Health Care Reform
In a Post-SCOTUS World
John Hickman, Esq
john.hickman@alston.com
© 2012, Alston & Bird, LLP
Since We Last Met
• A tax by any other name is still a tax . . . The Wait Over the
SCOTUS Decision is Over
– In a 5-4 decision, the Supreme Court upheld the individual mandate as a
permitted tax.
• A tax?
– Bottom line for health benefits . . . Address ACA compliance
issues in earnest
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SBC requirement
W2
$2500 cap
Pay or play decisions
Since We Last Met
• 1) Immediate concerns
– Ensure systems are in place to capture and report the value of health
coverage (regardless of whether employer or employee funded) on W-2s
for 2012 (to be issued in January 2013);
– Start/finish summary of benefits and coverage (SBC) implementation for
open enrollments commencing 9/23/2012;
– Analyze the comparative effectiveness research (CER) fee calculation
methods (Due 7/31/13 on 2012 average covered lives);
– Amend plans to comply with mandatory preventive care requirements
(including the women’s preventive health rules effective the first plan year
on or after August 1, 2012);
– Amend health FSA to limit salary reductions to $2500 (first plan year on or
after 1/1/2013).
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Since We Last Met
• 2) Late 2012/2013
– For employers that provide retiree medical prescription drug coverage and
receive the Part D (RDS) subsidy, the favorable tax treatment that allowed
a deduction for qualifying retiree prescription drug expenses as well as a
tax free RDS subsidy based on those expenses ends.
– In March 2013, employers will be required to send out notices to
employees regarding the existence of the exchange and the criteria for
enrollment. No guidance yet as to what these notices must include.
Since We Last Met
• 3) In 2013 (for 2014)
• Implement remaining health insurance reforms effective 1/1/2014 (no
excessive waiting periods, no annual limits on essential benefits, no preexisting condition exclusions for anyone, restrictions on deductible/oop max
limits, clinical care coverage requirements);
• Prepare for employer shared responsibility reporting (report for 2014 in 2015
but need to analyze the data gathering requirements before 2014 begins);
• Determine the reinsurance pool assessment applicable to self-funded plans
(including non-exempt FSAs and HRAs);
• Analyze whether pay or play requirement will be satisfied—i.e., whether plan
provides (i) minimum essential coverage (ii) if minimum essential coverage, is
it affordable and (iii) if affordable, does it provide minimum value
The Administration’s 2012
Budget Proposal
• No direct impact on Flex, FSAs, HRAs, HSAs, but …
• Proposal to cap health (and other) exclusions and deductions for high
income taxpayers at 28%
– Makes Flex and other pre-tax benefits less attractive to high income
individuals. How would that work?
– To determine your tax increase (subject to AMT and other complications)
take the amount of your current pre-tax expenditure for health care as
reflected on W-2 (including salary reduction and employer paid HC) and
multiply by 8% if in 36% bracket or 11% if in 39% bracket.
– Example: The Hickman family HC bill (high deductible coverage at
$15,000 per year) times 11% equals an additional $1650 in taxes.
Will We See Such Changes?
• Congress Unanimously rejected budget but
• Number one tax subsidy is health care (qualified plans, IRAs,
pensions, combined are second)
– Consistent with JCT expenditure analysis
• Existing Cadillac tax provisions would be a wear-away
– All Major tax Reform Proposals Target Health Care Tax
Subsidies
• Simpson Bowles – Zero Plan eliminates 106 exclusion
• Bipartisan
– Wyden/Coats – Eliminates Section 125 but not 106
– Domenici/Rivlan – Caps 106, then eliminates over 10 years, eliminates
HSAs over 10 years
• Ryan – Proposal before 111th Congress eliminates 106, but retains
HSAs
PPACA and Its Impact
on Employer Provided
Health Coverage
What We Will Cover
• Health Care Reform: A High Level Recap and Update
• Where are we now
• Where are we going
• What does it all mean ?
• Will employers play or pay?
• Focus on FSAs
• Focus on HRAs
– New Challenges Under ACA and Otherwise
• Focus on HSAs
The New Health Care Coverage
Landscape—General Overview
• Health Care Reforms
• 2 waves of mandates for Group Health Plans
– FPY on/after 9/23/2010
– FPY on/after 1/1/2014
• Health Care Exchange in 2014
• New Regs regarding minimum essential coverage
• Individual Mandate in 2014
• Supreme Court hearing in March, decision by June
• What if it’s unconstitutional?
• Employer “pay or play” mandate in 2014
• Agencies Requested Input
• Tax Provisions
The New Health Care Coverage Landscape—
Changes in Effect Prior to 2014
• Implementation Timeline
• Changes effective in 2010
– Change in “dependent” definition for purposes of health plan tax exclusions
(“child” through age 26)
» Coverage and Plan changes
– Small employer tax credit
» In 2014 restricted to exchange coverage
• Immediate Health Care Reform (First PY beginning on or after 9/23/10)—
Wave #1 of Health Reforms
• Changes effective January 1, 2011
– Limits on OTC benefits
– SIMPLE Cafeteria Plan Rules for Small employers
• W-2 reporting for coverage cost delayed until 2012 (first report
in 2013)
– Special exceptions for most FSAs, small employers, and HRAs
• Changes effective January 1, 2013
– Loss of Medicare Part D retiree subsidy deduction
– $2500 cap on FSA salary reductions
The New Health Care Coverage Landscape—
Changes in Effect On and After 2014
• Changes Effective in 2014
• Individual mandate
• Employer play or pay requirement
• Employer Coverage Reporting
– Required to Report Minimum Essential Coverage and premium Costs in 2014
– Applies to insurers and self funded plans
• Exchanges
• Changes generally effective first plan year on/after January 1, 2014—
• Wave #2 of Health Reforms
• Employer Quality of Care Coverage Reporting
– Will require information on health care outcome, safety, and wellness
– Regulations due by March 23rd
– Must Make available to enrollees and on internet
• Changes Effective in 2018
• “Cadillac Plan” excise tax
Health Reforms---What is a
group health plan?
• Reforms added to the HIPAA portability subparts of
ERISA and the IRC
• This means that:
• Liability for failing to comply w/reforms is same as violating HIPAA
portability under ERISA/Code
– Specific performance under ERISA
– $100/day penalty under IRC and HIPAA
– Mandatory Self-Reporting and excise tax for violations (Form 8928)
• The reforms do not apply to:
– Excepted Benefits (such as stand alone and non-integrated dental, vision,
Health FSA)
– Stand alone retiree plans
– Delayed effective date for certain requirements
for grandfathered plans
Note: Other aspects of PPACA such as tax changes do apply.
Grandfathered Plans Overview
• Grandfathered plans are permanently exempt from the
following reforms:
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Preventive services
Limits on cost sharing
Reporting requirements
Appeals process
Selection of doctors and referral requirements
Coverage of clinical trials
No discrimination against providers
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Grandfathered Plans
• Grandfathered plans are subject to the following
requirements:
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Uniform explanation of coverage (Summary of Coverage)
Cost reporting and rebates
Notification of availability of the exchange and subsidies
Prohibition on lifetime/annual limits (FPY 6 months after enactment)
Limitation on preexisting condition exclusions (FPY 6 months after
enactment for children under 18 and 2014 for adults)
• Prohibition on rescissions (FPY 6 months after enactment)
• Limitation on waiting periods (FPY 2014)
• Coverage of adult children; (FPY 6 months after enactment however,
for years before 2014, the coverage requirement applies only if the
adult child is not eligible to enroll in another eligible employer plan)
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Grandfathered Plans
• Interim Final Regulations issued 6/14/2010
• FAQ Guidance Parts I, II, IV and new guidance issued April 1, 2011 (Q/A
Part VI)
• A plan is a grandfathered plan with respect to individuals who were enrolled
on March 23, 2010. The plan does not stop being a grandfathered plan
because individuals enrolled on that date cease to be covered, provided that
the plan has continuously covered someone since March 23, 2010.
