Some employers that sponsor insured group health plans will receive rebates this year from insurers due to the medical loss ratio limits imposed on insurers under the Patient Protection and Affordable Care Act of 2010 (as amended by the Health Care and Education Reconciliation Act of 2010, together “Health Care Reform”). Under applicable Health Care Reform regulations, affected insurers must issue the 2011 rebates by August 1, 2012. 

Prior to enactment of Health Care Reform, many states already imposed medical loss ratio limits on insurers and, if those limits are higher than the limit imposed under Health Care Reform, they continue to apply. Medical loss ratio limits require insurers to spend at least a minimum percentage (e.g., 85%) of premiums collected on claim payments for those covered under the plan. 

If an insurer fails to meet the minimum medical loss ratio threshold with respect to a covered group, it must issue a rebate to the policyholder. In most cases involving group health plans, the policyholder that receives the rebate is the employer that sponsors the plan. 

If the plan is covered by the Employee Retirement Income Security Act of 1974 (“ERISA”), as most employer-sponsored group health plans are, the rebate amount generally will be considered a plan asset to the extent it is attributable to participant contributions. Therefore, such an employer must handle the rebate in accordance with ERISA’s fiduciary rules respecting plan assets. The US Department of Labor (“DOL”) issued Technical Release 2011-04 describing its position with respect to when the medical loss ratio rebates will be considered plan assets and how the rebates should be handled.

Most group health plans are funded by the general assets of the sponsoring employer, including amounts paid by employees with pre-tax payroll deductions. In such a case, according to the DOL guidance and in the absence of specific plan or policy provisions addressing the allocation, the employer generally must allocate any medical loss ratio rebate for a given year among the participants in proportion to their contributions for that year. If the cost to allocate the rebate among former participants approximately offsets the rebate, however, the employer can limit allocation to current participants. The allocation may be made in the form of a cash payment, premium reduction, or benefit enhancement, as appropriate under the circumstances.

According to IRS guidance, where covered individuals made their contributions on a pre-tax basis for a given year, any rebate allocation for that year will be taxable. Perhaps surprising to some, this tax treatment includes a rebate allocated by the employer in the form of a premium reduction. On the other hand, if covered individuals made their contributions on an after-tax basis for the year for which a rebate is issued, the rebated amount (whether cash or premium reduction) will not be taxable.           

The US Department of Labor (“DOL”) has released frequently asked questions (“FAQs”) regarding implementation of the federal health care reform law’s summary of benefits and coverage requirement. (This set of FAQs is Part VIII in the general series about implementation of the law.) See our earlier blog post regarding the summary of benefits and coverage regulations that were issued last month.

Among other things, the FAQs (released March 19, 2012) clarify certain points regarding the distribution of summaries of benefits and coverage (“SBC”): The SBC must be provided beginning with the first day of the first open enrollment period that starts on or after September 23, 2012. It must be given to COBRA participants as well as active employees. It must be provided to individuals eligible to enroll outside the open enrollment period beginning with the first plan year that starts on or after September 23, 2012. The SBC can be provided electronically to covered individuals as long as the existing DOL electronic disclosure rules are satisfied. For eligible individuals who are not covered, employers can provide the SBC electronically as long as the format is readily accessible and a free paper copy is provided upon request.       

The FAQs also clarify that certain changes to the SBC content and format are permissible: Information about premium costs and whether the plan is grandfathered may be added to the SBC. Plans and issuers can combine, in a single SBC, information for different coverage tiers, cost-sharing options, and add-ons (such as FSA’s, HRA’s and wellness programs). Finally, the FAQs provide that the SBC table column and row sizes may be altered to accommodate the amount of information and information in a row can roll from one page to the next.   

The DOL reiterated that the federal enforcement agencies’ collective focus is to help plans and insurers to comply with the regulations, as opposed to penalizing them for noncompliance. Other than the addition of minimum value and minimum essential coverage statements for 2014, changes reflecting the elimination of annual limits, additional coverage examples, and refinements described in the FAQs, the DOL does not anticipate more changes to the SBC template. The DOL also stated that it intends to release additional FAQs on the SBC requirement.

Welcome relief may be in store for employers that are facing significant minimum funding obligations to their defined benefit retirement plans. The Senate, on March 14, 2012, passed with strong bipartisan support a surface transportation reauthorization bill called the “Moving Ahead for Progress in the 21st Century (MAP-21) Act” (S. 1813), which includes a pension funding provision that would stabilize interest rates used in calculating yearly minimum required contributions.

