Although the Patient Protection and Affordable Care Act (“PPACA” or the “Act”) is now over three years old, the Act’s core requirements will not take effect until 2014. The last half of 2013 should be a “wild ride” as the federal agencies charged with implementing the Act scramble to prepare for 2014 and employers weigh their compliance options. This white paper is part of our ongoing PPACA series that is intended to keep clients abreast of recent developments and things to watch for as we count down to 2014. Included in this issue:
PCORI FEES: NEW FORM 720 AND JULY 2013 FILING DEADLINE In June, the Internal Revenue Service (“IRS”) released an updated Form 720 which contains a new section to facilitate payment of the Patient Center Outcomes Research Institute (“PCORI”) fee. The PCORI fee, which is intended to partially fund the Research Institute, is a temporary fee that will be assessed against insurers and sponsors of self-funded plans for seven years, beginning with plan years ending after September 30, 2012. The fee does not apply to “excepted benefits” plans.
The fee for 2012 is $1 times the average number of covered lives under the plan. In 2013, the fee will increase to a rate of $2 times the average number of covered lives under the plan (including COBRA qualified beneficiaries). For the subsequent years, the fee will include an inflation factor adjustment. The IRS has indicated that the fee is tax deductible for employers. Filing is required by July 31 of the year following the calendar year in which the plan year ends. For calendar year plans (i.e., those with plan years ending December 31), the initial filing deadline is July 31, 2013. Plans that operate on a fiscal plan year basis will have until July 31, 2014 to make their initial PCORI filing. These deadlines are not to be confused with the more substantial “transitional reinsurance” fee under PPACA, the initial payment of which will not be due until January 2015.
COMPLIANCE LOOPHOLES, SHORTCUTS AND SILVER BULLETS
As 2014 approaches, the press will likely devote increasing coverage to “loopholes” in PPACA and compliance shortcuts that some employers may consider. Over the past few months, a number of clients have inquired about several of these potential approaches to PPACA compliance.
Use of “Skinny Plans”: A May 20 article in the Wall Street Journal generated tremendous interest among some employers regarding the possibility of complying with PPACA by offering a “skinny plan.” A skinny plan is a group health plan that offers very little by way of health benefits and, consequently, does not cost much. PPACA imposes shared responsibility penalties on large employers (those with 50 or more full-time equivalent employees) that fail to offer their full-time employees “minimum essential coverage” that is “affordable” and of “minimum value.” Employers that fail to offer minimum essential coverage may be subject to a substantial penalty that is equivalent to $2000 times the employer’s full-time employee head count, less 30. Surprisingly, employer-provided health plans that offer minimal health benefits (e.g., preventive care services) will likely constitute minimum essential coverage, provided they do not solely offer “excepted benefits” such as dental and vision coverage. Thus, these so-called skinny plans may allow large employers to avoid the penalty for failing to provide minimum essential coverage.
Notably, skinny plans are unlikely to meet PPACA’s “minimum value” requirements under regulations recently issued by the IRS. A large employer’s failure to offer a plan that is of minimum value will also trigger a penalty; however, the resulting penalty is $3,000 times the number of full-time employees who purchase coverage on a health care exchange using a health care premium tax subsidy. If no employees purchase coverage on an exchange using a tax subsidy, then there is no penalty. In addition, IRS proposed regulations state that this penalty cannot exceed the penalty that would apply if minimum essential coverage is not provided. With this in mind, skinny plans should not be viewed as a pathway to avoiding PPACA shared responsibility penalties. For a large employer that cannot afford to offer a richer health plan, however, a skinny plan may be a way to significantly reduce its penalty exposure.
Early renewals: Small employers (fewer than 50 full-time equivalent employees) are not subject to shared responsibility requirements; however, they will be impacted by a number of PPACA mandates that are likely to increase health insurance premiums next year. New mandates that are likely to drive premium costs in 2014 include elimination of pre-existing condition exclusions for adults, modified community rating (elimination of rating based on claims experience), guaranteed issue/renewability, and required coverage of essential health benefits. Some carriers are offering “early renewal” as a strategy for delaying the premium increases that are likely to result from these mandates. Since most of these mandates do not apply until the plan year “beginning on or after January 1, 2014,” some carriers believe that by renewing early, small group insured plans can “lock in” lower, pre-mandate rates for nearly a year. The federal agencies charged with enforcing PPACA and the Pennsylvania Insurance Department have not yet stated their position on whether an early renewal approach poses any problems under the law. However, even if this is a lawful approach, there are a number of reasons to think carefully about early renewal, including:
Employees who are about to meet a plan’s deductible requirements may be adversely affected by an early renewal;
Employers with higher experience-based premiums could conceivably see a favorable premium in 2014 due to the advent of community rating;
Changing a plan’s renewal date will require amendment to plan documents and filings, etc; and
In the event of a Department of Labor (“DOL”) plan audit, aggressive steps such as this may subject the employer to closer scrutiny.