• Family members may be added
• “New employees” (newly eligible and newly hired) may be added
• Two anti abuse rules
– Merger and acquisition
– Employer initiated transfer to another option/plan
• Regulations apply separately to each benefit package option offered under a
plan
• A single ERISA plan may have multiple benefit options
Grandfathered Health Plans
• Clarifications regarding basic requirements
– Notices to participants of grandfather status
Update
• FAQ Part IV clarifies that notice to participants is not
required for every communication to participants
– Required whenever a “summary of benefits” is provided
– Regulations describe changes that will cause loss of
grandfather status—
Update
• Changes not prohibited should not impact status
• Any new rules from agencies will be applied prospectively
• FAQ Part VI clarifies that grandfather status is lost on
effective date of amendment that causes loss of status, not
date amendment was adopted
Grandfathered Health Plans
• Transferring Employees To Another Plan
– Grandfather status lost when transfer, if treated like a plan
amendment to the transferor plan, would cause loss of
grandfather status
• Unless there is a bona fide employment purpose for transfer
Update
– FAQ Part VI provides examples of bona fide business reasons
(nonexclusive list)
• Issuer is exiting market
• Low or declining enrollment makes continuation of benefits package
impractical
• Package eliminated under multiemployer plan as part of CBA
• Catch-all: for any reason provided multiple benefit packages covering a
significant number of other employees remain
Grandfathered Health Plans
• Entering
into new contract or changing insurers
Update
– Amendments to regulations in late 2010 allows GHPs to
change insurers without losing grandfather status – for policies
effective on or after November 15, 2010
• But new policy or contract cannot include any other change in regulations
that cause loss of grandfather status
• Self-funded plan moving to insured arrangement effective on or after
Update
November 15, 2010 would fall within this rule
– Informal guidance suggests that changing from insured to selffunded would not itself cause loss of status
• Unclear whether November 15 effective date rule would be applied by
analogy
Grandfathered Health Plans
• What changes cause loss of grandfather status?
– Bucket #1: Elimination of all or substantially all benefits to
diagnose or treat particular condition (no recent guidance)
– Bucket #2: Any increase in percentage cost-sharing
Update
• FAQs Part VI provide that reclassifying band-name drug to new costsharing tier when generic alternative becomes available does not cause
loss of grandfather status
Grandfathered Health Plans
• What changes cause loss of grandfather status?
– Bucket #3: Increase in fixed-amount cost-sharing of more than
$5 or 15% above medical inflation
Update
Update
• FAQ Part II clarifies that this applies even to co-payments that are for a
single category of service
• FAQ Part VI provides that certain changes to implement a value-based
insurance design do not cause loss of grandfather status [later slide]
Grandfathered Health Plans
• What changes cause loss of grandfather status?
– Bucket #4: Decrease in employer contribution rate of more than
5 percentage points below rate on 3/23/10
Update
Update
• Applies to rate for any tier of similarly situated individuals
• FAQ Part II clarifies that if tiers are restructured (e.g., single/family to
single, plus one, family), then each new tier must be evaluated against
corresponding prior tier
• FAQ Part VI provides that if employer’s contribution rate changes as a
result of increases in costs but not increases in the formula, it is not
considered a decrease for this purpose
– Example: Retiree formula that is fixed dollar multiplied by years of
service subject to flat dollar cap
Grandfathered Health Plans
• What changes cause loss of grandfather status?
– Bucket #5: Certain changes to annual limits (no recent
guidance)
• Lowering an annual limit in place on 3/23/10
• For a plan with no limits on 3/23/10, adding an annual or lifetime limit
• For a plan with a lifetime (but no annual) limit on 3/23/10, imposing an
annual limit that is lower than the lifetime limit
• Still unclear how newly added treatment specific limits would be
measured under these rules
Prohibition on Lifetime and
Annual Limits (ALL)
• Interim final regulations
• Essential benefits defined by statute -- HHS leaves determination of
essential benefits to states
• Minimum allowable annual restrictions
– $750k PY before 9/23/2011
– $1.25M PY before 9/23/2012
– $2M PY before 9/23/2014
• Implementation Issues related to Scope of prohibition
• Financial limits only
– While day or treatment limits generally “ok” be wary of impact on GF
status and combination of financial cap and per day/treatment limit
• Prohibition is on any EHB (not just aggregate caps)
• What benefits are “essential” (Chiro, Fertility treatment, Transplants)?
– Agency guidance provides that states will make determination
– Issues for multi-state self funded plans
• Scope of special enrollment rights for newly eligible
• Impact on HRAs
• Limited Time Waiver program for “mini-med” plans now closed
Prohibition on Rescissions (ALL)
• No rescission of coverage is permitted except in cases of
fraud or intentional misrepresentation
• Interim final regulations define rescission as any retroactive
termination of coverage other than for non-payment of premium
• Permissible rescission (e.g., for fraud, intentional
misrepresentation) requires at least 30 days notice.
• Termination for nonpayment of premiums not a rescission
• Implementation issues
• How to handle ineligible participant/dependent terminations
– Some good informal FAQ guidance for COBRA events
– What about immediately eligible dependents
• How to handle administrative errors
New Claim Appeals Process (GF)
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Changes for ERISA plans
– Definition of “adverse benefit determination”
• Now includes rescission determinations
– Urgent Care Timeframe
• Amended regulations retain 72 hour period
– Appeals Procedure
• Access to documents
• Right to present “testimony”
– Conflicts of Interest
– Denial Notice Content
• Certain additional content applicable FPY on/after July 1, 2011
• Amended regulations clarify that treatment/diagnosis codes need not be provided in claims and appeal
determinations unless requested
• CLA requirement clarified based on county-wide statistics
– Strict Adherence
• Modified consistent with court decisions (deminimis, good faith, for cause exceptions)
– External review
• Modified so that only applies to recissisions and decisions requiring medical judgment
Claims and Appeals Rules: FYA
1/1/12
• Strict compliance rule
– Plans must “strictly adhere” to all requirements of internal
claims and appeals procedures
– Noncompliance allows claimant to go to external review or to
court without exhausting plan’s internal procedures
• Permits court to accord no deference to plan’s benefit denial
– Important exceptions for deminimis and good faith errors
• Deadline for urgent care claims kept at 72 hours
Claims and Appeals Rules: FYA
1/1/12
• Culturally and linguistically appropriate notices
– Amended final regulation greatly simplifies “CLA”
requirement
• Triggered only in counties where 10% or more are literate only in same
non-English language
– Based on US Census Data 255 Counties (78 in Puerto Rico)
• When triggered one page Notice advising of foreign language assistance
would suffice
• Additional content requirements for denial notices
– Information sufficient to identify claim
• Amended final regulation provides that diagnosis and treatment codes
(and their meanings) only required to be provided upon request
Claims and Appeals Rules: FYA
7/1/11
• Additional content requirements for denial notices
– Information sufficient to identify claim
• Date of service, health care provider, claim amount
– Reason(s) for denial
• Denial code (and meaning of code) only required upon request
• Description of any standards used in denying claim
• For final internal denials, a “discussion of the decision”
– Description of available internal appeals and external review
procedures
• Including information on how to initiate an appeal
Claims and Appeals Rules: FYA
7/1/11
• Additional content requirements for denial notices
– Availability of (and contact information for) any office of
Update health insurance consumer assistance or ombudsman
• Grace period guidance contains information (in appendix) on state offices
that may be used in notices
Claims and Appeals Rules: FYA
9/23/10
• Rescission is adverse benefit determination
– Definition of term in DOL claims procedure regulations
expanded to include rescissions of coverage
• Regardless of whether rescission has an adverse effect on any particular
benefit at that time
• Rescission = Retroactive cancellation or discontinuation of coverage
except for failure to pay timely premiums
• Additional criteria for full and fair review
– Expansion of existing rights of claimants
• Right to review claim file
• Right to present evidence and testimony on appeal
• Must be provided any new or additional evidence and given opportunity
to respond before appeal decided
Claims and Appeals Rules: FYA
9/23/10
• Avoiding conflicts of interest
– Claims and appeals must be decided in a way that ensures
independence and impartiality of decision makers
• Plans cannot hire, promote, or terminate claims reviewer based on
likelihood of supporting benefit denial
• No bonuses based on number of claims denied
• Plans cannot contract with medical experts based on expert’s reputation
for outcomes in disputed cases
– Must be retained based on professional qualifications only
• Continued coverage pending outcome of appeal
– Under interim final regulations, this is satisfied by complying
with existing rules for concurrent care decisions
External Review: FYA 9/23/10
• External review applies for both GHPs and insurers
– State or federal external review process must be followed
• No grace period for external review rules
• Only issues that involve medical judgment or rescission
are subject to external review
– Medical necessity, experimental/investigational, medical
appropriateness, etc.
