example, the exclusion under Section 105(b) of the Code is effective March 30, 2010, while coverage for adult children under age 26 is not required until the first plan year after September 23, 2010. Further, the income exclusion under Code Section 105(b) applies to children who have not attained age 27 as of the end of the taxable year, while the Health Reform extension only requires extended coverage to adult children under the age of 26.

Section 106 of the Code excludes from an employee's gross income coverage under an employer-provided accident or health plan (i.e., the portion, if any, of the health plan premium paid by the employer). The Notice provides that the IRS and Treasury Department intend to amend the regulations under Code Section 106, retroactively to March 30, 2010, to provide that the coverage under an employer provided accident or health plan for an Eligible Adult Child is also excludable from the employee's income.

As a result, on and after March 30, 2010, both coverage under an employer-provided accident or health plan and amounts paid or reimbursed under such a plan for medical care expenses of an Eligible Adult Child are excluded from the employee's gross income.

Cafeteria Plans, FSAs, and HSAs

The Notice clarifies that because coverage for an Eligible Adult Child is excludable from income under Code Sections 105 and 106, such coverage is considered a "qualified benefit" for cafeteria plan purposes, including health flexible spending accounts ("FSA"). Thus, effective March 30, 2010, employees may make pre-tax contributions under an employer's cafeteria plan (including pre-tax contributions to a health FSA) to provide benefits to an Eligible Adult Child.

Employers may also allow employees to make mid-year cafeteria plan election changes for an Eligible Adult Child, even if the child is not otherwise the employee's dependent under Code Section 152. The Notice provides that the IRS and Treasury intend to amend the regulations, retroactive to March 30, 2010, to include change in status events affecting Eligible Adult Children (including becoming newly eligible for coverage or eligible for coverage beyond the date on which the child otherwise would have lost coverage).

The Notice provides that amendments to cafeteria plans that are required to cover Eligible Adult Children may be made by December 31, 2010 (and made retroactive to the first day of the year), even if an employer wishes to permit employees to immediately make pre-tax salary reduction contributions for health benefits under a cafeteria plan (including a health FSA) for Eligible Adult Children. Normally, an amendment may be made to a cafeteria plan on a prospective basis only.

One issue to note for employers is that neither the Health Reform legislation nor the Notice modified the reimbursement rules governing Health Savings Accounts ("HSAs"). Thus, until further guidance is issued, reimbursements from an HSA may not be made on a tax-free basis for medical expenses incurred on behalf of an Eligible Adult Child.
Employer Considerations

Employer Considerations

The Notice provides employers with much needed guidance regarding the tax consequences associated with the Health Reform extension of coverage to adult children under the age of 26. Because the effective date of the tax-exclusion with respect to coverage provided to an Eligible Adult Child is March 30, 2010, employers that wish to extend coverage to adult children prior to the date they are required to do so under Health Reform may do so without creating negative tax consequences for employees.

Medical plans that provide coverage to children will need to be amended to reflect the Health Reform requirements. As indicated in the Notice, amendments will also need to be made to cafeteria plans to permit pre-tax salary reduction contributions with respect to coverage for Eligible Adult Children. Such amendments may be made retroactively (by December 31, 2010), if the employer wishes to allow employees to make such contributions immediately.
 

There is a second bite at the COBRA apple for employees who initially lost group health plan coverage as a result of a reduction in hours of employment during the period beginning September 1, 2008, which is followed by an involuntary termination of employment on or after March 2, 2010. These individuals (and their affected family members) would normally not be eligible for COBRA continuation of coverage because they were not covered by the health plan on the day before the termination of employment. However, the Temporary Extension Act of 2010 extends the availability of COBRA continuation of coverage, and the 65% COBRA subsidy, where there is a reduction in hours (resulting in a loss of coverage) followed by an involuntary termination of employment.

If the employee did not make a COBRA election when eligible as a result of the reduction in hours, or made the election and later dropped coverage, the involuntary termination of employment is treated as a qualifying event. However, the 18 month period of COBRA continuation is considered to have begun at the reduction in hours qualifying event. Therefore, the COBRA subsidy for involuntary terminations is only available for the difference between 18 months and the number of months of COBRA available after the loss of coverage due to reduction in hours.

For example, if a reduction in hours qualifying event occurred on 11/30/2009, COBRA would have begun on 12/1/2009 and would end on 5/31/2011. If that individual had an involuntary termination on 3/9/2010 (with the loss of coverage at the end of the month in which the termination occurred, 3/31/2010), the post-termination COBRA continuation would be offered from 4/1/2010 through 5/31/2011 (18 months – 4 months of reduction-of-hours COBRA = 14 months). Because the entire post-termination COBRA period is less than 15 months, the 65% COBRA subsidy will be available for the entire 14-month period.

