On May 09, 2014, the Centers for Medicare and Medicaid Services (part of HHS) issued a bulletin to handle Special Enrollment Periods (SEPs).
HHS has a concern with the former Model COBRA Continuation Coverage Election Notices (Model Election Notices) published by the Department of Labor and other documents provided by employers, has not address, or did not sufficiently address, Marketplace options for persons eligible for COBRA.
Their concern is with persons eligible for COBRA and their qualified beneficiaries may have been provided insufficient information to understand, they cannot voluntarily drop COBRA and enroll in the Marketplace outside of the Marketplace open enrollment.
As a result, in accordance with 45 CFR 155.420(d)(9), HHS is providing an additional special enrollment period based on exceptional circumstances so persons, who are eligible for COBRA and COBRA beneficiaries are able to select Qualified Health Plans (QHPs) in the Federally Facilitated Marketplace (www.healthcare.gov).
Affected individuals have 60 days from the date of this bulletin (May 09, 2014), through July 1, 2014, to select QHPs in the Marketplace.
Individuals should contact the Marketplace call center at 1-800- 318-2596 to activate their special enrollment period. When calling, individuals want to be sure to inform the Marketplace call center, they are calling in regard to their COBRA benefits and the Marketplace. Once it has been determined they are eligible for the special enrollment period, the individual can view all of the plans available to them and continue the enrollment process over the phone or online through creating an account on healthcare.gov or logging into their existing account.
In addition, COBRA beneficiaries are able to choose QHPs in the Marketplace during the annual open enrollment period and if determined, they are eligible for any other special enrollment periods outside of the open enrollment period.
There are still many lingering questions needing to be answered surrounding notification of the 60-day special enrollment window, that include:
- Will employers be required to notify only those in an active COBRA status as of May 1, 2014?
- Will employers be required to notify former employees who were eligible for COBRA at any time during the open enrollment period (which ended March 31)?
- What method(s) is/are required for notification? (i.e. US MAIL? E-Mail? Phone?)
- What sort of “proof” should each plan administrator have to show that they communicated to the right qualified beneficiaries in a timely manner?
- Should employers and/or plan administrators re-send Initial Rights Notices for their 2014 active populations?
Employer’s need to be careful when providing alternative continuation coverage to a COBRA qualified beneficiary. In order to eliminate and employer’s COBRA obligations the alternative coverage needs to satisfy all of COBRA’s requirements and last for longer than the required COBRA continuation period and extend that period if an additional or secondary qualifying event occurs during that period.
In the case of City of McAllen v. Casso, 2013 WL 1281992 (Tex. App.-Corpus Christi, March 28, 2013) the City was found liable for a breach of contract and fraud in a lawsuit where the former employee sued the City for how health coverage was to be provided under a severance agreement. The court awarded more than $440,000 in damages and $150,000 in attorney fees (however an appeals court reduced the amount of these damages).
In 1991 Dahlila Guerra Casso was a municipal court judge in McAllen Texas when she was diagnosed with lupus in which she believed was aggravated due to the unsanitary conditions in the building where she worked. Due to her illness she had to resign her position of presiding judge and negotiated a severance agreement with the city. Under the agreement she would receive a lump-sum financial payment and sign a waiver of liability. The agreement stated “The City will continue to pay Casso’s health insurance premiums for Health Insurance Coverage with The City of McAllen throughout the period of time from the date of the execution of this Agreement through June 2002.”
The agreement was executed on April 12, 1999, however in 2001, the City sent a blank “Enrollment/Change/Cancellation Form” to Casso asking her to just sign it. Casso assumed this blank form was just giving the City authorization to make payroll deductions and signed the blank form on a signature line underneath the following statement: “I authorize my employer to make the appropriate payroll deductions as a result of this enrollment and/or change.”
The City paid Casso’s insurance premiums until June 1, 2002 but believed they were not obligated under the agreement to keep Casso enrolled indefinitely under its plan even if Casso continued to pay the premiums. The City believed that Casso was eligible for COBRA beginning in June 2002 for 18 months of coverage.
The City sent the signed enrollment/change/cancellation form to their third party claims administrator TASB along with a letter from the city’s benefits coordinator stating that Casso was enrolling in COBRA coverage. This letter which was submitted into evidence at the trial claimed that Casso is “eligible for C[OBRA] benefits effective July 1, 2002 through December 31, 2003.” The form had the words “COBRA Coverage” handwritten on a line next to the words ‘Qualifying Event”. Casso stated that she never intended for this form to be used to enroll her in COBRA because she believed she was covered under the City’s health plan as long as she paid her premiums.
