This Employer Webinar Series program is presented by Spencer Fane Britt & Browne LLP in conjunction with United Benefit Advisors Thank You For Your Participation Kansas City = Omaha = Overland Park St. Louis = Jefferson City www. spencerfane. com www. UBAbenefits. com
Nondiscrimination Rules for Insured Health Plans and Latest Guidance regarding “Grandfathered” Plans Presented by: Copyright 2010 Robert Browning, Esq. and Chadron Patton, Esq. 2
Nondiscrimination Rules - Overview u Section 105(h) and self-insured plans ¡ ¡ u What does it prohibit? What is the consequence of a violation? Applying 105(h) to fully-insured plans ¡ ¡ What aspects of Section 105(h) apply? ¡ What is the consequence of a violation? ¡ Copyright 2010 What plans are subject to the rule? What plans/arrangements are most at risk? 3
Code Section 105 u u u Copyright 2010 Code Section 105 – employees are not taxed on the benefits they (or their dependents) receive under employersponsored health plans where “premiums” are paid by employer or paid with pre-tax employee contributions via 125 plan Section 105 is not applicable if premiums are paid with employee after-tax amounts Section 105(h) – taxes some or all of the benefits paid to “highly compensated individuals” in “discriminatory” self-insured plans 4
Section 105(h) – “self-insured” u Existing Section 105(h) nondiscrimination rule applies to all “self-insured” medical reimbursement plans: ¡ ¡ Plans are considered self-insured unless reimbursements are provided under a policy of accident or health insurance (or similar arrang. ) Even plans underwritten by an insurance policy are self-insured if they do not shift the risk to an unrelated third party n n Copyright 2010 Cost-plus or administrative-services-only policies are considered “self-insured” Stop-loss insurance does not count as “insurance” 5
Highly Compensated Individuals u Highly Compensated Individual (HCI): ¡ One of 5 highest paid officers; or ¡ 10% or more owner (after attribution); or ¡ One of the highest paid 25% of all EEs. n Copyright 2010 For purposes of highest paid 25%, “all employees” includes the 5 highest paid officers, but excludes the “excludible” employees who do not participate in any selfinsured plan of the employer 6
105(h) – Excludible Employees u u u Copyright 2010 Employees with less than 3 yrs of service Employees under age 25 Employees who normally work less than 35 hours/wk (if others work more), or any employee who works less than 25 hours/wk Employees who normally work less than 9 months/year (if others work more), or any employee who works less than 7 months/yr Union employees (if benefits bargained) Non-resident aliens 7
105(h) – Discrimination Tests u Self-insured plan must not discriminate in favor of “highly-compensated individuals” with respect to either: ¡ ¡ u Copyright 2010 Eligibility to participate; or Benefits If plan is discriminatory, HCIs will be taxed on some or all of the benefits they receive under the plan (i. e. , no adverse consequence for the plan sponsor) 8
105(h) – Eligibility Tests u Plan must “benefit”: ¡ ¡ 80 percent or more of all employees who are eligible to benefit, if 70 percent or more of all employees are eligible to benefit; or ¡ u 70 percent or more of all employees; or a “nondiscriminatory classification” of employees (based on rules similar to the 410(b) coverage test for qualified plans) “Excludible Employees” excluded from tests: ¡ ¡ Copyright 2010 But only if excluded from plan? But only if no similar employee is included? 9
Nondiscriminatory Classification Test u u Based on Treas. Reg. Section 1. 410(b)-4 Two-part test: ¡ ¡ Must be a “reasonable” classification of employees based on objective business criteria Must cover a “nondiscriminatory” percentage of non-HCIs (as compared to the % of HCIs): n n ¡ Copyright 2010 “Safe-harbor” ratio percentage; or “Non-safe-harbor” ratio percentage with favorable facts and circumstances May pass with ratio percentages as low as 39% (safe-harbor) or 29% (non-safe harbor) 10
Eligibility Test - Example u Plan covers 10 physicians and 10 staff, but excludes 20 nurses and residents (assume physicians = HCIs and no excludables) ¡ ¡ Plan does not pass 80%/70% test ¡ Plan’s ratio percentage is 33. 3%, so it does not pass “safe-harbor” test ¡ Copyright 2010 Plan does not benefit 70% of all EEs May or may not pass “non-safe-harbor” test, depending on facts and circumstances 11
Benefits Test u u u Copyright 2010 105(h) Benefits Test – requires that all benefits provided to any participant who is an HCI must also be provided to all participants who are non-HCIs Also applies to benefits provided to spouses/dependents of participants Applies to benefits subject to reimbursement (not actual benefits paid) 12