– Other adverse benefit determinations not subject o external
review
Dependent Coverage Mandate
• Required coverage for children until age 26
– Plans that cover children must make coverage available for employees’
children until age 26
• Marital status of the child is not relevant (but a child’s children/spouse need not
be covered)
• Eligibility is definable only by the child’s relationship with the employee
(residency, financial dependence, student status, or employment cannot be
used—because of age correlation)
– Terms and conditions of coverage cannot vary based on age (“uniformity
requirement”)
• Example: Premium surcharge for over age 18 not OK
– Effective for plan years beginning on or after 9/23/10
• Until 2014, grandfathered plans need not cover child with other
employer coverage available (not through parent)
Dependent Coverage Mandate
• Under related tax rule, coverage is nontaxable until
December 31st in year that child turns 26
– Tax rule defines “child” using Code §152(f)(1) definition—
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Son or daughter (generally biological)
Legally adopted son or daughter (or one placed for adoption)
Stepson or stepdaughter
Eligible foster child
– The new rules do not affect state tax treatment of coverage
provided to employees’ children
• All states (including WI) now conform to federal tax treatment
Dependent Coverage Mandate
• Other practical issues in complying with mandate
– Grandfathered plans can limit, but is it worth it?
• Only available until 2014
• May be cumbersome to track other coverage
• Transient coverage could increase special enrollments
– Mandate is not applicable to “excepted benefits”
• But employers may prefer to apply uniform eligibility and extend dependent
coverage under other plans (e.g., health FSA, stand-alone dental)
– Tax rule will make most coverage nontaxable
– Mandate and tax rule applies to HDHPs, but not HSAs
• Expenses of nondependent children are not reimbursable by
HSA because HSA rules not yet amended
• But nondependent child could have his or
her own HSA
Additional FYA 9/23/2010 Mandates
• (ALL) No pre-existing condition exclusions on enrollees under age 19
• Could apply to young employees, spouse or dependent children
• Implementation issues
– Determine if any pre-ex in plan may apply to children
• (NGF) First dollar coverage (i.e., no cost-sharing) must be provided for certain
evidence-based preventive care (including well-child care) and certain
immunizations
• Regulations allow for network and medical management restrictions
• Implementation issues
– Conform wellness/preventive care to list and ensure no cost sharing applies
– Issues with regard to contraceptives
» Insurer/TPA may be required to provide benefit
– How to communicate list of covered expenses to participants
– Difficulty with interplay between essential benefits (no annual/lifetime cap) and
preventive care caps.
Additional FYA 9/23/2010 Mandates
• (ALL) Prepare and distribute a new “Summary of Coverage”
• Distributed at enrollment, no more than 4 pages, and 12pt font
• Notice of material changes in Summary required 60 days prior to
effective date
• Final regulation issued February 2012
• Required to be distributed for annual enrollments beginning
September 23rd 2012
• (NGF) Fully insured plans sponsored by employers will generally be
required to satisfy the same Section 105(h) discrimination
requirements that apply to self-funded plans
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Impact on executive comp arrangements designed to avoid 409A
Likely no small employer exception
Guidance provides for delay until FPY after regulations
Applicable to premium reimbursement plans (not subject to 105(h)?
Penalty is $100 per day excise tax (self reported) for affected
participant
Additional FYA 9/23/2010 Mandates
• (NGF) Special rules regarding health care providers:
• Plan enrollees are allowed to select their primary care provider,
or pediatrician, from any available participating providers;
• Precludes prior authorization or increased cost-sharing for
emergency services, whether in-network or out-of-network
– Interim final regulations require payment at greater of network
rate, out of network rate, or Medicare rate; and
• Precludes plans from requiring authorization or referral by the
plan for obstetrical or gynecological care
• Interim final regulations impose notice requirements
Effective in 2011
– No reimbursement of OTC medicines or drugs (except
insulin) by health FSA, HRA, or HSA without prescription
• Related to expenses incurred in calendar year 2011; not
based on “plan year”
• Notice 2011-5 Provided Guidance on health debit cards
– Impact on participation rates and administration costs?
– Recent study by CHPA re: OTC cost efficiency
CER Fees Effective in 2012
• Comparative Effectiveness Research CER Fees
payable for plan years ending after 9/30/2012
– For Calendar year plan, payable for 2012 PY
– (IRS Notice 2011-35 request for comments)
• For the first year for which the fee is effective, it is $1
multiplied by the average number of covered lives.
The rate of the fee increases to $2 for the next year and
is indexed thereafter.
• Issues for HRAs, non-exempt FSAs
CER Fees: Who, What, Where, When
• IRS Proposed Regulation Published April 17th
• Applies to all non-excepted benefit HRAs (including
retiree only HRAs and premium only HRAs); applies to
non-exempt FSAs as well
• Tax is not assessed against PSP,
– but PSP is in best position to determine amount and assist plan
with compliance
– Do you charge for this service?
• Some relief provided for EAPs, wellness, disease
management where “not significant benefits in nature of
medical care”
Overview
• Virtually all HRAs will be applicable self-insured health
plans subject to the fee rules.
– No exception for retiree only HRAs
– Possible exception for vision/dental only HRAs
• Only the FSAs that are NOT excepted benefits will be
subject to the fee rules.
– Very few FSAs are not excepted benefits.
– Footprint issue
– More than $500 employer credit issue
Overview
• The fee is the product of the average number of lives
covered (generally the sum of participants and covered
dependents, but special rule for FSAs and HRAs) and
the applicable dollar amount ($1 for plan years ending
prior to October 1, 2013 and $2 for plan years ending on
or after October 1, 2013)
– Thus, if your HRA operates on a calendar year, the
applicable dollar amount is $1 for the 2012 plan year and $2
for 2013.
– NOTE: For HRA/FSAs, “covered lives” generally means
participants and not covered dependents
Overview
• If the HRA/FSA is stand alone, the plan sponsor must
pay the fee with respect to the average number of
covered lives during the plan year in accordance with
one of the fee calculation methods below
• If the HRA/FSA is integrated with a fully insured major
medical plan, the plan sponsor must pay the fee with
respect to the average number of lives covered under the
HRA/FSA during the plan year in accordance with one
of the fee calculation methods below.
– An individual covered under both the HRA AND FSA would
not have to be counted twice
Overview
• If the HRA/FSA is integrated with another self-insured
major medical plan of the plan sponsor, each person
covered under multiple arrangements is only counted
once.
– The plan sponsor will pay the fee equal to the average number
of lives covered under both the self-insured major medical
plan and HRA/FSA.
– However, if the HRA/FSA covers anyone who is not also
covered under the self-insured major medical plan, then the
plan sponsor must pay the fee with respect to average number
of individuals covered only under the HRA/FSA in accordance
with one of the methods below
Fee Calculation Methods
• The IRS has provided four different methods to
calculate the average number of covered lives under a
self-insured plan. [NOTE: The IRS has provided a
special rule for HRAs/Health FSAs. In the case of
HRAs/FSAs, you will consider only participants in your
calculation of covered lives]
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Actual Count Method
Snapshot Method #1
Snapshot Method #2
Form 5500 Method
Fee Calculation Methods
• Actual Count Method: The actual count method formula
is the sum of actual covered lives each day during the
plan year / total number of days in the plan year.
• Snapshot method #1: The snapshot method #1 formula
is the sum of covered lives on one or more dates in each
quarter / the applicable number of dates used. So, for
example, if you use the first day of each quarter as your
benchmark, then you will add the total number of lives
on the first day of each quarter and then divide that
number by 4.
•
Fee Calculation Methods
• Snapshot Method #2: This is the same as #1, except that
the number of covered lives on your benchmark date(s)
in a quarter is the sum of participants with self only
coverage and (participants with other than self-only x
2.35).