Sponsors of defined benefit plans that are subject to the funding requirements of Internal Revenue Code Section 412 must make regular funding contributions to their plans. The minimum required contribution for each plan year is based in part on segment rates, which represent the average corporate bond interest rates over the preceding two years. The amount of each contribution is inversely related to the segment rates used – the lower the rates, the higher the minimum contribution that an employer must make to its plan. Because of historically low interest rates prevailing in the last few years, employers have been subject to rising pension funding liabilities, at a time when liquidity is a serious concern for many.

The goal of the pension funding relief provision in MAP-21 is to stabilize the segment rates from year to year, which would offer near-term relief to plan sponsors. Under this provision, the corporate bond segment rates used to calculate minimum required contributions for a given plan year must be within a “corridor” (gradually increasing from 10 percent in 2012 to a maximum of 30 percent in 2016) of the average of the segment rates for the prior 25 years. In the current environment, this would have the effect of raising the segment rates used for minimum required contribution calculations (which are low due to being based on historically low post-2008 interest rates) by “smoothing” them using the significantly higher pre-2008 interest rates. This, in turn, would permit employers to make lower minimum required contributions in the near term (although it also would result in higher funding contributions during periods of abnormally high interest rates).

MAP-21 will be considered by the House, which has struggled to gather bipartisan support for its own version of the transportation reauthorization bill.

 

The agencies primarily responsible for enforcing the Patient Protection and Affordable Care Act of 2010 issued 150 pages of final regulations implementing the mandate that group health plans and insurers provide a four-page summary of benefits and coverage to individuals who enroll in health plans.

Under the regulations issued February 9, 2012, plan administrators and insurers must distribute the summaries of benefits and coverage (“SBC”) no later than the first day of open enrollment for the plan year beginning on or after September 23, 2012. For a fully-insured group health plan, the insurer must provide the SBC. For a self-funded (or partially self-funded) plan, the plan administrator (that is, the employer unless the employer has delegated that responsibility) must provide the SBC. For plans that use a calendar-year plan year, this means employers need to ensure that the SBC is distributed by the first day of open enrollment this fall (for the 2013 plan year). Thereafter, the SBC must be distributed to participants who enroll anytime during a plan year beginning on or after September 23, 2012. Although months away, the effort needed to create and distribute SBCs in compliance with the regulations may be daunting for many employers (especially those with self-funded or partially self-funded plans), so employers should begin taking action now. 

The SBC is intended to ensure that information is presented in clear language and in a uniform format that helps individuals better understand the coverage available to them and compare different options. Among other things, the SBC must include a description of coverage, including cost-sharing (e.g., deductibles and co-payments), any exceptions or limitations, coverage examples, and a uniform glossary. The regulations even specify the minimum font size for the SBC. 

It is clear from the preamble to the regulations that the agencies hope the SBC rules will pressure employers, as well as insurers, “to compete on price, benefits, and quality” in group health plan offerings and that this will help mitigate the “inefficiency in the health insurance and labor markets” as perceived by the federal government.

Under  Department of Labor Regulations, plan administrators of individual account plans such as 401(k) plans and most 403(b) plans must provide all participants who are eligible to direct investments in the plan with certain investment and fee information (see http://www.dol.gov/ebsa/newsroom/fsparticipantfeerule.html for more information).  The plan administrator is the employer sponsoring the plan unless the employer has designated another plan administrator.  For calendar year plans, the first annual disclosure is due by August 30, 2012 and the first quarterly disclosure is due by November 14, 2012.

Historically, most employer-plan administrators have not had easy access to all of the information that must be disclosed to participants pursuant to these regulations.  However, under separate regulations, plan service providers are required to provide to plan administrators – by July 1, 2012 – the information necessary for the initial annual participant disclosures. 

Many record keepers have been busy compiling the information provided by service providers to their plan clients so that they can assist plan administrators in preparing the participant disclosures in the form required by the regulations. 

Plan administrators should contact their record keepers now regarding these disclosures to confirm that they will be providing assistance in preparing the participant disclosures. Even after this information is compiled by the record keepers, plan administrators will need to review the information to ensure that it is correct and in compliance with the regulations.

For more information regarding these and other disclosures, please see our recent article Employee Benefits Plans Alert: Compliance Deadlines Loom for Fee and Other Disclosures.  

