Focus On Employee Benefits
Health and Welfare: Agencies Issue Proposed Regulations and Templates for Summary of Benefits and Coverage Document and Uniform Glossary of Terms
On August 22, 2011, the U.S. Departments of Labor ("DOL"), Health and Human Services ("HHS") and the Treasury ("Treasury") (collectively the "agencies") issued proposed regulations implementing provisions of the Patient Protection and Affordable Care Act ("PPACA") that require the development -- and distribution by group health plans (and health insurers) -- of a summary of benefits and coverage document ("SBC") and a uniform glossary of various commonly-used health coverage-related terms ("Uniform Glossary"). The proposed regulations would require group health plans and health insurers to prepare and provide to certain individuals and entities (without charge) an SBC for each "benefit package" offered under the plan or coverage, and to make available the Uniform Glossary. The proposed effective date of the regulations -- which apply to all group health plans and health insurance coverage, whether "grandfathered" under PPACA or not -- is March 23, 2012.1
Contemporaneous with the issuance of the proposed regulations, the agencies published guidance providing, among other items, a proposed template for the SBC (available at http://www.dol.gov/ebsa/pdf/SBCtemplate.pdf), with proposed instructions and sample language for the template (available at http://www.dol.gov/ebsa/pdf/SBCInstructionsGroup.pdf, for group health plans and health insurance coverage), a guide for "coverage example calculations" to be included in the SBC (available at http://www.dol.gov/ebsa/SBCCoverageGuide.xls), and a proposed Uniform Glossary (available at http://www.dol.gov/ebsa/pdf/SBCUniformGlossary.pdf). These proposed documents essentially mirror materials that were previously prepared by a subgroup of the National Association of Insurance Commissioners ("NAIC"). The agencies are soliciting public comments on the proposed documents, and numerous aspects of the proposed regulations, themselves, by October 21, 2011.
SBC Distribution Requirements
The proposed regulations require group health plans, group health plan administrators, and health insurers offering group health insurance coverage to provide an SBC to a participant or beneficiary with respect to each benefit package for which he or she is eligible, at the following times and under the following circumstances2:
- If the plan or insurer distributes written application materials for enrollment, then the SBC must be provided as part of those materials. If the plan or insurer does not distribute written application materials for enrollment, then the SBC must be provided no later than the first date that the individual is eligible to enroll in coverage.
- If, after providing the SBC, but before the effective date of the individual's coverage, there is any change to the information included in the SBC, then the plan or insurer must update and provide a current version of the SBC to the individual on or before the effective date of coverage.
- The plan or insurer must provide an SBC to any HIPAA "special enrollee" who enrolls in coverage mid-year (e.g., upon marriage, the birth of a child, adoption, or placement for adoption), within 7 days of the request for a special enrollment.
- If participants or beneficiaries are required to renew coverage affirmatively for a succeeding plan year, then the plan or insurer must provide a new SBC upon the renewal. (If a written (paper or electronic) application is required for renewal, then the SBC must be provided by no later than the date the application materials are distributed). If renewal is automatic, then the SBC must be provided by no later than 30 days before the first day of the new plan year.
- If a participant requests an SBC, then the plan or insurer must provide it as soon as practicable, but no later than 7 days following the request.
In addition, if any "material modification"3 is made to any of the terms of the plan or coverage that would affect the content of the SBC, and the change occurs mid-year (i.e., other than in connection with a renewal or reissuance of coverage), then the plan or insurer must provide notice of the modification, or an updated SBC, to participants and beneficiaries by no later than 60 days before the date the modification will become effective. Notably, this notice/updated SBC must be provided before the date by which a summary of material modification ("SMM") must be furnished for ERISA group health plans, pursuant to existing DOL regulations (which generally require an SMM to be provided within 210 days after the close of the plan year in which the modification is adopted, or, for a "material reduction in covered services or benefits," within 60 days after the modification is adopted). The preamble to the proposed regulations notes that a material modification notice/updated SBC provided in a timely manner for an ERISA-covered group health plan will also satisfy the requirement to provide an SMM (if applicable) for those same plan or coverage changes.
The proposed regulations provide three "special rules to prevent unnecessary duplication with respect to group health coverage," which aim to streamline and simplify the provision of the SBC. First, although the requirement to furnish an SBC could apply to three different parties in the context of a single insured group health plan (i.e., the plan, the plan administrator, and the health insurer), it would be sufficient if any one party were to provide the SBC in a "timely and complete" manner. Second, the proposed regulations would allow a single SBC sent to an address where a participant and any beneficiaries are "known to reside" to satisfy the requirement to provide the SBC to all individuals residing at that address. Third, for group health plans that offer multiple benefit packages (e.g., a PPO option, an HMO option, etc.), the plan or insurer will be required to provide a new SBC automatically upon renewal only with respect to the benefit package in which the individual is enrolled (unless the individual requests an SBC for another benefit package for which he or she is eligible).
