Group Health Plans: Year-End Action Items, Upcoming Changes, New Guidance

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As 2012 closes, group health plan sponsors turn their attention to completing 2012 tasks, implementing upcoming 2013 changes, and preparing for the full impact of ACA in 2014.

As 2012 draws to an end, employers pass another milestone related to group health plan compliance with Patient Protection and Affordable Care Act (ACA) requirements and draw ever nearer to the revolutionary changes of 2014. This LawFlash reminds employers about 2012 and 2013 action items for group health plan sponsors and outlines recent regulatory guidance for 2014.

2012 Reminders

W-2 Reporting. Employers that filed at least 250 Forms W-2 in 2011 must report the aggregate value of health coverage on the 2012 Forms W-2 provided to employees in January 2013. Employers must determine which benefits are subject to reporting and how to calculate the value of those benefits on their payroll systems, how to handle midyear coverage changes, and how to treat former employees and retirees. The Form W-2 reporting requirement is discussed in detail in our January 12, 2012, LawFlash, "Updated Guidance on Form W-2 Reporting of Healthcare Coverage," available here.

Summary of Benefits and Coverage (SBC). By now, employers with calendar-year plans should have distributed their SBCs as part of the open enrollment process for 2013. Employers should make further plans to distribute SBCs to new participants and upon request. Employers must also provide revised SBCs 60 days in advance of a midyear change that modifies, in a favorable or unfavorable way, the terms of their current SBCs. SBC requirements are discussed in our March 13, 2012, LawFlash, "Summaries of Benefits and Coverage Due This Fall," available here.

Comparative Effectiveness Research Fee. Beginning with plan years ending after September 30, 2012, plan sponsors of self-insured plans and insurers will be subject to an annual fee per covered life to fund the Patient-Centered Outcomes Research Institute. The fee starts at $1 per covered life for the first year, increases to $2 per covered life for the second year, and will increase each year thereafter based on a standard tied to National Health Expenditures until it expires in 2019. This fee is discussed in our June 6, 2012, LawFlash, "Internal Revenue Service Issues Guidance on New Research Fee," available here.

Medical Loss Ratio Rebates. Insurers of plans that did not spend enough of their insurance premiums on the provision of medical care distributed rebates to employers this past summer, placing employers in the unenviable position of determining how much, if any, of the rebates should be passed through to participants who paid a portion of the premium. If any of the rebates belonged to participants, these amounts should have been determined and distributed within three months of receipt. The issues associated with the rebates are discussed in our August 14, 2012, LawFlash, "Medical Loss Ratio Rebates: The Clock Is Ticking," available here.

Full-Time Employees. Recent Internal Revenue Service (IRS) guidance in Notice 2012-58 outlines a number of safe harbors related to determining when employees are treated as full-time employees for purposes of the employer shared responsibility requirement found in Internal Revenue Code section 4980H and applicable to all employers on and after January 1, 2014. While the Notice will be the subject of proposed regulations, it appears that employers can use up to a 12-month initial measurement period to determine whether a new variable-hour or seasonal employee completes an average of 30 hours of service per week or more and, as a result, is treated as a full-time employee for the following stability period. Note, however, that in order to make this determination as of January 1, 2014, and use the full 12-month safe harbor, employers should begin identifying such employees and counting hours of service before the end of 2012.

2013 Highlights

Assessment of Grandfathered Plan Status. Plan sponsors of grandfathered plans must assess whether 2013 plan design changes will impact their plans' grandfathered status. For example, grandfathered plan status is lost if any increase is made to the percentage of cost-sharing borne by a participant or if a co-pay increases by more than $5 (this increase would be from the co-pay in place when the ACA was enacted in 2010, not from the prior year). These and other plan changes having a negative impact on grandfathered plan status are discussed in our June 21, 2010, LawFlash, "Interim Final Rules Released on Group Health Plan Grandfather Status Under Healthcare Reform Law," available here. If grandfathered plan status is lost, significant changes may be required to comply with all applicable healthcare reform provisions.

FSA Limit. Beginning with plan years starting on or after January 1, 2013, annual salary reduction contributions to a healthcare flexible spending account (FSA) provided under a cafeteria plan will be limited to $2,500 (indexed). Employers that currently permit healthcare FSA salary reductions in excess of $2,500 should alert employees to this reduction before the start of the 2013 plan year and amend their cafeteria plans by the end of 2013.