  

The Internal Revenue Service (“IRS”) has  amended its guidance to employers on how to report the cost of group health coverage. Notice 2012-9 addresses, among other things, cost determinations for employee assistance programs, wellness programs, and health reimbursement arrangements. 

Internal Revenue Code section 6051(a)(14), enacted as part of the Patient Protection and Affordable Care Act of 2010, requires employers to report each year the aggregate cost of employer-sponsored group health coverage on Form W-2 (excluding amounts contributed to Archer Medical Savings Accounts and health savings accounts, and employee salary reduction contributions to health flexible savings arrangements). Although effective for the 2011 tax year, the IRS delayed enforcement of the section until 2012. Thus, beginning with the cost for 2012, employers must report the cost of health care coverage for each employee on the employee’s W-2, and the Form W-2s must be issued no later than January 31, 2013. 

The new Notice also clarifies, among other things, that:

  • small businesses filing fewer than 250 W-2s are not subject to the health care cost reporting requirement for 2012 (at least);
  • the acceptable methods for determining the cost of coverage for an employee who terminates employment during the year;
  • the reportable cost includes both pre-tax and after-tax employee contribution amounts for reportable coverage;
  • the standard for determining whether a dental or vision plan is subject to the reporting requirement is the same as the standard for determining whether that dental or vision plan is subject to the Health Insurance Portability and Accountability Act regulations. 

Generally, the reportable cost is determined by using the same method used to determine the applicable premium for COBRA purposes (actuarially determined for self-funded plans or simply the insurance premium for insured plans). However, employers with self-funded plans in particular have some flexibility in this regard.

IRS continues to accept and consider comments submitted in response to its earlier guidance on the reporting requirement in Notice 2011-28. Jackson Lewis attorneys are available to assist employers and other interested parties to submit comments to help shape the regulatory guidance regarding health care cost reporting.

The Internal Revenue Service has announced its Voluntary Classification Settlement Program (“VCSP”) offering relief to certain employers from unpaid employment taxes, penalties and interest that may result from misclassification of workers.  The IRS’s September 21, 2011, Announcement 2011-64 and “Frequently Asked Questions” (published on September 30) explains that the VCSP allows employers to correct misclassification issues on a prospective basis, while providing refuge from the possibility of audit and potential employment tax liability for past tax years.  Employers who want to participate in the VCSP must apply on Form 8952, agree to a three-year extension of the statute of limitations on employment tax assessment for the tax years commencing with the year of the VCSP participation election, pay all employment taxes due under the VCSP, treat the workers who are the subject of the VCSP as employees going forward, and enter into a closing agreement with the IRS.

Under the VCSP, an employer will pay only 10% of the reduced rate of employment tax provided under section 3509 of the Internal Revenue Code for the most recent tax year (in 2010, 10.68% for workers at or below the Social Security wage base). Participating employers will pay no penalties and no interest on unpaid employment taxes. An employer who misclassified workers and paid them $1,000,000 in 2010 for wages below the Social Security wage base, for example, would owe only $10,680 in employment taxes, rather than $106,800, plus interest and penalties, for that year.

To be eligible for VCSP, employers must have treated the misclassified workers as non-employees consistently in past years, have filed Form 1099s for the previous three years, and not currently under audit for worker classification issues by the IRS, Department of Labor or any state government agency.  Employers who have been audited worker classification issues in the past may participate in the VCSP only if they complied with the terms of the agencies’ determinations or closing agreements resulting from the audits.

On its face, the VCSP seems a good deal. However, employers should proceed with caution.  Executing a closing agreement with the IRS does not resolve potential liability arising from worker misclassification under federal and state minimum wage and overtime laws, state unemployment compensation and workers’ compensation statutes, or laws pertaining to employee benefits under ERISA.  Given the policy of “information sharing” by and between state and federal agencies, the employer who carelessly runs to the VCSP program without due consideration may find itself facing substantial unintended, and unwanted, consequences—falling like Alice down the rabbit hole to a place not much like “Wonderland.”

The individual mandate provision of the 2010 health care reform law is unconstitutional, the U.S. Court of Appeals for the Eleventh Circuit decided in Florida v. HHS on August 12th. The Sixth Circuit previously held in Thomas More Law Center v. Obama that the individual mandate is constitutional. Therefore, the Eleventh Circuit decision creates a circuit split, making it more likely that the U.S. Supreme Court will tackle the issue.  