Time to Consider Self-Insuring?: Traditionally, most small employers that offer employee health coverage have obtained insurance from a carrier instead of establishing a self-insured plan. The claims risks posed by self-insurance are easier for a large employer to absorb. For this reason, small employers that want to control their health care costs have had limited tools at their disposal, primarily: (a) shopping their plan on an annual basis for the best rates; (b) implementing wellness programs in hopes of reducing claims; (c) increasing employee cost-sharing; and (d) reducing available benefits. Several of the PPACA mandates that may increase premiums next year do not apply to self-insured plans. For example, unlike small group insured plans, self-insured health plans are not subject to maximum deductible limits, nor do they have to offer “essential health benefits” (although they are required to eliminate lifetime and annual monetary limits on such essential health benefits). Perhaps more importantly, self-insured plans are more likely to derive the financial benefits of a healthy workforce and associated wellness initiatives – they will not be directly affected by community rating (i.e., paying premiums based on the health risks in the geographic area as opposed to based on the employer’s claims history).
With this in mind, will 2014 see a dramatic increase in the number of small employers that opt to self-insure? Perhaps. However, PPACA has not eliminated the risks of self-insuring that have historically kept small groups away. In fact, by eliminating annual and lifetime monetary limits on essential health benefits, PPACA has inflated those risks. With this in mind, although self-insurance may be the right answer for some smaller employers, it is an option that should only be taken after careful study. The good news, however, is that PPACA’s “guaranteed issue” mandate will make it easier for small employers who experiment with self-insuring to return to the insured market if self-insurance proves to be too costly.
Opportunities and Risks Associated with Temporary Employees: Few industries will be more dramatically affected by PPACA in 2014 than the temporary staffing industry. The industry is very cost-competitive and many agencies keep their fees down by offering temporary employees few, if any, employee benefits. However, PPACA requires larger agencies to choose between offering qualifying coverage to full-time employees, paying a shared responsibility penalty or finding a way to keep temporary employees from qualifying as “full-time” under the shared responsibility rules. Companies that use temporary staffing firms may also find temporary employees to be a useful means for reducing the number of full-time employees to whom an offer of coverage must be made – or to delay the offer of such coverage. However, there are potential risks associated with any approach that is designed to avoid (or delay) offering coverage to full-timers.
Veterans in human resources and employee benefits are well aware of the age-old employee/independent contractor distinction. PPACA brings new significance to this issue. Employers that rely heavily on temporary employees for extended periods and who control their work are at risk, under IRS regulations, of being found to be the “common law employer” of the temps. Under PPACA, this could mean that the employer using the temporary employees is expected to make an offer of coverage to temporary employees who qualify as “full-time” under the shared responsibility rules – and the penalties for failing to do so could fall on the using employer. Likewise, temporary employees that are deemed to be employed by the using employer could conceivably push an otherwise small employer over the 50-employee threshold for purposes of triggering the shared responsibility requirements. Of course, not all temporary employees will be deemed employees of the using employer. However, it is prudent for employers and the temporary agencies they use to identify strategies for avoiding unforeseen PPACA consequences that arise out of the extended use of temporary workers. Such strategies may include caps on hours worked per week or year, allocation of supervisory control to the agency, confirmation of whether the agency will be offering PPACA-compliant coverage and indemnification provisions in client service agreements.
Reduction of Work Hours and ERISA Section 510: It is expected that many employers will reduce work hours for part-time employees who would be considered full-time under PPACA’s 30-hours per week standard in 2014. Employees currently working between 30-35 hours per week may find their schedules reduced to 25-29 hours in 2014 (or earlier due to “measurement period” considerations). Several recent articles have speculated that reducing employee work hours to avoid shared responsibility requirements may violate Section 510 of the Employee Retirement Income Security Act (“ERISA”) inasmuch as this would “interfere with” an employee’s rights under an ERISA benefit plan. Of course, this novel argument has not yet been tested in court; however, it is unlikely the argument will prevail. PPACA does not “require” any employer to offer coverage; it merely imposes a penalty on large employers who fail to do so (assuming a full-time employee then purchases coverage on an exchange using a tax subsidy). An employer who reduces a part-time employee’s hours to avoid this penalty is, therefore, not “interfering” with that employee’s rights under a health plan; if the employee is not currently covered under the plan, he or she has no “rights” under the plan. The trickier question, however, is whether a full-time employee who is already covered under his employer’s plan has recourse under Section 510 if his employer reduces his hours to fewer than 30 per week in order to avoid having to continue providing coverage. This novel argument may be tested in courts after the shared responsibility rules take effect.
DOL ISSUES MODEL HEALTH CARE EXCHANGE AND COBRA NOTICES, SETS EFFECTIVE DATES
PPACA requires employers to provide employees with a notice of health coverage options available to them through the so-called “Health Care Exchanges” (a/k/a the “Health Insurance Marketplace”). The Exchanges are intended to be virtual insurance marketplaces (federally-facilitated in Pennsylvania), through which individuals may compare and shop for “qualified health plans.” This notice requirement applies to all employers covered by the federal Fair Labor Standards Act, including those with fewer than 50 employees.