• Form 5500 Method:
– only self only coverage is sum of participants on Form 5500 at
beginning of plan year and participants on Form 5500 at end
of plan year / 2.
– both self only and other than self only is the sum of
participants on Form 5500 at beginning of plan year and
participants on Form 5500 at end of plan year.
Paying/Reporting the Fee
• The fee is payable by the plan sponsor. The TPA cannot
pay the fee on the plan sponsor’s behalf.
– NOTE: There is no control group rule concept in these rules;
therefore, if the plan is maintained by employers in a
controlled group of employers, and the plan document fails to
identify the specific plan sponsor, then each employer will be
responsible for reporting the fees for the average number of its
employees/dependents covered under the plan.
• Employers will file a Form 720 by July 31 of the year
following the calendar year in which the applicable plan
year ended. Payment must be made with the filing.
W-2 Reporting for 2012 Coverage
• Employers must report aggregate value of employersponsored coverage on Form W-2 (reports due 2013
for 2012 coverage)
• Includes COBRA rate of all health coverage subject to Cadillac tax
• Are payroll systems in place to capture amounts
• Retirees not already required to receive W2 not subject to this
requirement
• Transitional rule exception for employers with fewer than 250 W-2s
W2 Guidance
• IRS guidance on this issue so far:
• IRS Notice 2011-28
– Effective for 2012 Forms W-2, Qs & As providing guidance on
requirement.
• IRS Notice 2012-9
– Amends and Restates Notice 2011-28, adding additional guidance and
clarification.
– Among other things, clarifies reporting for HRAs (Q33), health FSAs (Q19), vision and dental (Q-20), wellness and EAP (Q-32).
– (Q-37-38) Cancer, Hospital Indemnity and Other Supplemental Health
coverage must report cafeteria plan salary reductions and employer
contributions
» Accident coverage, disability coverage, dental and vision
coverage not required to report value of coverage
Effective in 2013
• Health FSA salary reductions limited to $2,500 each
year
• The cap is indexed to the CPI starting in 2014
• Interpretation issues
– Per IRS Notice 2012-40, Plan year approach
• Does this open door to elimination of use/lose rule?
• Deduction previously permitted for amounts allocable
to the Medicare Part D subsidy for prescription drug
plans is eliminated
• FAS 106 impact and impact on balance sheets
Reforms Effective Plan Years
On/After 2014
• (ALL) No preexisting condition exclusions or
limitations are permitted
• (ALL) Prohibition on excessive waiting periods—i.e.
no waiting period in excess of 90 days
• (NGF) Fair Health Insurance Premiums (applicable
only to health insurers)
• Limitations on premium setting (e.g. limitations on premium setting
based on age, tobacco use)
• Indirect impact on self insured plans?
Reforms Effective Plan Years
On/After 2014
• (NGF) No discrimination based on health status is permitted
• Essentially, the same rules that currently exist under HIPAA
• The bill raises maximum incentive amount for wellness programs that
provide the incentive based on achieving a health standard from 20 to 30
percent of the COBRA cost of coverage
– Also gives the Secretaries of Labor, HHS, and the Treasury leeway
to increase the percentage to 50 percent
• (NGF) Cost limitations
• Out-of-pocket expenses do not exceed the amount applicable to coverage
related to health savings accounts (HSAs)
• Deductibles do not exceed $2,000 for single coverage and $4,000 for
family coverage (as indexed)
– Unclear whether deductible requirement may only apply to fully
insured plans in small group market
– Query: Can you ever have a “bronze plan” once this requirement
applies?
Reforms Effective Plan Years
On/After 2014
• (NGF) Fully insured plans in small group market must provide
essential benefits
• Not applicable to fully insured plans in large group market and self
insured plans
• Self insured plans NOT required to provide essential benefits
• (NGF) Group and individual plans are required to cover routine
costs
of participation in certain clinical trials by qualified individuals
• (NGF) No nondiscrimination against providers who act within
the scope of their license
• Not an any willing provider statute
Health Insurance Exchange
• PPACA provides funds to states to establish a health insurance
exchange through which individuals may purchase health
insurance beginning in 2014
• Exchange-related provisions in PPACA impact employers in
the following ways:
• Beginning in 2017, states may allow all employers of any size to
offer coverage through the exchange
– Prior to 2017, only small employers - employers with 100 employees
or less (except in states that limit small employers to employers with
50 or fewer employees)—may participate
• Employers who offer coverage through the exchange may permit
employees to pay for such coverage with pre-tax dollars through the
employer’s cafeteria plan
Employer Responsibility
• Effective January 1, 2014 - play or pay mandate #1:
• Employers with 50 or more full-time “applicable” employees are
subject to the following penalties related to coverage that they offer
or fail to offer to full-time employees:
– Applicable employers who fail to offer full-time employees health
coverage must pay a penalty with respect to each full-time employee in
any month in which any full-time employee receives a federal subsidy
for the exchange
» The penalty is determined on a monthly basis and is the product of
the total number of full-time employees of the employer (over 30)
for that month and 1/12 of $2000 (up from $750)
» For example, a business with 51 employees that does not offer
coverage is subject to tax equal to 21 times the applicable payment
amount
Employer Responsibility
• Effective January 1, 2014 - play or pay mandate #1 (cont’d):
• Part-time employees are taken into account solely for the purpose of
determining if an employer has at least 50 employees
– The number of full-time employees otherwise determined is
increased by dividing the aggregate number of hours of service of
employees who are not full-time employees by 120
• Employers who are “applicable large employers” solely because of
seasonal employees who are otherwise full-time employees and that
work less than 120 days during the year are NOT considered
“applicable large employers”
Employer Responsibility
• Effective January 1, 2014 - play or pay mandate #2:
• Even when coverage is extended, applicable employers who offer
coverage for any month to a full-time employee who is certified
as having enrolled in the exchange and received a tax subsidy is
subject to a penalty equal to the product of the total number of
such employees who have received a tax subsidy and 1/12 of
$3000 (capped at 1/12 of $2000 times the total number of fulltime employees during such month)
» Note: employees offered employer coverage are not eligible
for a credit unless their required premium exceeds 9.5% of
household income or the plan’s share of allowed costs is less
than 60%.
Employer “Mandate” – Pay or Play
Applies to:
• Employers with 50 or more FTEs
• PT employees count based on hours / 120 per month (only for
whether penalty applies, not for calculation of the amount of
penalty)
• Certain exceptions for seasonal employees who work < 120 days
per year
• Controlled group rules apply (combine related employers)
Pay or Play: Sledgehammer Penalty
• If one FT employee does not have offer of minimum essential coverage
• If one FT employee who is not eligible for coverage purchases insurance on an
exchange and receives a tax credit
• Penalty = $2,000 times # of FT Employees minus 30
Example
•
•
•
•
•
Giant Business Machines (GBM) has 300,000 employees
GBM offers insurance to 299,999 employees
The last employee (Sam) purchases insurance on exchange and receives a tax credit
Penalty = 299,970 times $2,000 = (approx) $600 million
GBM wishes it had offered coverage to Sam!
Pay or Play: Tackhammer Penalty
•
•
•
•
•
•
Where coverage is offered to all FT employees
Cost to employee of coverage exceeds 9.5% of household income or the amount the
plan pays is less than 60% of value of coverage.
FT Employee enrolls in exchange and receives tax subsidy.
Penalty to Employer is $3,000 per year for that employee
Capped at Sledgehammer penalty.
Employer pays no penalty for employee if:
– Household income > 4 x poverty (about $40,000 for individual, $89,000 for family
of 4)
– Employee chooses not to purchase coverage on the exchange
– Employee is covered by Medicare, Medicaid, spouse’s plan, parents’ plan, other
employer’s plan, etc.
Pay or Play: Tackhammer Penalty
Example
• GBM offers coverage to Sam at high price; he goes to the
exchange and obtains coverage with a subsidy.
• Tackhammer penalty = $3,000, not $600 million.
How will the pay or play impact
employer sponsored coverage?