The city terminated Casso’s health coverage in December 2003. Casso made a number of attempts to obtain new health coverage but was denied. Casso incurred large out of pocket medical expenses as a result of being uninsured since December 2003. She sued the city for various state-law claims, including breach of contract. Casso specifically stated during the trial that she negotiated certain terms of her agreement that did not include reference to COBRA eligibility. She stated that by the terms of the agreement that the city was to keep her on its health plan until she turned age 65 in which she would be eligible for Medicare.
The court stated that the agreement was ambiguous because it specified the date when the city would stop paying her insurance premiums, it did not specify the date when her plan enrollment would end. Casso stated that to resolve the ambiguity they needed to look at the definition of ‘participant’ under the plans terms which were: 1) a regular full-time employee; 2) a spouse or child of a participant; 3) a retired employee; or 4) a COBRA participant. Casso stated that she was no longer a full-time employee and because COBRA is legally available for only 18 months post employment, she must have been covered as a ‘retiree” participant from 1999 until December 2003. Under the plans terms, a “retiree” is entitled to buy in to coverage until the time he or she turns age 65 and becomes eligible for Medicare and the city breached the agreement by terminating her coverage before the age of 65.
The court agreed with Casso and awarded roughly $600,000 in damages, including medical costs, lost profits and attorney fees. The city appealed however the state appeals affirmed most of the claims with the exception of attorney fees.
Anytime an employer is considering alternative coverage to a qualified beneficiary, it should seek experienced guidance to make sure that the alternative coverage satisfies all of COBRA’s requirements and is structured to ensure that it reduces or eliminates the employers COBRA obligations.
When open enrollment season rolls around, keep in mind that COBRA qualified beneficiaries have the same rights as active employees. Open enrollment is a period in which an employee covered under a plan can choose to be covered under another benefit package within the same plan and at the same time can add or remove coverage of family members. This same rule also applies to COBRA. Under COBRA, a qualified beneficiary is only entitled to continue the coverage in place immediately before the qualifying event. However, COBRA regulations provide that a qualified beneficiary may change coverage at open enrollment to the same extent that similarly situated active employees can do under the plan.
A good example would be taking an employer who offers both a medical indemnity option and an HMO option. Jim an employee who is covered under the medical indemnity option terminates his employment and elects COBRA in July to continue his medical indemnity option coverage. In December during the open enrollment period, Jim now must be given the opportunity to switch to HMO coverage for which the premium rates could be different. If Jim had a spouse who also elected COBRA, the spouse would have the same independent right to switch to the HMO coverage as well. If the spouse retained her indemnity coverage and Jim switched to the HMO, the plan could charge each of them the individual premium rate applicable to the coverage elected.
The rules allow for a qualified beneficiary who elected and paid for COBRA to add coverage for dependents under that plan at open enrollment. If the plan permits active employees to add new family members at times other than open enrollment, then qualified beneficiaries must be permitted as well.
Example of adding a dependent to COBRA coverage: Bob is a covered employee under the group health plan maintained by his employer. At the time when Bob’s employment is terminated, none of his family members are covered under Bob’s group health plan. Because the family members were not covered under the plan the day before the qualifying event, the family members are not qualified beneficiaries and do not have a right to elect COBRA. However, if Bob elects and pays for his COBRA coverage, he must be allowed to add his family members to his COBRA coverage under the plan during any open enrollment period to the extent as similarly situated active employees can do so. The premiums may change based on different rates for family plans.
Here is an example of a dependent child-qualified beneficiary adding a dependent: John is a covered employee under his employer’s group health plan. John’s spouse and child are also covered under the plan. When John terminates employment, all three family members elect and pays for COBRA coverage. John’s child, Jerry, has his own child while still receiving COBRA coverage. In this case, because the child is not a child of John, the child is not a qualified beneficiary in its own right, however Jerry must be allowed to add the child to his COBRA coverage under the plan during open enrollment.
During an open enrollment, qualified beneficiaries can not only switch from one medical plan to another, they can also elect plans of different types if similarly situated active employees are allowed to do so. For example, if an employer offers medical and dental coverage under two separate health plans and a qualified beneficiary elected medical only for his COBRA coverage, the qualified beneficiary must be given the opportunity to add dental to his coverage during the plans open enrollment.