Exchange Notice. At this date, it still appears that employers must notify their employees on March 1, 2013, of the availability of the ACA health insurance exchanges beginning in 2014, along with an explanation of how the exchanges will work and how the employer's coverage will interrelate with the exchanges. However, as there has been no guidance issued so far about this notice requirement, and the state exchange deadline just passed last week, employers remain hopeful that there will be a delay of this deadline in the weeks ahead.

Preventive Health Services. Continuing a path begun in 2011, the ACA preventive care requirements expanded for plan years beginning on or after August 1, 2012, to include certain women's preventive services, including contraceptive methods and counseling. While these requirements are subject to certain delays or exceptions for religious employers (and are also the subject of a number of ongoing lawsuits), most employer plans that are not grandfathered should be prepared to deliver these services without cost sharing or other restrictions in 2013.

Additional Medicare Tax. An additional Medicare tax of 0.9% applies to annual wages and compensation above $200,000 for individuals and $250,000 for families beginning January 1, 2013. The tax applies to compensation (including noncash fringe benefits and nonqualified deferred compensation) that is typically subject to Medicare taxes. For an employer, proposed regulations require withholding of the additional tax from wages that it pays to an individual in excess of $200,000 in a calendar year, determined without regard to the individual's filing status or wages paid by any other employer, even if the individual may not ultimately be liable for the additional tax. Questions and answers can be found here. Proposed regulations can be found here.

Medicare Part D Subsidy Changes. ACA closed a perceived loophole for employers that receive a Medicare Part D subsidy for maintaining their employer-provided retiree drug coverage. Now, starting in 2013, Internal Revenue Code section 139A prevents employers from deducting the cost of drugs associated with the Medicare Part D subsidy. The practical impact of this change is to reduce the economic value of the Medicare Part D subsidy for employers, thus leading employers to investigate dropping retiree drug coverage or moving to potentially more economically effective methods of offering retiree drug coverage.

2014 Guidance

In recent weeks, we have seen a flood of regulatory guidance related to ACA provisions that will take effect in 2014, with plenty more still to come, including guidance on determining full-time status and the employer shared responsibility requirements. The following is a brief summary of the recent guidance and where to find it. In the coming months, we will address in more detail those items that will significantly impact employers.

Wellness Programs. The IRS, Department of Labor, and U.S. Department of Health and Human Services (HHS) released joint proposed regulations implementing the expanded wellness rules adopted by ACA. These rules contain good news for employers with wellness programs and basically adopt and expand the existing HIPAA-vintage wellness rules. The proposed rules, if adopted unchanged in final form, will allow employers to offer outcome-based wellness programs that include incentives of up to 30% of the cost of coverage (and up to 50% of the cost of coverage if the wellness program contains a smoking cessation element). The proposed regulations are available here.

Market Reforms. HHS published a proposed rule addressing significant ACA changes in the insurance market for nongrandfathered individual and small-group plans. Under the proposed rule, insurers may vary premiums only with respect to age, tobacco use, geography, and family size. Insurers would be required to maintain a single statewide risk pool for each of the individual and small-group markets, reflecting a drive toward standardization of pricing. Insurers would also be required to report any increase in premium rates and justify the increase on standardized forms provided by HHS. The proposed rule can be found here, with technical fact sheets describing in greater detail the changes in market reform and rate review available here and here. The Centers for Medicare and Medicaid Services has also released a proposed template for submitting premium rate increases available here.

Transitional Reinsurance Program. HHS issued a proposed rule on benefit and payment parameters for 2014. Part of the proposed rule includes additional details regarding the transitional reinsurance program—a program to help stabilize premiums for exchange coverage in 2014 to 2016. Funding for the program comes from contributions from insured and self-insured health plans. The fee is calculated on a per capita basis and is expected to be approximately $63 per year per person. The regulations can be found here.

Essential Health Benefits (Among Other Things). HHS has proposed essential health benefit (EHB) regulations addressing state-specific "EHB benchmark plans" for the individual and small-group markets. While not directly applicable to determining essential health benefits for plans under the federal exchange or employer-provided plans, the state-specific EHB benchmark plans give employers a glimpse into the minds of the regulators. Some of the proposed state-specific EHB benchmark plans include number-of-visit and/or dollar limits on benefits such as chiropractic care and infertility treatments. The guidance also sets out the approved methods to determine whether plans in the individual and small-group markets satisfy the 60% minimum actuarial value test. The guidance further clarifies that the annual limits on deductibles and out-of-pocket limits under ACA apply only to the individual and small-group markets and do not apply to self-insured employer plans or the large-group market. A fact sheet on the proposed regulations and links to additional material is available here.