The COBRA administrator must provide a notice describing this new right to elect subsidized COBRA to qualified beneficiaries who lost group health plan coverage as a result of reduction in hours on or after 9/1/2008 and who are terminated between 3/2/2009 and 3/31/2009 (proposals in Congress would extend this date to 12/31/2009). The notice must be provided within 60 days following the involuntary termination of employment.
 

This morning, President Obama signed the Temporary Extension Act of 2010 (H.R. 4691) after Senator Jim Bunning of Kentucky agreed to end his filibuster and the Senate voted Tuesday night to pass the measure.

The Act, generally referred to as an extension of unemployment benefits, also extends eligibility for the 65% COBRA subsidy to individuals who have involuntary terminations through March 31, 2010. Eligibility had expired for terminations after February 28, 2010. The law is retroactive, so that persons who were involuntarily terminated on March 1st and 2nd are eligible for the subsidy. No other changes in the terms of the COBRA subsidy were made.

Employers and other health plan sponsors should adjust their COBRA notices to reflect the new March 31, 2010 subsidy eligibility expiration date.
 

A model notice that informs employees of the availability of premium assistance for employer-provided group health plan coverage was published in the Federal Register on February 4, 2010, one year after President Obama signed the Children’s Health Insurance Program Reauthorization Act of 2009 (CHIPRA). Employers who offer group health plan coverage must provide this notice to employees before the beginning of the next plan year, and annually thereafter. CHIPRA’s impact on employer health plans and the notice requirements are described below.

CHIPRA’s Impact on Employer Health Plans

CHIPRA affects employer group health plans in two ways:

• It requires most group health plans to have a special enrollment period when there is a termination of Medicaid or CHIP coverage, or when a child becomes eligible for assistance in the purchase of employment-based coverage. The employee must request coverage within 60 days of the event.
• It allows a State to offer a premium assistance subsidy for qualified employer-sponsored coverage to all targeted low-income children who are eligible for child health assistance under the plan and have access to such coverage. New York and 39 other states have chosen to offer such assistance. Election of the subsidy is voluntary on the part of the child (or the child’s parent). The subsidy amount is the difference between the employee contribution required for enrollment only of the employee, and the amount required for enrollment of the employee and the child in such coverage, less any applicable premium cost-sharing applied under the State child health plan. The premium assistance may be paid either as reimbursement to an employee for out-of-pocket expenditures or directly to the employee’s employer. The employer may opt out of the direct payment with notice to the State.

Notice Requirements

The model notice issued by the Department of Labor is available in modifiable, electronic form on its website, www.dol.gov/ebsa.

Employers must provide the notice, free of charge, to each employee, regardless of enrollment status. The initial copy of the notice must be provided in connection with the annual enrollment period for the first plan year that begins after the date of publication, or May 1, 2010 (if later). For employers that operate health plans on a calendar year basis, the first notice is due in advance of the plan year that begins January 1, 2011. It is also a good idea to include the notice in enrollment materials for new hires. Each year, another copy of the notice must be provided to all employees.

Although the notice must be a separate, prominent document, it may be delivered with the annual enrollment packets or the summary plan description, as long as the delivery of those documents meets the timing requirements described above. No separate mailing is required. Electronic delivery in accordance with the Department of Labor’s electronic disclosure safe harbor is permitted.
 

While there has been significant press coverage of the health care reform bills being considered by Congress, there has not been as much attention given to the impact that this legislation could have on employers. As widely publicized, both the House and Senate passed their own versions of a health care reform bill. The House passed the Affordable Health Care for America Act (H.R. 3962) on November 7, and the Senate passed the Patient Protection and Affordable Care Act (H.R. 3590) on December 24. Both houses promise to act quickly to reconcile these two bills, with the goal of presenting President Obama with a bill for signing early in the year.

The bills differ in many ways, and it is too early to predict which provisions of the bills will survive the conference process, but at this stage, there are a few core concepts employers should understand:
 

Employer Mandate: Commonly referred to as “pay or play,” both bills contain provisions designed to force employers to offer health care coverage to employees. In the House bill, any employer that fails to offer an acceptable health plan must pay a tax of 8% of payroll. (The tax is phased out for smaller employers.) Under the Senate bill, employers are not technically required to provide coverage, but a “free rider penalty” penalizes employers with over 50 employees in certain circumstances. Generally, if an employer does not provide coverage or offers a plan that is considered “unaffordable,” and at least one employee enrolls in an exchange plan instead (explained below) and receives a government subsidy, the employer would pay a penalty of as much as $750 per year for every full-time employee it employs (not just the number of employees who purchase coverage through an exchange and receive a subsidy.)