Remember that each qualified beneficiary has their own independent rights. Example: Rick is employed by a company that offers several group health plans. By the terms of the plans, any family member whom an employee chooses to cover must be covered by the plan covering the employee. Before Rick’s termination of employment, he along with his spouse and two children are covered under Plan A. Upon Rick’s termination, each of the four family members is a qualified beneficiary. COBRA coverage is elected by all four family members. Six months after Rick’s termination, there is an open enrollment in which active employees are offered an opportunity to choose to be covered under a new plan or to add or eliminate family coverage. During the open enrollment period, each of the four qualified beneficiaries must be offered the opportunity to switch to another plan as though each qualified beneficiary were an individual employee. Each member of Rick’s family could choose coverage under a separate plan even though family members of employed individuals could not choose to do so. Of course the individual premium would apply under each plan.
On June 26, 2013, the Supreme Court struck down section 3 of the Defense of Marriage Act, a federal law that had given the definition of “marriage” as a legal union between one man and one woman as husband and wife, and “spouse” as a person of the opposite sex who is a husband or a wife (United States v. Windsor, 570 U.S.__ (2013). Prior to this Windsor decision, the Defense of Marriage Act virtually meant that employers were not required to offer equal benefits to their employees in same-gender marriages. Although these same-gender partners were allowed the legal right to marry in many states, the majority of these couples were not receiving equal treatment from their employers with regards to health insurance and other employee benefits. But after the Supreme Court’s ruling, many employers are offering domestic partnership coverage – after all, the federal government now generally recognizes same-gender spouses as married in regards to federal laws, protections and legal obligations.
When the Defense of Marriage Act was declared unconstitutional it basically tossed the definition back into the hands of the individual states. If a state legally recognizes someone as a spouse, then the federal law will follow suit; however; the Windsor decision doesn’t force a state to recognize same-sex marriages. This could be confusing for employers in those stated that have chosen not to recognize these same-sex marriages and a bit tricky when it comes to the COBRA implications.
When employers are making the decision on whether to offer benefits to same gender spouses, many considerations must be given. For example, the date of the decision to offer COBRA benefits could be a somewhat sketchy because one could argue that because if the Defense of Marriage Act was declared unconstitutional does that say that it was always unconstitutional? Should employers go back retroactively and offer COBRA benefits to same-gender spouses that were not offered coverage at the time before the Windsor decision was made? The answer is not so clear and brings up many questions regarding effective dates.
Residency requirements can be another challenge – what if a same-gender couple that is legally married in one state moves to another that does not recognize their marriage? What about employers that operate in multiple states? The federal government seems to make no distinction on the state of residency and there has been legislation introduced that opts for the “place of celebration” to be the determining factor in same-gender marriages that would ultimately recognize that “if a marriage is valid anywhere, then it is valid anywhere.”
It is our opinion, employers must ponder the recent legal decisions regarding same-gender marriage very carefully in terms of the implications it will have on COBRA administration. It would be extremely important to proceed with legal counsel and keep in mind that there are many factual questions that need to be addressed in order to determine the outcome in a variety of scenarios.
When analyzing the grounds for complaints involved in the hundreds of COBRA cases reported, a vast majority involve very basic errors. All too often these cases illustrate that employers and plan administrators often lack the understanding of basic COBRA compliance. These misunderstandings and errors not only open up exposure to possible litigation which involves costly legal fees and penalties; but, employers and plan administrators often find themselves responsible for thousands of dollars in excise taxes for these COBRA compliance issues as well. On top of keeping up with COBRA compliance requirements, employers and administrators also need to be cognizant of other laws affecting their group health insurance plans – namely health care reform, HIPAA and the Mental Health Parity Act. Furthermore, regulations need to be properly deciphered and translated from the pertinent state governments, as well as other agencies such as the IRS and Labor, Health and Humans Services.
Because litigation and the aggravation caused by compliance issues can be costly even if you win the case, it is a wise move to take time to look at your COBRA notification process and check for basic documentation clarity. To begin with, have you updated your COBRA notices with the most recent guidance from the U.S. Department of Labor regulations? Does your notice include both the rights and responsibilities of the qualified beneficiaries? Your notice should clearly outline the election date deadlines as well as the premium payment due dates. The consequences of tardiness in both electing coverage and paying premiums should be clearly spelled out in the notice. Addressing possible multiple qualifying events should also be part of the notice along with an explanation of how the qualified beneficiary should inform the plan administrator of these events should also be included.