• Today’s Prevailing Theory: Employers will cease to provide group health
coverage to their employees/dependents
• The case for this theory:
– Employees can purchase coverage in the exchange
– PPACA is driving health care costs up for employers
– The penalty for failing to offer coverage (Sledgehammer Penalty) is less than the
actual cost to provide health coverage
• Thus, employers may ultimately adopt the following view: Let me just give my
employees additional compensation to account for the loss of health coverage
and then they can just purchase coverage on the exchange instead of from
me!!!!!!
• Information is needed to help employers PROPERLY analyze this issue
Pay or Play--PPACA Economics
•
•
Reasons for insurance from employee’s perspective
– Risk mitigation
– Negotiated discounts (overcharging the uninsured)
Reasons to get insurance through employer
– Income tax / FICA exemption for employer premiums and employee premiums
• Exchange coverage may not be offered through employer’s cafeteria plan
• Thus, employee pays for exchange coverage with after-tax dollars
– Exceptions:
» Tax subsidy employees
– Employer better equipped to make complex purchasing decision
• Even with Navigators and online facilitation---it may be easier to get through employer
– Individual market has higher premiums due to anti-selection and individual underwriting /
selling costs and/or coverage may be better than coverage in exchange
Pay or Play: Reasons Maintaining Coverage
•
•
•
•
Sledgehammer penalty
FICA tax savings on employer / employee health plan premiums coupled with employer
tax deduction for employer health plan costs may exceed the difference between the
sledgehammer penalty and cost to provide health coverage (savings)
Increased salary needed if no insurance offered
– “Equalizing” through compensation will cost more than the cost of coverage due to
income/employment tax associated with compensation
Business reasons
– Company cultural imperatives
– High value workforce
– Impact on productivity
– Public relations / government relations
Weighing the Pay or Play Decision
• If coverage is dropped
• Nondeductible excise tax of
$2000 per FTE (real cost higher
deduction)
• Pressure to increase taxable
wages to pay for exchange
coverage
• Uncertainty as to whether
coverage is purchased
• Exchange risk of higher cost
– Adverse selection
– Mandated benefits
• If coverage continues
• Cost of continuing coverage
– Costs are deductible
– Subsidy is variable
• Potential competitive
advantage of offering
better/lower cost coverage
• More freedom over
coverage options
• Potential risk pool
advantage
Notice/Reporting Requirements
• No later than March 2013, employers must provide
notice to employees of the following:
–
–
–
–
the existence of the exchange
services offered by exchange
How to enroll/request information
If employer’s coverage is unaffordable, the fact that a tax
subsidy may be available
– The fact that employer contribution may be lost (other than
through free choice voucher) if employee enrolls in exchange
Notice/Reporting Requirements
• Reporting beginning in 2014 regarding coverage options offered
to all full-time employees
–
–
–
–
–
–
–
Employer information
Whether minimum essential coverage is offered?
The length of the waiting period
The months during the year that it was offered
Monthly premium for the lowest cost option in each enrollment category
Employer’s share of the total allowed costs of benefits
The employer’s premium under the option with the highest employer
contribution
– The number of full-time employees each month
– Name, address, and TIN of each full time employee during the year and the
months during year covered under plan (report also provided to employees)
Auto-enrollment for employers
with more than 200 employees
• Effective date?
• Provision has no separate effective date,
• But recent q/a guidance indicates likely NOT effective until some
time after 2014
• What plans does it apply to?
• Excepted benefits ? Likely not.
• How does it apply with regard to cafeteria plan rules
Cadillac Plan Tax
• Beginning in 2018, PPACA (as modified by the Reconciliation Bill) imposes a 40
percent excise tax on:
• “Coverage providers:” for the sum of months in which the aggregate value of
employer sponsored health coverage for the employee exceeds:
– 1/12 of $10,200 for single coverage and $27,500 for family coverage
» The higher family threshold applies to both single and family coverage
offered under a multiemployer plan
» These amounts are to be adjusted automatically if health costs increase by
more than anticipated before 2018
» The thresholds are increased by CPI + 1 in 2019, and by CPI thereafter
» An employer may make an adjustment to reduce the cost of plans when
calculating the tax if the employer’s age and gender demographics are not
representative of a national average
» The PPACA transition rule for high cost states does not apply
– The annual limit for retirees between ages 55 and 64, individuals engaged in
certain high-risk professions (e.g., law enforcement professionals, EMTs,
longshoremen, construction workers, and miners), and those employed to
install electrical or telecommunication lines is increased to $11,850 for
individual coverage and $30,950 for family coverage
Cadillac Plan Tax
• Determined by the employer and assessed against “coverage
providers”
– “Coverage providers” are defined to include the following:
• In the case of fully insured plans, the health insurer
• In the case of HSA or medical savings account (MSA) contributions, the
employer making the contributions
• In the case of a self-insured plan or flexible spending account (FSA), the
person that administers the plan (e.g., the TPA)
– In many cases, employer-sponsored coverage will include both fully
insured and self-insured contributions (it may also include HSA
contributions)
• The coverage provider’s applicable share of the tax will bear the same ratio
to the total excess benefit as the cost of the coverage provider’s coverage to
the total value of employer-sponsored coverage
Cadillac Plan Tax
• The coverage subject to the excise tax rule
includes:
• The applicable premium (determined in accordance with
COBRA rules) for all accident and health coverage provided by
the employer, even if paid for with after-tax dollars by the
employee (except vision only insurance, dental insurance,
accident and disability insurance, long-term care insurance, and
after-tax funded hospital indemnity and/or specified disease
coverage)
• Both non-elective and salary reduction contributions to a health
FSA
• Employer contributions (presumably including salary
reductions) to an HSA
Other New Taxes
• Several new taxes are imposed, including:
• Indoor tanning procedures effective for services performed on
or after July 1, 2010)
• New sector tax on health insurers (but not self-insured plans or
TPAs) beginning in 2014
• 0.9 percent increase in Medicare taxes for those earning more
than $200,000 for single individuals and $250,000 for joint
filers (effective beginning in 2013)
– Such individuals would also be subject to a 3.8% tax on their net
investment income (to the extent that total income exceeds the thresholds)
– This new tax would be effective starting in 2013
• CER fee: A fee equal to $2 ($1 in 2013) multiplied by average
number of covered lives imposed. Applies to both fully insured
and self insured plans.
What Does it All Mean?
• What does it all mean for Individual account based
plans?
• Focus on FSAs
• Focus on HRAs
– New Challenges Under ACA and Otherwise
• Focus on HSAs
PPACA Scorecard:
Impact of PPACA on FSAs
• Generally excepted from PPACA as an excepted benefit
• Permitted (not required) to cover children up to 26
• Changes to plan documents, SPDs, etc.
• In 2011 OTC medicines and drugs require an Rx
• Additional manual administration, but IIAS automation
allowed by IRS in Notice 2011-5
• Simple Cafeteria Plan Provisions
• When applicable, possibly provides pre-tax coverage option
for some small employers
– Company comprised of only key employees or HCEs (for
DCAP test)
PPACA Scorecard:
Impact of PPACA on FSAs
• In 2013 FSA salary reductions cannot exceed $2500
• Administration issues for non-calendar year plans
• May open the door for elimination of use/lose rule
– Impact on grace period?
– Impact on elections?
PPACA Scorecard:
Impact of PPACA on FSAs
• Impact of 2014 Marketplace changes
• Some of “gap” that FSAs typically fill will be taken up by more
robust mandated coverages but many employers will convert to self
funded to avoid such mandates, which could preserve greater room
for FSAs;
• As costs to comply with PPACA continue to increase (in particular
the increase in delivery costs due to the health insurance reforms),
employers may shift more traditional health coverage responsibility
(coinsurance/deductibles) to employees, which may also preserve
role of FSAs
• Employers who drop coverage in 2014 due to market factors such as
pay or play penalty/existence of exchange may desire to “stay in
game” with FSA
• FSA benefits will be counted for Cadillac Tax
• Likely a “crowding out” impact beginning in 2018
PPACA Scorecard: HRAs
• In 2011 OTC medicines and drugs require an Rx
• Limited term W-2 reporting exception; no SBC exception
• Some HRAs are exempt from most of PPACA
• Limited scope vision, dental, and retiree only coverage
• Non-exempt HRAs will be especially impacted (square peg, round hole) by
• Annual cap prohibition
– Qualification for regulatory FSA exemption (5 times rule)
– Qualification for “mini-med” waiver until 2014 for plans in existence
9/21/2013
• Claims requirements and external review
• SBC requirements
• Limits on deductible and OOP will constrict plan design in 2014
• Subject to Cadillac Tax in 2018
PPACA Scorecard: HRAs
• Will market changes (elimination of underwriting/exchange)
open door for defined contribution health plans?