Individual Mandate: Subject to certain exceptions, individuals will be required to obtain health insurance coverage through their employer or on their own through an exchange, or pay a penalty. Certain low income individuals would receive subsidies to help pay for the costs of premiums and cost-sharing. The amount of the penalty differs between the two bills, with the House bill imposing a potentially larger penalty.

New Rules for Insurance Policies: Both bills specify categories of benefits that must be covered under “qualified” health plans, and impose specific cost-sharing limits, out-of-pocket spending limits, and rules regarding annual and lifetime limits. The House bill would subject all plans, including all employer-sponsored plans, to these requirements, although plans currently offered by employers would be grandfathered for five years. Under the Senate bill, only plans offered through the exchange (explained below) or in the individual or small group market would be subject to most of these requirements. Since the exchange would be open only to individuals and small businesses, plans offered by larger employers would be exempt from most of these rules.

Small Business Tax Credits: Both bills provide tax credits to small businesses that offer health insurance. Businesses with 10 or fewer employees and average taxable wages of $20,000 or less would be eligible for the credits. The credits would be phased out as average compensation increases to $40,000 (House bill) or $50,000 (Senate bill) and the number of employees increases to 25. The amount of the credit differs between the bills.

Health Insurance Exchange: Both bills set up health insurance exchanges to facilitate the purchase of insurance by individuals and small businesses. The exchange would not be an insurer, but would provide access to insurers’ plans. Exchange plans would be required to contain specified features and cover specified benefits. Individuals eligible for employer plans would not be allowed to apply their employer’s contribution toward an exchange plan (i.e., the employee would be responsible for the entire exchange premium), thus deterring individuals from dropping employer coverage for an exchange plan (although the Senate bill would require employers who provide coverage to offer “free choice vouchers” to a small segment of low-income employees to purchase insurance through the exchange.) Certain small businesses would be “exchange-eligible,” meaning the employer could make exchange plans available to employees.

Excise Tax on Certain Employer-Sponsored Plans: This controversial tax on so-called “Cadillac plans” is included only in the Senate bill and would place a 40% tax on employer-provided health insurance plans with an aggregate value of more than $8,500 for individuals and $23,000 for families (with some exceptions), and would be adjusted for inflation. Note that these amounts apply to the full value of the plan, not just the premium. This includes not only the premium of the health plan, but also any dental, vision or supplemental plan, as well as employer contributions to HSA or FSA accounts. Only the value of the plan in excess of the limit would be taxed. The tax would be imposed on the insurer, which in the case of some self-insured plans would be the employer. Opponents of this provision see it as an unfair tax on the middle-class that would drive employers to reduce coverage for their employees. Supporters see it as a tool to reduce the use of excessive health insurance plans that do not improve heath outcomes, but encourage unnecessary health care spending.

Flexible Savings Accounts: Under both bills, FSA contributions would be capped at $2,500 per year. Currently, employers have the discretion to set FSA contribution limits. In addition, employees would no longer be able to use tax-free FSA or HSA funds for non-prescription drugs and medical supplies.

These are just a few highlights of two lengthy, complex bills. All of these provisions are subject to change in the conference process.
 

Starting January 1, 2010, employers and certain other entities that administer group health plans will be required, for the first time, to report on an Internal Revenue Service ("IRS") form certain types of group health plan violations and pay the applicable excise taxes. Violations that must be reported include a failure to satisfy health coverage continuation requirements under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), certain requirements under the Health Insurance Portability and Accountability Act ("HIPAA"), certain mental health benefit parity requirements, childbirth hospital stay requirements, and certain health coverage continuation requirements for seriously ill higher education students. Administrators of group health plans were not required to self-report such violations when they were discovered, and the lack of such self-reporting often resulted in any applicable excise taxes not being paid. The IRS has issued regulations that will require such violations to be self-reported, and will require any applicable excise taxes to be paid in a timely manner.

Steps that should be implemented by employers to comply with these new requirements include:

making sure that employees or other persons who are involved in the administration of each applicable group health plan are informed about these new requirements;

implementing procedures that will help ensure the timely discovery of applicable group health plan violations, the timely submission of the IRS form reporting such violations, and the timely payment of all applicable excise taxes; and

to the extent an employer's group health plan is administered by another entity (e.g., a third party administrator, an insurance company or a health maintenance organization), reviewing any agreement with such entity to see if any changes are needed to help ensure compliance with these new requirements.

 

Taxpayers Required To Comply With These New Requirements

The new self-reporting and excise tax payment requirements for certain group health plan violations generally apply to: (1) employers who sponsor a group health plan that is subject to the requirements described in the following paragraph ("Covered Health Plan"); (2) unions and other employee organizations who sponsor a Covered Health Plan; (3) third party administrators of Covered Health Plans (e.g., a third party administrator of a self-insured Covered Health Plan); and (4) certain other third parties who are responsible for providing benefits under a Covered Health Plan (e.g., insurance companies or health maintenance organizations).