Remember to read your group health plan document as well as your official Summary Plan Description and check to make sure the legally required language is up-to-date. Furthermore, it is your ERISA fiduciary responsibility to administer the plan according to its terms. Make sure that your administration is consistent with the actual written plan terms. Using the excuse that you were administering the plan on what you were verbally told, rather than what was written in the Summary Plan Description simply won’t hold up in court.
Once an employee is terminated, a common mistake is often made at the time of the exit interview – employers are frequently overly glib in giving out misinformation to the terminated employing by promising far too much in terms of COBRA coverage. Another possible instance where verbal misinformation can easily be conveyed is the time frame during the election period. Specific special messages are required in terms of how claims are handled when health care providers or health care institutions are calling to confirm coverage and yet the qualified beneficiary has not elected and/or paid for COBRA coverage.
Check to make sure qualified beneficiaries are afforded their open enrollment rights and given the proper notification. If you change or add a group health plan ensure you are also notifying COBRA qualified beneficiaries and remember not to forget those that are in the middle of their election periods – these potential qualified beneficiaries can often slip through the cracks.
In summary, it is often the simple mistakes that get most employers and plan administrators into trouble when it comes to COBRA compliance. Taking the time to go over your documents and notification process – as well as reminding well-intentioned employees of the dangers of making verbal promises that cannot be met – will save countless hours and costly fees by avoiding future litigation.
When one company purchases another, there can be significant implications to the obligation to provide health benefits. Former employees of the seller company are typically entitled to continue health benefits under COBRA if they lose coverage as a result of the transaction. The traditional view is that the seller company has the obligation to provide COBRA coverage. But what happens when the seller company ceases operation and terminates its health plan? How do these displaced employees get continuation coverage.
It is not uncommon, in an asset purchase transaction, for the buyer to assume a substantial portion of the operations of the selling company. In many instances, the buyer also agrees to take on and hire former employees of the seller. These types of arrangements give rise to special considerations for employee benefit plans, the continuation of health coverage being one of them.
The COBRA regulations contain a number of regulations explaining what happens to qualified beneficiaries in the event of an asset purchase transaction. 26 CFR 54.4980B-9 includes provisions that deal specifically with continuation rights and obligations in an asset purchase transaction. Included in these regulations is an explanation of instances where the buyer is obligated to provide the continuation coverage under its own plan, even though it may not have ever employed the individual employees.
In the context of a business reorganization, the regulations recognize the existence of a “M&A qualified beneficiary.” In an asset sale, this is someone who has a COBRA qualifying event prior to or in connection with the sale and whose last employment prior to the qualifying event was associated with the assets being sold. Under this definition, an employee working for the seller company who loses coverage as a result of the asset sale (typically through termination of employment) would be an “M&A qualified beneficiary.” The regulations go on to provide that if the seller ceases to provide health coverage as a result of the transaction, and if the buyer continues the business operations associated with the assets purchased “without interruption or substantial change,” the buyer becomes a “successor employer.” If the buyer is a “successor employer,” a group health plan maintained by the buyer has the obligation to make COBRA coverage available to M&A qualified beneficiaries with respect to that asset sale. So if the seller is ceasing to offer health benefits as a result of the transaction, the buyer could, by operation of law, take on the COBRA obligation of the seller regardless of whether it agreed to do so in the asset purchase agreement.
An example: Seller provides group health coverage to its employees. Seller sells all of its assets to Buyer, which also sponsors a health plan. Buyer agrees to take on all but 2 of Seller’s former employees and continues the operations of Seller without significant interruption. Seller terminates its health plan. Under these facts, Buyer would be considered to be a “successor employer” and would have the obligation to provide continuation coverage to all M&A qualified beneficiaries when the Seller plan terminated. This coverage would be for the employees assumed AND the two employees not assumed (as well as their qualified dependents). In some instances, it may also include those former employees already receiving COBRA from the Seller’s plan (if their loss of coverage is deemed to be attributable to the asset purchase).