• Retiree medical only plans
– PPACA mandates are n/a
– Limits on insurer underwriting (3/1 age based variance) make this an
attractive pre-65 option
• Active employee plans have outstanding issues
– Will stand-alone HRA violate prohibition on annual caps
– Will employer get credit for play/pay purposes as minimum essential
coverage
– Can employee receive both employer reimbursement and exchange
subsidy?
» Nondiscrimination issues for employer arrangements
unavailable to lower paid employees
PPACA Scorecard: HSAs
•
•
•
•
Subject to separate W-2 reporting,
In 2011 OTC medicines and drugs require an Rx
Excise tax for non-health care distributions increased to 20%
New “mismatch” between dependent for HDHP eligibility
purposes and tax free distribution purposes
• Some concern with regard to viability of HDHP coverage under
actuarial valuation requirements
• Agency bulletin provides for crediting of portion of annual value of
employer funded HRA/HSA toward actuarial value of underlying
coverage
• Limits on deductible and OOP for employer group coverage (but
not health insurance issuers) will constrict plan design in 2014
• Salary reductions and employer contributions likely subject to
Cadillac tax
Workshop
Health Savings Accounts and
Wellness Program Compliance Issues
Health Savings Accounts (HSAs)
A Crash Course in Health Care Consumerism
84
Agenda
• A little background on CDHC
– FSAs, HRAs, and HSAs
– Legal environment, differences and similarities
85
86
Components of Consumer Driven
Health Care
• Sensitize health care consumers to real cost of health
care by shifting financial responsibility
– Provide an account (HSA/HRA)
– Reduce 100% coverage and co-pay arrangements
• Educate consumers as to relative value/quality of health
care providers and services
• Preserve negotiated network/discount arrangements
87
Types of Consumer Driven
Healthcare Vehicles
• Health Flexible Spending Account
• Health Reimbursement Arrangement
• Health Savings Account
88
Health Flexible Spending Accounts
• FSA (Flexible Spending Arrangement) – Proposed 125
Regulations
– Typically funded with employee pre-tax salary reductions (but sometimes
subsidized with employer contributions)
– Open Plan Design
• Not required to be offered with any other particular type of coverage
• Employer has discretion to determine eligibility
– Typically a notional account (funding works like an ASO)
• Claims paid from employer’s general assets
– Claims substantiation required/distributions restricted to medical expenses
– Use-it-or-lose-it rule applies (no carryover)
• Promotes unnecessary spending at the end of the year
• IRS has recognized limited 2 ½ month “grace period”
– Regulatory compliance (ERISA, COBRA, HIPAA, tax rules)
89
Health Reimbursement
Arrangements
•
HRA (Health Reimbursement Arrangement) – IRS Rev. Rul. 2002-41 and
Notice 2002-45
– Employer-funded reimbursement account
• Employee pre-tax contributions not permitted
– Open plan design
• Not required to be offered with any other particular type of
coverage
• Nevertheless, often offered with a plan with a “higher” deductible
• Employer has discretion to determine eligibility
– Generally a notional account (funding works like an ASO)
• Claims paid from employer’s general assets
– Claims substantiation/distributions restricted to 213 expenses
– Unused funds may carry over
• Participants have incentive to use HRA wisely in order to limit out
of pocket expenditures in the future
• Contrast to Health FSA use it or lose it rule
– Regulatory compliance (ERISA, COBRA, HIPAA, tax rules)
– Some issues under ACA
90
Health Savings Accounts
• HSA (Health Savings Account) – Section 223 of Tax Code
– Individual account funded by anyone (employer, family
member, your speaker)
– Restricted plan design
• Can only be offered to those with qualified high deductible health
plan and generally no other non-high deductible health coverage
• Compare and contrast to Health FSA/HRA
–
–
–
–
Any “Eligible Individual” may establish HSA
Tax-advantaged IRA-like trust
No claims substantiation /distributions allowed for any purpose
More relaxed regulatory compliance (ERISA, COBRA,
HIPAA?)
91
Impact of CDHC on
Health Care Delivery
• Employer/Plan Sponsors
– Employee perception (is this a takeaway)?
– Will CDHC really reduce health care costs/utilization?
• Health Care Providers
– Employees will have choice . . . But what will this do to my account
receivables?
• Health Insurers
– Do I have product that qualifies ? Possible ACA issues.
– What ancillary services do I want to offer (trust, education tools, access
tools, etc) ?
– What is the adverse selection and impact on cash-flow ?
• Financial Institutions
– Will there be money to manage? . . . If not, how can revenue be generated
(account and interchange fees) ?
– Can we get other entity to do HSA customer service, account
reconciliation/maintenance, etc. ?
92
A Primer on HSAs
• Key elements of HSAs
– HSAs must be established by or on behalf of “Eligible
Individuals”
– HSAs are “Qualified Trusts” maintained by “Qualified
Trustees”
– Contributions to HSA are tax free/deductible so long as they
are made by or on behalf of an “Eligible Individual” and do
not exceed sum of “Monthly Limits” for the tax year.
Earnings on HSA funds are generally tax free
– Distributions to HSA Account Beneficiary are tax free if for
“Qualified Medical Expenses”
• Tax status of distributions not conditioned on Account Beneficiary
being an Eligible Individual
93
Who is an “Eligible Individual”?
• An “Eligible Individual” is any individual who satisfies all four of the
following conditions on the first day of a month:
– Condition #1: The individual is covered under a qualifying “HDHP”
– Condition #2: The individual is not covered under another non-HDHP that
covers the same benefits as the HDHP except for “Permitted Coverage”,
“Permitted Insurance”, and “Preventive Care”
– Condition #3: The individual cannot be claimed by anyone else as a
dependent on that person’s tax return
– Condition #4: The individual is not “entitled” to Medicare
• Due to Age, ESRD, or Disability
• Mere eligibility for Medicare does not disqualify an otherwise eligible
individual
94
What is a High Deductible Health
Plan (HDHP)?
• An HDHP is any health plan that satisfies the following
conditions:
– Annual deductible is not less than the “statutory minimum
deductible” of:
• $1,200 (1250 for 2013) for single coverage
• $2,400 (2500 for 2013) for family coverage
• “Embedded” deductible must meet at least minimum family deductible
– e.g., Plan has $4000 deductible for family coverage but
will pay expenses for an individual once the individual
family member has incurred $2400 in expenses
– Out of pocket expense maximum (including the deductible)
does not exceed the following out of pocket expense limit
(OOP Limit):
– $6050 (6250 for 2013) for single coverage
– $12,100 (12,500 for 2013) for family coverage
95
What is a High Deductible Health
Plan (HDHP)?
• Special Rule for Network Plans:
– Out of pocket max/deductible imposed on out of network
expenses in a network plan are disregarded in determining
whether plan is HDHP
• Can impose any deductible/out of pocket max for out of network
expenses and it will not disqualify the plan overall
• Cannot use out of network deductible limit/oop max to satisfy HDHP
rule
96
What is an HDHP?
•
•
•
HDHP can be
– Self-insured group plan
– Fully insured group plan
– Individual policy
– Coverage under spouse’s employer’s plan
The HDHP can provide the following types of coverage below the minimum statutory
deductible (the “3 Ps”):
– “Preventive Care”
– “Permitted Coverage”
– “Permitted Insurance”
Does the employer have any responsibility to confirm the eligible individual status of
employee?