Discriminatory Benefits u u u Copyright 2010 Better coverage (more covered conditions, procedures, drugs, etc) Lower copay, deductible, out-of-pocket limits, etc. Lower cost (employee’s share) Longer coverage (employer-paid COBRA, etc) Exception for diagnostic tests (executive physicals, etc. ) 13
105(h) - Special Rules u u u Copyright 2010 HCIs are determined, and eligibility is tested, as if the “employer” includes all members of the “controlled group, ” as determined under Code Section 414 Employer may designate (and test) two or more plans as a single plan Retired employees may be tested separately 14
Consequences u u u Copyright 2010 If a self-insured plan violates the 105(h) eligibility test, a percentage of the benefits paid to HCIs become taxable (based on the ratio of the total benefits paid to HCIs vs. the total benefits paid to all EEs under the plan) If a self-insured plan violates the 105(h) benefits test, then all discriminatory benefits paid to HCIs are taxable “Benefits” means actual reimbursements (not the premiums paid for coverage) 15
Health Care Reform u Extends the “concept” of the 105(h) non-discrimination rule to insured group health plans, but with two important differences: ¡ ¡ Copyright 2010 Nondiscrimination requirements do not apply to all insured plans; Consequences of violation fall on the plan sponsor, not the HCI(s) 16
Plans Subject to New Nondiscrimination Rule u Rules similar to those under Section 105(h) now apply to fully insured group health plans, but do not apply to: ¡ ¡ Retiree-only plans ¡ Copyright 2010 Excepted benefits – e. g. , dental, vision, longterm care, accident or disability income, specific disease/illness coverage, Medicare supplemental coverage -- if offered separately from group health plan coverage “Grandfathered” plans 17
Applying 105(h) to Insured Plans u u u Copyright 2010 Under health care reform, for plan years beginning on or after Sept. 23, 2010, insured plans that are not grandfathered must satisfy the 105(h) discrimination tests (both the eligibility test and the benefits test) HCI is defined the same way Employer means the entire controlled group 18
Consequences – Insured Plans u Insured plans that are subject to 105(h), but fail either the eligibility or the benefits test, are subject to: ¡ Section 4980 D excise tax = $100 per day per non-HCI discriminated against n ¡ Copyright 2010 Limited exception for “small” employers (50 or less employees) Civil action by participant to enjoin the discriminatory practice 19
Examples of Discrimination u u Copyright 2010 Management-only health coverage Better benefits (reduced premium or increased benefits) for management Post-termination continuation coverage (including COBRA) for management or other HCIs only Coverage provided to HCI as result of resolution of employment litigation 20
Avoiding Discrimination u u Offer broad coverage, equal benefits, and equal cost Switch to self-insured plan, and have HCIs pay for coverage with after-tax $ ¡ u u u Copyright 2010 May need to gross-up for tax effects Keep insured plans “grandfathered” as long as possible Offer retiree coverage under separate plan Limit discriminatory coverage to “excepted” benefits 21
“Grandfathering” Guidance u u u Copyright 2010 Overview Health care reform provisions applicable to all plans Additional provisions applicable to nongrandfathered plans Loss of grandfathered status Recent guidance 22
Overview u u u Copyright 2010 Insurers and plan sponsors must modify their plans/contracts to comply with significant new market reforms The Affordable Care Act (“ACA”) "grandfathers" certain plans that were in existence on the date of enactment from some of the reform requirements Effective the first plan year beginning on or after September 23, 2010 23
Overview u u Copyright 2010 To maintain status as a grandfathered health plan, a group health plan or health insurance coverage must include a statement, in any plan materials provided to a participant or beneficiary describing the benefits provided under the plan or health insurance coverage, that the plan or coverage believes it is a grandfathered health plan. Also, the plan or health insurance coverage must maintain records documenting the terms that were in effect on March 23, 2010, and any other documents necessary to verify, explain, or clarify its status as a grandfathered health plan. 24
Overview u u Copyright 2010 For health insurance coverage maintained pursuant to a collective bargaining agreement ("CBA") that was ratified prior to March 23, 2010, the coverage is deemed to be grandfathered until the date on which the last of the CBAs in effect on March 23, 2010, terminates. This special rule only applies to insured plans maintained pursuant to a CBA, not to self-funded collectively bargained plans. 25