The regulations acknowledge that the determination of the obligation to provide COBRA coverage under asset purchase arrangements is based on “relevant facts and circumstances,” so there are not clear cut guidelines. There is also a provision that the Buyer and Seller may specifically contract or allocate the responsibility to make COBRA coverage available. However, if the party contractually obligated to make COBRA coverage available fails to meet obligations, the party liable under the statute will not be relieved of their burden to provide coverage.
The complexity of this analysis demonstrates just one of the reasons it is important to consult with counsel about the employee benefit implications of any transaction involving the acquisition of another employing entity, including asset purchases. There can also be issues with retirement plan obligation, severance obligations and bonus plans. Every buyer and seller should fully explore what benefit obligations they may have before completing the sale.
Keith R. McMurdy “Employee Benefits Legal Blog.” Fox Rothschild, LLP. 6 May 2008.
COBRA regulations for dependent children can be confusing and we receive many calls from both brokers and employers about what must be offered to dependent children, newborns, and adopted children in regards to COBRA coverage. Hopefully the following will provide a better understanding on how to administrate COBRA for children as beneficiaries.
It is important to remember that the term “dependent child” is not defined by COBRA, but rather by the terms of the group health plan. Therefore the COBRA term “dependent Child” is not to be confused with the terms “dependent” or “tax dependent” which are used for federal tax purposes. For example, it is possible that an individual living in the household might be a tax dependent and yet not a COBRA qualified beneficiary because he or she is not a dependent child of the covered employee. Furthermore, dependent children who are qualified beneficiaries have COBRA rights separate from and independent of the covered employees and spouses who are their parents.
There is one circumstance that allows a child to be a qualified beneficiary regardless of whether that he or she is a dependent of the covered employee. For example, a child is receiving benefits according to a qualified medical child support order (QMCSO). A QMCSO creates the right of a child of a plan participant to receive benefits under the participant’s group health plan. It may be required that the health plan of a noncustodial parent provide coverage for that child even though he or she is not considered to be a “dependent” per the health plan’s definition. When a child is enrolled in a group health plan under a QMCSO he or she is treated as a beneficiary for all purposes of ERISA regardless of his or her status as a dependent of the covered employee.
In terms of adult children, if the group health plan provides coverage for the children of their participants, then the coverage generally must be available until the child turns age 26 regardless of their student status. Furthermore, a child enrolling under this mandate must be treated as a HIPAA special enrollee and be offered all of the benefits available to similar individuals who did not lose coverage due to loss of dependent status.
Newborn and newly adopted children that are born to or placed for adoption with the covered employee during COBRA continuation coverage are also considered to be a qualified beneficiary. However, there is a limitation added per the IRS COBRA regulation: If a covered employee who is a qualified beneficiary has not elected COBRA coverage then any newborn or adopted child of the employee born or adopted after the qualifying event is not a qualified beneficiary. It must be pointed out, however that the meaning of this statue is somewhat unclear and may be difficult to interpret in various scenarios. One thing is clear – the newborn or newly adopted baby must be born to or adopted by the covered employee in order to be a qualified beneficiary. For example, if a dependent child Mary ceases to be a dependent and elects COBRA, then gives birth to a baby, that baby would not be considered a qualified beneficiary.
As for a newborn or newly adopted child added at Open Enrollment, the qualifying event giving rise to the period of coverage during which the child is born or adopted determines the amount of remaining coverage. However, if there is a second qualifying event, such as the death of the covered employee, then the child’s COBRA coverage will be extended 36 months from the employee’s termination date. A newborn child has the parent’s maximum coverage period and a child is entitled to the same coverage as children of active employees. For example, if the active employee is allowed to change coverage or add dependents at subsequent open enrollments, then the newborn or adopted child must be allowed to do so as well. Additionally, there are stipulations in the case of an adopted qualified beneficiary with a dependent. For example, if 18 year old Julie is adopted by an active employee during his COBRA coverage, but her daughter Natalie is not adopted, then only Julie can elect coverage at that time. However, at the next open enrollment Natalie can become covered, although Natalie will not be considered a qualified beneficiary.