– Employer has no responsibility to monitor coverage maintained by employee other
than that provided by employer
• Employer must ensure its health plan is a qualifying HDHP
• Employer must ensure that any non-HDHP coverage that it sponsors and that is
maintained by an employee does not disqualify an otherwise eligible individual
97
No other non-HDHP health coverage
• Recent Treasury guidance indicates that other non-HDHP
coverage must be limited to any one or a combination of the
following “3 Ps”:
– Permitted Coverage
– Permitted Insurance
– Preventive care
• See Revenue Ruling 2004-38; Revenue Ruling 2004-45
• Very simple rule to follow: If an individual has non-HDHP that
provides coverage other than one or more of the “3Ps”
mentioned above, the individual is NOT an Eligible Individual
98
No other non-HDHP coverage
• Rev. Rul. 2004-45 clarified the impact of FSAs and
HRAs on HSA eligibility
– General Rule: Can’t be an Eligible Individual if you have
general purpose Health FSA and/or HRA that provides
coverage below the statutory deductible for anything other
than the 3 Ps.
99
Implementation of HSAs
• The HSA Trust
– HSA can be a trust or custodial account established by the
Eligible Individual or by Employer or Family Member on
Eligible Individual’s behalf
– It is the “Eligible Individual’s” account
• Once money is in the trust, it cannot be taken away
• HSAs are not subject to the Code’s COBRA provisions (but the
underlying health coverage generally is)
– Qualified Trustee/Custodian may require certification that the
individual is an “Eligible Individual” but is not required to
request certification
100
Implementation of HSAs
•
•
•
What is an HSA “Qualified Trust”?
– Trust or Custodial account created in the United States
– Only receives cash (except Rollover Contributions)
• Maximum annual amount that the trustee can accept for any HSA is
$6250 (in 2012) + applicable additional contribution for those age 55
and older (1000)
– The Trustee is a “Qualified Trustee”
– No part of the trust assets is invested in life insurance contracts
• Investments limited to those investments that would otherwise be
permitted for an IRA
– The assets of the trust/custodial account are not commingled with other
property except in a common trust fund or common investment fund
– The assets of the account are non-forfeitable
• This requirement prohibits employer restrictions on the use of HSA
account funds
Individual may establish more than one HSA
Husband and wife cannot have a combined HSA
– Important for additional age 55 “catch-up” contribution purposes since
only “account holder” can get additional amount
101
Contributions
• ANYONE may contribute to an HSA on a tax-favored basis to the extent that
the sum of all contributions for the year do not exceed the sum of the
“monthly limits” for the year
• Employer contributions are generally tax free
• Contributions from other than employer and employee are generally deductible
by Eligible Individual
– Employees may contribute with deductible after-tax funds or with pre-tax
funds made through the cafeteria plan
– “Rollover Contributions” permissible
• Contributions from another HSA or MSA
• Rollover from HRA/Health FSA to HSA allowed consistent with Notice
2007-22
102
Contributions
• Contributions may be made any time prior to due date of
individual’s tax return for that year
– Some employers may wish to make annual contribution at
beginning of tax year
• Creates “uniform level” of coverage (i.e., a Health FSA like benefit)
• If individual ceases to be an “Eligible Individual” during any month of
the tax year, contributions attributable to such month and subsequent
months are “Excess Contributions”
– IRS Notice 2004-50 allows for “uniform coverage” like
contribution schedule
103
Contributions
• In order for contributions to be deductible and/or tax free, the
aggregate annual contributions for the year from all sources
cannot exceed the sum of the “Monthly Limits” for months during
the year in which the individual is an Eligible Individual
• See Special “Last Month” Rule for eligible Individuals as of
December 1st
• The “Monthly Limit” is 1/12 of the following:
– Single coverage -- $3100 (3200 for 2013)
– Family coverage -- $6250 (6400 for 2013)
• Monthly limits are subject to COLAs.
104
Contributions: Special Rule
for Individuals Age 55 or Older
• Special Contribution Rule for those age 55 or older
– The aggregate annual contribution limit (i.e., the sum
of the Monthly Limits) is increased for those age 55
or older by the “Additional Contribution Amount”
– The Annual Additional Contribution Amount is as
follows:
• 2009 and beyond
$1000
105
Contributions: Excess Contributions
• If contribution amount from all sources exceeds sum of
monthly limits, then the excess is considered an “Excess
Contribution”
• Excess Contributions are subject to a 6% excise tax unless they
are returned to the employee prior to April 15 following the
year in which they were contributed
– Employer Contributions are included in gross income
– Should not be subject to income and employment tax withholding unless
there was reason to know when contribution was made that the
contribution would not be excluded from income
– Earnings from excess contributions are included in gross
income
• Distribution itself is NOT subject to excise tax for non-qualified
medical expenses
106
Distributions
• Distributions from HSA are tax free if for “Qualified Medical
Expenses”
• What are “Qualified Medical Expenses”
– Any Code Section 213(d) expense (with a few exceptions) for the
individual or the individual’s “Tax Dependents”
• Includes OTC drugs that are prescribed
• Excludes premiums for health coverage except for:
– COBRA
– Long term care premiums
» Subject to Code Section 213 deduction limits
– Health coverage while receiving unemployment compensation
– Health coverage received by a Medicare Eligible Individual
(only due to age) other than a Medicare Supplemental Policy
» e.g., retiree coverage (whether HDHP or not)
» Does it also include Medicare premiums? IRS
confirmed includes Medicare Part A and B premiums
107
Distributions
•
What if distributions are not for “Qualified Medical Expenses”
– Distributions included in gross income
– Subject to 10% excise tax except in the following situations:
• Upon attaining the age of 65 (Medicare eligibility age)
• Becoming “Disabled”
– Disabled means unable to engage in any substantial gainful activity by
reason of a physical or mental impairment which will result in death or be
indefinite in duration
• Upon death of account holder
– May transfer to spouse tax free (spouse becomes account holder)
– If beneficiary is not spouse, may be includible in gross income of nonspouse beneficiary
• Redeposit of otherwise taxable distribution
– Mistaken Contribution: Mistake due to reasonable cause may arise in
connection with repricing and/or exceeding deductible
– Rollover limitations (e.g., within 60 days and once every 12 months)
» Mistake exception and use of electronic payment cards
108
Distributions
• Adjudication/Substantiation
– Who determines whether the distribution is taxable or not?
• The responsibility is on the individual to make that determination.
– Individuals should keep receipts in case audited by the IRS.
• Can the employer/trustee require substantiation before making a distribution?
– No
– Trustee can, however, restrict the number of distributions as well as
impose a minimum distribution amount
– Also, restrictions on card access to specified vendors may be permitted as
well
• Can trustee assist the individual in making the determination whether an
expense is a 213(d) medical expense or not?
– Yes
• Trustee is required to send 1099SA to individual including all distributions
from the HSA during the year. Individual reports taxable amounts.
109
Wellness Promotion/Prevention:
Overcoming Legal And Compliance Hurdles
Disease Management vs. Employee
Wellness Programs
• Wellness Programs: Designed to improve general health of overall employee
population before employees get sick.
– Example: Weight Watchers
• Disease Management Programs: Designed to improve health of particular
employees after they have developed chronic health conditions (e.g., asthma,
diabetes, heart condition, hypertension, renal disease).
– Example: Health coach to advise about options
Health Risk Assessments
• Health Risk Assessment: Series of medical and health-related questions aimed
at obtaining “baseline” information about employees’ overall health to identify
persons with chronic conditions or who are at risk for developing a condition.
Compliance Issues
• Practical and legal compliance issues may arise with Disease
Management and Wellness Programs under . . .