Under PPACA, the notice must inform an employee:
of the existence of the Marketplace, including a description of the services provided by the Marketplace, and the manner in which the employee may contact the Marketplace to request assistance;
that, if the employer plan’s share of the total allowed costs of benefits provided under the plan is less than 60 percent of such costs, the employee may be eligible for a premium tax credit if he/she purchases a qualified health plan through the Marketplace; and
that, if the employee purchases a qualified health plan through the Marketplace, the employee may lose the employer contribution (if any) to any health benefits plan offered by the employer and that all or a portion of such contribution may be excludable from income for Federal income tax purposes.
Recently, in Technical Release 2013-02, the DOL provided temporary guidance on the notice requirement and set a new deadline: employers must begin providing employees and new hires with a notice of the Exchanges on October 1, 2013, the same date on which open enrollment for coverage through the Exchanges is slated to begin. Employers must provide a notice to each employee, regardless of his/her plan enrollment status or of his/her part-time or full-time status; however, separate notices are not required for non-employee dependents or other individuals who are or may become eligible for coverage under an employer’s health plan.
The DOL has published two Model Notices, which employers may elect to use – a Notice for those employers that offer health care coverage to some or all of their employees and a Notice for those employers who do not offer a health plan. Employers may prepare their own notice of the Exchanges; however, they must be careful to ensure that they have provided all required content (including the information listed above) and that the content is presented “in a manner calculated to be understood by the average employee.” Notices may be delivered via first-class mail or electronically, as long as the DOL’s safe harbor requirements pertaining to electronic disclosures are met.
In addition to the Model Notices, the DOL also issued an updated model COBRA election notice, which must be used effective October 1, 2014. The model COBRA notice includes information regarding health care coverage alternatives offered through the Marketplace.
FINAL REGULATIONS IMPLEMENTING PPACA WELLNESS PROGRAM PROVISIONS ISSUED
At the end of May, the DOL and the Departments of the Treasury and Health and Human Services (the “Departments”) issued final regulations amending the 2006 Health Insurance Portability and Accountability Act (“HIPAA”) regulations pertaining to wellness programs. The final regulations apply to grandfathered and non-grandfathered plans.
Since 2006, employers offering wellness programs that tie a financial incentive to the attainment of certain health outcomes (i.e., “health-contingent” wellness programs) have been governed by HIPAA’s nondiscrimination regulations, which impose five basic compliance requirements for health-contingent wellness programs, including a general limit on the amount of financial incentives to 20% of the total cost of coverage under the plan. PPACA will increase this limit up to 30% (50% if related to tobacco use) in 2014.
The new rules outline the standards for nondiscriminatory health-contingent wellness programs, which are programs that reward individuals who meet a specific, health-related standard (e.g., non-use of tobacco, achievement of a certain weight or cholesterol level, or use of biometric screening or health risk assessments to identify employees with specific conditions or risk factors). In contrast, “participatory” wellness programs are those that are not tied to achievement of a health-related standard, such as reimbursement for gym membership and rewards for participation in a health education program that are not tied to an outcome. Participatory wellness programs are permissible under HIPAA, if made available to all similarly-situated individuals, regardless of their health status.
The regulations clarify the five nondiscrimination requirements for health-contingent wellness programs:
Individuals must be given the opportunity to qualify for the reward at least once per year.
The total reward offered under all of a plan’s health-contingent wellness programs cannot exceed 30% of the total cost of coverage under the plan (up to 50% to the extent that the additional percentage is related to tobacco use prevention or reduction.) The increased percentages are effective for plan years beginning on or after January 1, 2014.
The wellness program must be reasonably designed to promote health or prevent disease, whether activity-only (e.g., programs tied to a health-related activity and not an outcome, such as diet or exercise programs) or outcome-based. The final regulations indicate that a wellness program is “reasonably designed” if it has a reasonable chance of improving the health of, or preventing disease in, participating individuals, and it is not overly burdensome, a subterfuge for discrimination based on a health factor or highly suspect in the method chosen to promote health or prevent disease. This determination is based on all of the facts and circumstances of the individual program. In addition, an outcome-based program must provide a reasonable alternative standard to qualify for the reward for those individuals who do not meet the initial standard.
The full reward must be available to all similarly situated individuals – including those who qualify by satisfying a reasonable alternative standard. Plans and issuers have flexibility to design reasonable alternative standards; the final regulations explain what constitutes “reasonable” in the context of alternative standards, including a detailed explanation of the different application of this requirement to activity-only versus outcome-based health-contingent wellness programs.
Plans and issuers must disclose the availability of a reasonable alternative standard in all plan materials describing the terms of a health-contingent wellness program, including contact information and a statement that the recommendations of an individual’s personal physician will be accommodated. Sample language is provided in the regulations.
The final regulations also reorganize the presentation of the steps a plan or issuer must take to ensure that a wellness program is designed to meet the standards outlined in both PPACA and HIPAA. Employers that have or are considering implementing a wellness program – especially a health-contingent wellness program – should review the final regulations carefully to ensure compliance with HIPAA’s nondiscrimination rules.