It must be noted that COBRA election rules (including the 60-day deadline) do not apply to the children born or adopted during the COBRA continuation period. They must be enrolled during either the plans’ special 30-day enrollment period or some other period such as open enrollment. In summary although a newborn or newly adopted child is automatically considered a qualified beneficiary, the child is not covered until enrollment occurs. Because the IRS COBRA regulations do not provide for a specific period in which a newborn or newly adopted qualified beneficiary must enroll for COBRA coverage, special caution and legal counsel should be taken before rejecting late enrollments. Furthermore, because the plan administrator is not required to provide a separate COBRA election notice for the newborn or adopted child, the rights of these children should be clearly explained in the election notice that is provided to the qualified beneficiary. The IRS regulation’s definition of adoption or placement for adoption means, “The assumption and retention by the covered employee of a legal obligation for total or partial support of a child in the anticipation of the adoption of the child.” ERISA offers more guidance on what “placed for adoption” means however plan administrators should note that a child may be placed for adoption prior to the adoptive parents having physical custody of the child. Typically when COBRA is elected coverage begins on the date of the qualifying event. Because this rule cannot be applied to a newborn or adopted child who becomes a qualified beneficiary during a COBRA continuation period caused by another qualifying event, the plan administrator will need to determine when the child’s coverage is effective.
It is quite common for insurance companies that offer fully insured benefits to automatically pair the coverage with COBRA coverage as a part of the “product” offering. Often times insurers aren’t aware of whether the employer that is purchasing the coverage is subject to COBRA or not. Even a small business of less than 20 employees could be part of a larger controlled group. In that instance, the small business would actually be subject to COBRA rules so it’s important to remember that the insurer cannot judge whether a company must follow COBRA rules simply by counting the number of employees in its workforce. Furthermore, the brokers that are selling these policies to insured plans may need to do further investigating when determining whether an employer is indeed subject to COBRA coverage rules. It is critical that that insurers and brokers be aware of the basic rules in order to instruct their clients, and ultimately let the employer make the determination. Under COBRA’s small employer exception, companies with less than 20 employers are not required to be subject to COBRA coverage after what would otherwise be regarded as a “qualifying event.” This criterion is based upon how many workers were employed, on average, during the preceding calendar year.
To add to this confusion, many states have “mini-COBRA” laws that apply to small employers with insured group health plans. Often this state-law continuation coverage is mistakenly referred to as “COBRA coverage” by both brokers and insurers because it does offer a similar level of coverage than that of federally mandated COBRA coverage; however, the two should not be confused. This mini COBRA coverage may not be required to last as long as federal COBRA coverage and other terms & conditions may vary as well. It is imperative that employers be well advised of the applicable rules; otherwise they could be vulnerable to claims based on estoppel principles from former employees who mistakenly believed they had broader rights. In most cases, the courts do not side with an employer’s ignorance of the law as a defense to an estoppel claim. In fact, this ignorance can be proven to be evidence of gross negligence. A recent decision raised questions in this scenario regarding the responsibilities of the employer and the insurer. In the case, Hanysh v. Buckeye Extrusion Dies Inc., 2012 WL 3852569 (N.D. Ohio, Sept.5, 2012) the beneficiary’s claim for equitable estoppel survived a motion to dismiss after the court found the employer was grossly negligent when it did not realize it was not subject to federal COBRA rules because it employed less than 20 employees. After mistakenly offering Michael Hanysh COBRA coverage and accepting payments for several months, Buckeye later realized the error and promptly cancelled Haynsh’s coverage retroactively and refunded the premiums. Needless to say, the Hanyshes sued Buckeye for equitable estoppel, claiming that because of its material misrepresentations regarding their COBRA coverage, they were left with unreimbursed medical bills of over $16,000. The court concluded that Buckeye demonstrated gross negligence amounting “constructive fraud.” The 6th U.S. Circuit Court of Appeals has made the following definition of constructive fraud:
“A breach of legal or equitable duty which, in spite of the fact that there is no moral guilt resulting from the beach of duty, the law declares fraudulent because of its tendency to deceive others, to violate public or private confidence or to injure public interests. Constructive fraud may be found merely from the relation of the parties to a transaction or from the relation of the parties to a transaction or from circumstances and surroundings under which it takes place. It is said that constructive fraud is a term that means, essentially, nothing more than the receipts and retention of unmerited benefits.” U.S. v Lichota, 351 F.2d 81, 90 (6th Cir. 1965)
Consumer-Driven Health Care (CDHC) Solutions like Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA) have helped millions of Americans to more consciously and cost-effectively manage their health care. Recently, health care spending accounts have become the topic of much debate amid the push for health care reform. Proponents of health care spending accounts argue that these solutions have played a major role in reducing health care costs for many Americans, and that placing limitations on such solutions (such as the proposed $2,500 cap on FSA contributions) would be a costly mistake.