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HIPAA Nondiscrimination Requirements
Americans With Disabilities Act (ADA)
Genetic Information Nondiscrimination Act (GINA)
Age Discrimination in Employment Act (ADEA)
HIPAA Administrative Simplification (Privacy, EDI, and Security)
COBRA
ERISA
Income Tax
Plan Design/Integration Issues (e.g., HRAs and HSAs)
State law
Wellness Programs
Carrots and Sticks
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Two Competing Approaches:
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Carrot:
• Health club memberships
• Reduced health care premiums
• Smoking cessation programs
• Weight loss programs
• Free health examinations
• Healthy eating programs
• Stress reduction programs
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Stick:
• Refusal to hire
• Disqualification from health care plan
• Termination
HIPAA Implications for Wellness
Programs
• Generally cannot vary benefit based on health status . . . but variation
allowed for certain wellness programs
• Rule does not apply to programs that do not condition benefit on
ability to meet health standard (i.e., a “Participation Based Wellness
Program” – e.g:
– Incentives to participate in testing (regardless of outcome)
– Waiver of co-payment/deductible if participate in pre-natal
program
– Reimbursement of health club membership
– Reimbursements for smoking cessation or weight reduction
programs (regardless of outcome)
– Compensation to fill out health risk assessment
Requirements for “Standard Based”
Wellness Programs
• Any program that provides a “reward/penalty” based on the ability
to meet a health standard must:
– Limit reward/penalty to specified percentage 20 %
– Be reasonably designed to promote health or prevent disease
– Annual qualification requirement
– Must be available to all similarly situated participants -- i.e.,
individually tailored adjustments to program may be required for
individuals who cannot meet health standard
– Notice of individual accommodations must be provided
Requirements for “Standard Based”
Wellness Programs
• Example: Bonus for cholesterol levels below 200 must include
notice allowing those medically unable to comply to discuss
alternatives;
• Example: Bonus for body mass index might allow for qualification
based on walking 20 minutes three times a week;
• Example: Bonus for “tobacco-free” employees might allow for
qualification based on enrollment in smoking cessation program
(Note: assumption that tobacco use addiction is a medical condition
-- nicotine addiction)
Age Discrimination in
Employment Act (ADEA)
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ADEA prohibits employers from discriminating against individuals on the basis of age
with regard to employment and the privileges of employment (e.g., benefits)
– Generally can’t reduce or terminate benefits due to age
• May reduce benefits based on equal cost/equal benefit rule
– Recent case (Erie) has indicated that the ADEA applies to retirees
• Erie prevents employers from reducing benefits of retirees (e.g., at Medicare age) unless
plan meets equal cost/equal benefit rule
• Does not require employer to offer retiree benefits
– ADEA impacts both
• The ability to stop DM/Wellness program incentives /surcharges upon reaching a
particular age and
• Varying incentives/surcharge due to age
• Imposing additional requirements for incentive based on age
HIPAA Administrative
Simplification
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Are disease management, wellness programs subject to
HIPAA Privacy/Security/EDI?
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Only if
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The DM/Wellness is part of a “Health Plan” or
The DM/Wellness vendor is a “Health Care Provider”
Most argue that DM/Wellness is part of a “health plan”
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Facilitates information sharing with health care providers
without authorization and marketing concerns
Enables VEBA/Trust funding
COBRA
• Most “group health plans” are required to provide COBRA
continuation coverage to qualified beneficiaries if coverage
is lost as a result of certain qualifying events
– “Group health plan” means a plan that provides “medical care”
and is maintained by the employer
– Will DM/Wellness programs provided by the employer be
subject to COBRA?
• If they provide “medical care”
• General health not medical care
COBRA
• COBRA considerations:
– Is Medical care offered?
– What type of incentive is offered?
• Impact of cash incentives/premium reductions?
• Impact of HRA/HSA incentives?
– Part of overall health program or stand alone arrangement?
• Participation limited to plan participants or all employees?
– What benefit must be provided?
– What is cost of program?
Tax Issues
• Tax issues arise when
– Employer pays for coverage that does not constitute
“medical care”
• General health and wellness programs
– Weight reduction programs not limited to obesity
– Membership in a gym
• If not for medical care, the value of such programs must
generally be included in gross income and subject to
withholding?
Tax Issues
• Non-health incentives raise tax issues
– Cash payments
• Taxable and subject to withholding
– Gift certificates
• Likely taxable and subject to withholding
– If paid through VEBA, could be a disqualified benefit
• De minimis exception
Tax Issues
• Health related incentives
– E.g., contribution to HRA or HSA or Health FSA
– Generally non-taxable if health plan related
• No tax exclusion for self-employed individuals
• Health FSA
• Possible change of election issues
– Potentials for health benefit restricted debit card
– HSA
• Must be structured to be made “through the cafeteria plan”
State Law
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Statutory Restrictions:
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Smokers’ Rights: 20 states, including Arizona, Connecticut,
District of Columbia, Indiana, Kentucky, Louisiana, Maine,
Missouri, Mississippi, New Hampshire, New Jersey, New Mexico,
Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota,
Virginia, West Virginia, Wyoming
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Example: “An employer may not … require as a condition of
employment, an employee or prospective employee to refrain from
using; or … discriminate against an employee with respect to the
employee’s compensation and benefits or terms and conditions of
employment based on the employee’s use of tobacco products
outside the course of the employee’s or prospective employee’s
employment.”
Ind. Stat. 22-5-4-1
State Law
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Statutory Restrictions:
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Lawful Conduct / Lawful Products: 11 states, including
California, Colorado, Illinois, Minnesota, Montana, Nevada,
New York, North Carolina, North Dakota, Tennessee, and
Wisconsin.
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NY Example: “It shall be unlawful for any employer or
employment agency to refuse to hire, employ or license, or to
discharge from employment or otherwise discriminate against an
individual in compensation, promotion or terms, conditions or
privileges of employment because of: … an individual’s legal
use of consumable products prior to the beginning or after the
conclusion of the employee’s work hours, and off the
employer’s premises and without the use of the employer’s
equipment or other property.
State Law
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Common Law Tort Claims
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Wrongful Discharge in Violation of Public Policy
Invasion of Privacy / Intrusion into Seclusion
Example:
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Rodrigues v. The Scotts Company (Mass. Sup Ct.)
• Facts:
– Hired as lawn technician.
– Never smoked on the job; only off the job.
– Fired for drug screen that was positive for nicotine.
• Law:
– No statutory provision in Massachusetts
– Violation of Right to Privacy
– Unreasonable Search of his Person
State Law
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Thoughts/Conclusions:
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Patchwork Effect – Practical Limitations
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Legal compliance issues for national employers
Fairness issues for employees in different states
Administrative costs/burdens
Future Developments
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More and more action from state legislatures
Lobbying by American Civil Liberties Union
Americans With Disabilities Act
(ADA)
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Americans With Disabilities Act
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Coverage: 15 or more employees
Substantive Provisions:
– Non-discrimination / Accommodation
– Restrictions on Medical Examinations
– Confidentiality of Medical Information
Americans With Disabilities Act
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Non-Discrimination/Accommodation
– Provisions only apply to “disabled” individuals
• Definition: Physical or mental impairment that substantially limits
one or more major life activities.
– Most behaviors targeted by wellness programs do not rise to the level
of a “disability” under the ADA
• Smoking – No
• Weight – Maybe
• Alcohol Consumption – Yes
– Beware: “Regarded As” Disabled Claims
Americans With Disabilities Act
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Medical Examinations and Inquiries:
– Exams: ADA restricts manner and method of
administering “medical exams” to both applicants and
employees.
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Medical Exams: Vision tests, blood, urine and breath analysis; blood
pressure/cholesterol screens; x-rays
Questions: ADA also restricts asking “disability-related”
questions of applicants and employees
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Disability-Related Question: Any question likely to elicit information
about a disability.
Americans With Disabilities Act
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Medical Examinations
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Broad Coverage:
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Rules apply to both applicants and employees.
Rules apply to both disabled and non-disabled.
Consequently, anyone can sue you.
Common Liability Scenarios:
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Health Risk Assessments
Policing mechanisms for wellness programs
Americans With Disabilities Act
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Rules for Medical Examinations and Inquiries:
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Applicants:
– Pre-Offer: No examinations or inquiries allowed
– Post-Offer: Examinations permitted, but must apply to all
employees.
Employees: Must be “job-related and consistent with business
necessity.”
– Applies to all employees (whether disabled or not).
– “Job-related” = Ability to perform essential job functions
Americans With Disabilities Act
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Voluntary Wellness Program Exception:
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Statute: “A covered entity may conduct voluntary medical
examinations, including voluntary medical histories, which are part
of an employee health program available to employees at that work
site.”
Regulation: EEOC has not promulgated any regulation about
meaning of “voluntary.”
Enforcement Guidance: “Voluntary” means no penalty can be
imposed for not participating; anything other than “de minimis”
incentive is prohibited.