The law’s individual mandate requires individuals to maintain a specific minimum level of health insurance coverage beginning January 1, 2014, or pay a federal tax penalty for each month in which such coverage is not maintained. The law also requires an individual taxpayer to maintain the minimum required coverage for his or her dependents.   

The Eleventh Circuit upheld a lower federal court’s decision that Congress exceeded its commerce clause powers in enacting the individual mandate because Congress cannot “mandate that individuals enter into contracts with private insurance companies for the purchase of an expensive product from the time they are born until the time they die.” 

However, the lower court had declared the entire health care reform law invalid because it found the unconstitutional individual mandate to be legally non-severable from the rest of the law. The Eleventh Circuit disagreed, deciding that the individual mandate could be severed from the rest of the health care reform law.   

Despite the Eleventh Circuit’s decision on the legal severability issue, the individual mandate is one of the central tenets on which the health care reform law is based; thus, without it, the health care reform initiative will fail to achieve principle goals. 

The fate of health care reform rests with the U.S. Supreme Court at this point. We will continue to monitor health care reform legal challenges that are pertinent to employers. Meanwhile, the health care reform law provisions that directly impact employers and their group health plans remain “the law of the land,” so employers should continue to comply with applicable provisions and prepare for compliance with provisions having future effective dates.   

Jackson Lewis LLP’s interdisciplinary Health Care Reform task force provides guidance to employers and plan sponsors regarding obligations and strategies under the health care reform law and related laws.  For more information about our resources in this area, please contact Monique Warren (White Plains, warrenm@jacksonlewis.com), Joe Lazzarotti (White Plains, lazzaroj@jacksonlewis.com), or Lisa deFilippis (Cleveland, defilipl@jacksonlewis.com). 

Group health plans that are not grandfathered under the 2010 health care reform law (the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010) must provide women’s contraception without cost-sharing beginning with the first plan year that starts on or after August 1, 2012. The three agencies primarily responsible for enforcement of the health care reform law – the Departments of Treasury, Labor, and Health and Human Services ("HHS") – issued regulations on August 1, 2011, further implementing the health care reform law’s provision that requires coverage of preventive services without cost-sharing. The statutory provision requires plans to cover (among other preventive services) women’s preventive care and screening services that are included in guidance supported by the Health Resources and Services Administration (“HRSA”). (For more information about grandfathering, see our article, Health Care Reform Law: Agencies Explain "Grandfathering".)

Under the new regulations and in accordance with HRSA-supported guidelines, preventive services for women include all FDA-approved contraception (which, according to the HHS website does not include abortifacient drugs – so-callled "morning-after" pills), annual well-woman visits, breastfeeding supplies and support, domestic violence screening, annual screening for gestational diabetes, human papillomavirus testing every three years (for women at least 30 years old), annual sexually transmitted infection counseling, and annual human immunodeficiency virus screening and counseling. The requirement for non-grandfathered group health plans to provide for these services without deductibles, co-pays or other cost-sharing applies regardless of whether the plan is self-funded or fully insured. The preamble to the regulations includes a reminder that a more strict state insurance law will not be preempted by the Employee Retirement Income Security Act of 1974. In other words, plans would have to comply with any state law that requires insurers and health maintenance organizations to provide coverage for more services than the new regulations require.

The regulations include an exception for plans sponsored by “religious employers” that offer health coverage for employees. For this purpose, a religious employer is an organization (1) for which the inculcation of religious values is its purpose, (2) that primarily employs and serves persons who share its religious tenets, and (3) that is a nonprofit organization described in Internal Revenue Code (“Code”) sections 6033(a)(1) and 6033(a)(3)(A)(i) or (iii). 

The Department of Treasury’s regulations apply the excise tax provisions of Code section 4980D (generally $100 per day per individual, with certain limits and exceptions) to group health plan sponsors for failure to provide the required women’s preventive service coverage without cost-sharing.

Jackson Lewis LLP’s interdisciplinary Health Care Reform task force provides guidance to employers and plan sponsors regarding obligations and strategies under the health care reform law and related laws.  For more information about our resources in this area, please contact Monique Warren (White Plains, warrenm@jacksonlewis.com), Joe Lazzarotti (White Plains, lazzaroj@jacksonlewis.com), or Lisa deFilippis (Cleveland, defilipl@jacksonlewis.com).