Throughout the debate, and even before health care reform was at the top of the agenda, surprisingly little has been said about another less common—but still equally compelling—CDHC Solution: Health Reimbursement Accounts (HRA). HRAs are similar to FSAs and HSAs in that they allow employers to set aside tax-advantaged dollars that can be used by participating employees to pay for qualified health care expenditures. Unlike FSAs or HSAs, HRAs are solely employer-funded, and contributions to an HRA cannot be made through employee salary deferrals under a cafeteria plan. HRA contributions are not included in an employee’s income, so employees do not pay taxes on amounts contributed to their HRA accounts. One of the major benefits of the HRA compared to the FSA or HSA is the flexibility that it offers to the employer. Employers choose how much to contribute into their employees’ accounts, and employers also define the health care expenditures that are deemed qualified for tax-free reimbursement. HRA distributions are tax-deductible for the employer (when used for a qualified expense according to the plan), and, like an HSA, unused HRA funds roll over from year to year (provided the plan is set up to allow rollovers).
The fact that unused funds can roll over from year to year provides an incentive for employees to save toward future health care expenses and manage their funds wisely. It also acts as an important benefit to participants when comparing the HRA to the more popular FSA. From an employer’s perspective, the HRA also offers a strong advantage over the HSA. Since the account is employer-funded, the employer retains unused HRA funds should an employee leave the company. Better yet, HRA funds do not have to physically “sit” in an account; rather, the employer can simply report HRA funds as a liability on the balance sheet until a qualified claim is transacted. This is an important, but often overlooked benefit of the HRA that provides greater flexibility to the employer, frees up potentially large amounts of cash that can be used for other operations, and sacrifices zero benefit to the participant.
The advantages of an HRA might lead one to believe that it should be the standard, and not the exception, when it comes to CDHC plans. And yet, although HRAs have been around since 1954 and were reintroduced to the marketplace by the IRS in 2002, they have not taken off as quickly as the FSA or HSA. There are two probable reasons for this trend. First, many brokers have been hesitant to present HRAs to their clients because of the additional complexity many associate with an HRA plan. The second reason is that, until recently, there have been very few processing platforms capable of delivering efficient HRA administration to the employer.
But with demand comes innovation and opportunity, and brokers and employers would be wise to take another look at the HRA. As insurance premiums rise and health care reform efforts persist, there is no doubt that the HRA will become an increasingly attractive option. Employers and those who work in the benefits industry can capitalize on this valuable benefit by taking advantage of the new technology solutions that make HRA administration easier and more affordable than ever.
With more health care changes looming in the wake of Health Care Reform legislation, employers have rising health care costs to address and need to keep their eye on the ball.
Health care costs for midsized businesses have risen 5% to 8% per year over the past five years, according to McGraw Wentworth Inc., a consulting and brokerage firm in Troy, MI that specializes in employee benefits in the middle market and tracks costs based on data submitted by local companies.
At IntegraFlex, our advice to employers is to stick to the issues at hand and not let the Health Care Reform distract them.
Everyone has been so focused on Health Care Reform and the cost increase, but it’s important not to lose sight of the next couple of years. You need to think long-term and benchmark your plan and look at solutions/strategies.
Although most employers tend to look at health care once a year at renewal time, they should review it several times a year. If you wait for renewal to come around it’s always a scramble to try to decrease the rates! Things need to be well thought out and enough time given so that a solution/strategy can be developed prior to renewal.
Though many employers have focused on just staying in business, now is the time for businesses to think strategically about how their plan design will look three to five years out. Three years is practically long term in health care.
With the rate increase coming, what can be done to contain it over the long-hual?
Here are 7 tips for small businesses to consider in managing their health care costs:
• Shop the market
Particularly in the small and midsize market there have been some changes in the past 18 months in terms of competitiveness of products. Some popular plans have had fairly large rate increases this year, while other insurance companies have whole new product lines or new features with higher out-of-pocket costs that keep premium rates down. Other companies have greatly expanded their networks.