Applicable Provisions- All Plans u u Elimination of lifetime limits for “essential” benefits Restrictions on annual limits for “essential” benefits ¡ ¡ ¡ Copyright 2010 $750, 000 for policy years beginning on or after September 23, 2010 but before September 23, 2011 $1. 25 million for following policy years beginning before September 23, 2012 $2 million for following policy years beginning before January 1, 2014 26
Examples of “Essential” Benefits u u u u u Copyright 2010 Ambulatory patient services Emergency services Hospitalization Maternity and newborn care Mental health and substance abuse disorder benefits, including behavioral health treatments Prescription drugs Rehabilitative and habilitative services and devices Laboratory services Preventive and wellness services and chronicdisease management Pediatric services, including oral and vision care 27
Potential “Essential” Benefits u u u u Copyright 2010 Bariatric surgery and related treatments Infertility treatments Chiropractic care Speech therapy Physical therapy Vision benefits Applied behavioral therapy Hearing aids Acupuncture Organ transplants Hospice and palliative care TMJ (temporomandibular joint disease) Wigs 28
Applicable Provisions- All Plans u u u Copyright 2010 Preexisting condition exclusion prohibition for those under 19 Coverage of dependents to age 26 (for plan years prior to 2014, grandfathered plans do not have to provide coverage if the child is eligible for other employer coverage) No rescission of coverage except in the event of fraud or intentional misrepresentation of material fact 29
Additional Provisions for “Nongrandfathered” Plans u Patient Protections. Non-grandfathered plans: ¡ ¡ must permit a participant to designate a pediatrician as the primary care provider for a child; and ¡ Copyright 2010 must permit each participant to designate any participating primary care provider who is available to accept such individual; may not require a referral or preauthorization for obstetrical or gynecological care provided by a specialist in those areas. 30
Additional Provisions for “Nongrandfathered” Plans u u u Copyright 2010 Emergency Services. Must provide coverage for out-of-network emergency services at in-network levels. Preventive health services. Must provide first-dollar coverage of certain preventive services with no deductible. Coverage to age 26. Must provide coverage to age 26 regardless of whether child has other employer coverage. 31
Additional Provisions for “Nongrandfathered” Plans u u Copyright 2010 Appeals process. Must have an effective independent review process for appeals of coverage determinations and claims. Non-discrimination requirements for fully-insured plans. Fully-insured group health plans must satisfy Section 105(h) non-discrimination requirements. 32
Acceptable Changes to “Grandfathered” Plans u u Copyright 2010 Premium increases (except for those that result in an impermissible decrease in employer contribution) Appointment of a new third party administrator Compliance with federal or state legal requirements Voluntary compliance with the ACA 33
Loss of “Grandfathered” Status u u u Copyright 2010 Elimination of all or substantially all benefits to diagnose or treat a particular condition Increase in a percentage cost-sharing requirement (e. g. , raising an individual’s coinsurance requirement from 20% to 25%) Increase in a deductible or out-of-pocket maximum by an amount that exceeds medical inflation plus 15 percentage points 34
Loss of “Grandfathered” Status u u u Copyright 2010 Increase in a co-payment by an amount that exceeds medical inflation plus 15 percentage points (or, if greater, $5 plus medical inflation) Decrease in an employer's contribution rate towards the cost of coverage by more than 5 percentage points (e. g. , previously covered 55% of cost and now cover 49%) Imposition of annual limits on the dollar value of all benefits below specified amounts 35
Recent Guidance u Copyright 2010 The federal agencies’ general approach to implementation of health care reform will be compliance oriented, and will focus on assisting plans, issuers, and others acting in good faith, to comply with the law, rather than on imposing penalties. 36