Types of Violations That Are Covered By These New Requirements

Violations that must be reported include a failure to comply with the following requirements:

COBRA Health Coverage Continuation Requirements -- Group health plans that are subject to COBRA are required to comply with certain coverage continuation requirements.

HIPAA Preexisting Condition, Creditable Coverage and Special Enrollment Requirements -- Group health plans that are subject to HIPAA are required to, among other things, comply with limitations on preexisting exclusions, certification of creditable coverage requirements, and special enrollment requirements.

HIPAA Nondiscrimination Requirements Based on Health Status Factors -- Group health plans that are subject to HIPAA are not allowed to discriminate based on a health status factor.

Genetic Information Nondiscrimination Requirement -- The Genetic Information Nondiscrimination Act ("GINA") prohibits, among other things, discrimination based on genetic information.

Mental Health Parity Requirements -- The Mental Health Parity and Addiction Equity Act imposes certain parity requirements between mental health benefits and medical/surgical benefits.

Childbirth Hospital Stay Requirements -- The Newborns' and Mothers' Health Protection Act imposes requirements regarding minimum hospital lengths of stay in connection with childbirth.

Health Coverage Continuation Requirements for Seriously Ill Higher Education Students -- Michelle's Law imposes certain health coverage continuation requirements for dependent university and college students with serious medical conditions.

Comparable Contribution Requirements for Health Savings Accounts and Medical Savings Accounts -- Health savings accounts ("HSAs") and Archer medical savings accounts ("MSAs") are subject to requirements that help ensure that comparable contributions are made for nonhighly compensated employees.

Excise Taxes That Apply To Such Violations

The applicable excise taxes vary depending upon the type of violation involved. An excise tax of $100 a day per affected beneficiary generally applies to a violation of the COBRA health coverage continuation requirements. An excise tax of $100 a day per affected individual generally applies to violations of: (1) HIPAA's preexisting condition, creditable coverage, and special enrollment requirements; (2) HIPAA's nondiscrimination requirements based on health status factors; (3) GINA's genetic information nondiscrimination requirement; (4) the mental health parity requirements; (5) the childbirth hospital stay requirements; and (6) the health coverage continuation requirements for seriously ill higher education students. A violation of the comparable contribution requirements for HSAs and MSAs generally will be subject to an excise tax of 35 percent of the aggregate amount contributed to the HSAs or MSAs for all employees within the applicable calendar year.

IRS Form That Must be Filed If a Violation Occurs

If a violation of one of the requirements described above occurs, the applicable employer generally will be required to report that violation on IRS Form 8928 and will be required to pay the applicable excise taxes. If a COBRA health coverage continuation requirement is involved, the applicable third party administrator or insurer could be responsible for filing Form 8928 and paying the applicable excise taxes. If a violation occurs with respect to a multiemployer plan, the plan will be responsible for filing Form 8928 and paying the applicable excise taxes.

Deadline For Filing the Required IRS Form and Paying the Applicable Excise Taxes

For all violations described above other than a violation of the comparable contribution requirements for HSAs and MSAs, a Form 8928 generally must be filed and the applicable excise tax generally must be paid by the due date for filing the federal income tax return for the applicable taxpayer. If a violation of the comparable contribution requirements for HSAs and MSAs occurs, a Form 8928 generally must be filed and the applicable excise tax generally must be paid by April 15th of the calendar year that follows the calendar year in which the violation occurred. Special requirements apply with respect to extensions, multiemployer plans, and multiple employer plans.

Exceptions To the Excise Tax Requirements

With respect to all violations described above other than a violation of the comparable contribution requirements for HSAs and MSAs, exceptions to the excise taxes apply:

if the responsible party did not know, and would not have known even if reasonable diligence had been exercised, that the violation existed; or

if the violation was due to reasonable cause and not willful neglect, and was corrected within 30 days after the first day the responsible party knew, or exercising due diligence, would have known that the violation had occurred (the violation will be considered corrected if the violation is retroactively undone to the extent reasonably possible and the affected individual is put in a financial position as beneficial as the individual would have been in had the violation not occurred).

If a violation of the comparable contribution requirements for HSAs and MSAs occurs, the IRS can waive the excise tax if it is excessive and the failure is due to reasonable cause and not willful neglect.

Penalties That Apply If These Filing and Excise Tax Requirements Are Not Satisfied

A failure to satisfy these filing and excise tax requirements could result in late penalties of up to 50 percent, and interest charges.

Effective Date of These New Filing and Excise Tax Requirements

These new filing and excise tax requirements apply to any Form 8928 that is due on or after January 1, 2010.