• Specialty drug plan design
A number of health plans are coming out with special plan designs for high-cost specialty drugs such as injectables for multiple sclerosis and rheumatoid arthritis that generally cost $1,000 or more a month. Plan designs can offer incentives for using non-formulary or non-preferred drugs or therapeutic alternatives that can keep premium rates down for employers. Although it may only result in a 1 percent to 2 percent savings for employers in the short term, it may become a more important consideration in the future with many of these types of drugs currently in the pipeline.
• Consider wellness plans
If companies are not focused on keeping employees healthy, it will cost them in the long term — especially in the small to midsize range.
It’s the disability costs, (worker) compensation costs and the overall costs from lack of productivity when people are not feeling well.
It’s a good idea to take 5% to 8% of the health care budget and invest it into a wellness plan.
Some wellness-based preferred provider organizations (PPO) plans have outcome-based program incentives for employees to stop smoking, keep body mass index below a certain level or maintain cholesterol levels. Those who achieve the desired outcome — or in some cases just participate — have a lower premium rate or better benefit. This won’t fit for every employer, but a lot of people like it.
• Be wary of becoming the “plan of choice”
While many employers want their health plan to be better than the market in order to attract talent, this can drive up the cost of their plan over time.
What you often find since the market has changed in the last few years is that couples will always take that plan for their family at renewal time. In effect, you are covering another employer’s employees.
To dissuade that, spousal provisions have become popular. This is a monthly surcharge — the median being $100 — that an employer tacks on if an employee’s spouse is eligible for other coverage but doesn’t take it. An employee who has a stay-at-home spouse or whose spouse doesn’t have available coverage does not have to pay the surcharge.
Employees might object to this, but for an employer whose employee contribution is below market, the rate even with the spousal provision is still reasonable.
Employers should look closely at their enrollment rate and how their plan compares to the market. How many employees are taking it and how many of them have dependents on it?
The market median is 58% of dependent enrollment. If you have 70% of employees enrolling dependents, you may have plan of choice issues going on.
• Funding the plan
Large companies are considered companies who have 100 employees or more — and some say that number should be much higher. However, this is far from the contrary, employer groups under 100 employees are very capable of choosing a self-funding route that allows more individualized plan design and potentially lower costs over time.
An employer self-funds its health benefit plan by paying the medical costs for its employees and using a third-party administrator to process claims. Most small businesses contract with an HMO or insurance company to cover employees and dependents in a fully-insured arrangement.
A number of insurance companies have come up with plans for companies with as few as 50 to 60 employees to do self-funding or partial self-funding.
By converting from fully-insured to self-funding, companies can continue the same coverage with their health care plan and everything appears the same for employees, but employers might be able to better control costs. They are in effect gambling that they will have lower health care costs as a company than they would by being placed in a one-size-fits-all group rate with companies of similar size.
When self-funded, employers typically pay an administrative fee to the third-party administrator and purchase stop loss insurance or reinsurance. If an employer purchases reinsurance at $35,000 and an employee wracks up $200,000 in claims, the company is liable for $35,000 and the reinsurance kicks in to cover the other $165,000.
Small businesses that consider self-funding should know it’s a bit of a gamble. It may make sense if the demographics for a particular employer are favorable and the company believes costs can be managed at a lower rate.
A company might save significant money over a year, but you may have a bad month or two.
• Communicate with employees
Companies, especially those that have high turnover or a high number of contract employees that don’t come into the office daily, need to make sure they have strong communication to get employees to understand what the actual health care costs are.
The goal is to get employees to at least consider the impact of their behavior on the company. This relates back to the idea of wellness programs. You want your employees to participate in behaviors that benefit, not diminish, their health.
In effect, I’m handing you an American Express Platinum card and letting you go wherever you want to eat.
• Review the broker
Most companies use agents to find the best health care program for them even when they grow large enough to hire a human resources manager, which provides its corporate members with human resources services.
When companies start maturing, they may start hiring HR people, but they have a lot of responsibilities beyond health care, such as recruiting or payroll.
Most companies don’t hire a benefits administrator until they have more than 500 employees, and they continue to rely on consultants until they hit 1,000 or so employees. And some never take over benefits management.
You need to figure out that blend between using outside help versus inside help.
Although, most base commissions for brokers are 3 percent to 5 percent for smaller companies, but be warned, what brokers do for that commission varies significantly.
Most bid out coverage, but the question should be, are they coming up with strategies, benchmarking plans and providing data, handholding (a company) through complying with healthcare reform and COBRA or helping communicate the plan?