Recent Guidance u Fully insured group health plans will not be treated as having lost grandfathered status due to a change in employer contribution rates (assuming the issuer is not aware of the change) if the issuer and plan sponsor complete the following actions: ¡ ¡ u Copyright 2010 Upon renewal, the issuer requires the plan sponsor to clearly indicate both its contribution rate for the new plan year and its rate as of March 23, 2010. The issuer’s policies, certificates, or contracts of insurance clearly disclose that plan sponsors must notify the issuer if they change contribution rates during the plan year. Multiemployer plans may follow similar steps and the same relief will apply unless or until the multiemployer plan knows that the contribution rate has changed. 37
Recent Guidance u Copyright 2010 Plan can make various changes without losing its grandfathered status, other than changes previously discussed under “Loss of ‘Grandfathered’ Status, ” i. e. , not every change will cause a loss of grandfathered status. 38
Recent Guidance u Copyright 2010 Plans with Multiple Benefit Options. Grandfather status is determined on a benefit package-by-benefit package basis. Therefore, if a plan has three options among which participants may choose, such as a point-of-service option, a preferred provider option, and a health maintenance option, the loss of grandfathered status under one benefit package would not affect the grandfather status of the other two. 39
Recent Guidance u u Copyright 2010 Changes in Tiers of Coverage. If a plan eliminates or modifies any of the tiers of coverage it had on March 23, 2010 (e. g. , changes from self-only and family to a multi-tiered structure of self-only, selfplus-one, self-plus-two, etc. ), the employer contribution rate for any new tier would be tested by comparing it to the contribution rate for the corresponding tier in effect on March 23, 2010. For example, if the employer contribution rate for the family tier on March 23, 2010 was 50%, the employer contribution rate for any new tier of coverage other than self-only could not be less than 45%. 40
Recent Guidance u Copyright 2010 A plan can add new coverage tiers for classes of individuals not previously covered under the plan without losing grandfather status, as long as it does not eliminate or modify a tier of coverage in existence on March 23, 2010. 41
Recent Guidance u Copyright 2010 Changes in Cost-Sharing. Each change in cost-sharing is tested separately and an increase in employee cost-sharing in even one category of services (e. g. , such as a change in an office visit co-payment) will result in a loss of grandfather status if the increase exceeds the applicable standard. 42
Recent Guidance u u Copyright 2010 Cost-Sharing. If a policy holder had an option under an individual health insurance policy to pay a reduced premium in exchange for higher cost sharing available on March 23, 2010, he/she can exercise the option after that date without affecting the plan's grandfather status. Thus, the cost-sharing level that would apply under this option would be grandfathered as part of the policy in place on March 23, 2010, even if the level did not apply for the particular individual at that time. 43
Recent Guidance u Copyright 2010 Wellness Programs. Plans may continue to provide incentives for wellness programs but penalties under a wellness program, such as cost-sharing surcharges, “may implicate” the standards discussed earlier and should be examined carefully. In addition, Plans should take steps to ensure they do not run afoul of HIPAA nondiscrimination rules regarding penalties based on health status. 44
Recent Guidance u Copyright 2010 Disclosure Requirement for Grandfathered Plans can comply with the grandfathered disclosure requirement if they include the model disclosure language whenever a summary of the benefits under the plan is provided to participants and beneficiaries. 45
Recent Guidance u u Copyright 2010 The interim final regulations, by their terms, provide that if an employer enters into a “new policy, certificate, or contract of insurance” after March 23, 2010, then the new policy, certificate, or contract is not a grandfathered health plan. Regulators have said in two sets of FAQs that they will be addressing circumstances under which plans may change insurers without endangering their grandfathered plan status. 46
Contact Information Robert Browning rbrowning@spencerfane. com 913 -327 -5192 Chadron Patton cpatton@spencerfane. com 913 -327 -5137 Copyright 2010 47
Thank you for your participation in the Employer Webinar Series. You may receive HRCI credit of 1. 5 hours for your participation. This Employer Webinar Series program is presented by Spencer Fane Britt & Browne LLP in conjunction with United Benefit Advisors To receive your HRCI credit information, obtain a recording, or to register for future presentations, contact your local UBA Member Firm. Kansas City = Omaha = Overland Park St. Louis = Jefferson City www. spencerfane. com www. UBAbenefits. com
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