Appearance and Manner of Distributing the SBC
The SBC must be provided as a stand-alone document, pursuant to the agencies' SBC template and related instructions, and must be presented in a uniform manner that meets specified formatting requirements. In light of concerns about potential redundancies and additional costs, the agencies are requesting comments on whether and how the SBC could be coordinated with summary plan descriptions ("SPDs") and other plan disclosure materials. In the absence of additional guidance, however, employers would be well-advised to ensure that the SPD for any group health plan describes the terms and features of each benefit package using similar (or identical) language as the SBC, to avoid confusion, inconsistencies, and/or ambiguity.
The proposed regulations would allow an SBC provided to a participant or beneficiary to be furnished electronically if the plan (or insurer) satisfied the DOL's general requirements for electronic distribution under Title I of ERISA, pursuant to 29 CFR § 2520.104b-1 (which includes the DOL's "safe harbor" for electronic distribution). Notably, the preamble to the proposed regulations states that the SBC may be provided electronically if the (much narrower) requirements of the DOL's safe harbor are met. However, the plan language of the proposed regulations seems to permit a broader interpretation, based on the DOL's general requirements for electronic distribution. Separate rules also apply regarding the permitted electronic disclosure of SBCs (1) by a group health insurer to a group health plan (in case of an insured plan); and (2) by a health insurer to prospective and current enrollees in the individual health insurance market.
Finally, all SBCs must be presented in a "culturally and linguistically appropriate" manner, using the same thresholds and standards that apply for purposes of providing notices of adverse benefit determination under the agencies' regulations relating to claims, appeals and external review under PPACA. Accordingly, in specified counties in the U.S., plans must make certain language interpretation services available, and include in the English versions of SBCs a statement, in any applicable non-English language, disclosing the availability of those services.
The proposed regulations require group health plans and health insurers to make available to participants, beneficiaries, applicants, policyholders, and covered dependents the Uniform Glossary, which contains uniform definitions of various medical- and health coverage-related terms (such as appeal, co-insurance, emergency medical condition, medically necessary, and many others). The Uniform Glossary must be available upon request, in either paper or electronic form (as requested), within seven days of the request. For electronic disclosures, this requirement may be satisfied simply by providing an internet address -- which may be a place on the plan's or insurer's own website or simply a place on HHS's or DOL's website (www.HealthCare.gov and www.dol.gov/ebsa/healthreform, respectively) -- where the Uniform Glossary may be found. The SBC also must list a website to obtain the Uniform Glossary.
Preemption and Potential Penalties
For insured group health plans (and individual health insurance coverage), state laws that require the provision of an SBC that supplies more information than what is required under the proposed regulations may remain effective, whereas state laws that require the provision of an SBC that supplies less information will be preempted. (All such state laws generally will be preempted in the context of self-funded group health plans.)
A non-governmental ("private sector") group health plan that fails to provide an SBC in a timely and proper manner will be subject to an IRS-imposed excise tax of up to $100 per affected individual, per day of non-compliance, which must be self-reported on IRS Form 8928. In addition, the DOL intends to issue future regulations implementing procedures for assessing a $1,000 per-violation fine for a group health plan's "willful" failure to comply with the SBC requirements. A health insurer that fails to provide an SBC in a timely and proper manner typically will be subject to the enforcement mechanism(s) employed by the relevant state, and HHS separately may impose a fine of up to $1,000 for each individual to whom the health insurer "willfully fails" to provide an SBC or Uniform Glossary. However, HHS has indicated that it will use "enforcement discretion" if it determines that the applicable state is addressing willful violations adequately.
Employer/group health plan sponsors (and health insurers) should begin preparing now to compose SBCs, implement procedures to ensure their timely provision, and make available the Uniform Glossary, beginning March 23, 2012. Although the current regulations are in proposed form, the rapidly-approaching effective date indicates that these provisions may be on the "fast track" to being finalized.
Health and Welfare: Recent PPACA Guidance Delivers Good News and Bad News for Stand-Alone HRAs
On August 19, 2011, the Center for Consumer Information and Insurance Oversight ("CCIIO"), an agency within the U.S. Department of Health and Human Services' ("HHS") Center for Medicare and Medicaid Services ("CMS"), issued new guidance relating to the application of the PPACA prohibition on annual dollar limits for essential health benefits to stand-alone, non-retiree-only, health reimbursement arrangements ("HRAs"). Under this guidance, all stand-alone HRAs that were in existence on September 22, 2010 are exempted from having to apply individually for an annual limit waiver for plan years beginning on or after September 23, 2010 but before January 1, 2014. That's the "good news". The "bad news" is the negative inferences created by this guidance for stand-alone HRAs: are stand-alone HRAs that were established after September 22, 2010 now compelled to comply with the annual limit prohibition under PPACA?4 Will all stand-alone HRAs be compelled to comply with the annual limit prohibition beginning in 2014?
By way of background, all self-funded and insured group health plans will be prohibited from imposing annual dollar limits on so-called "essential health benefits" for plan years beginning on or after January 1, 2014. See PPACA section 2711; 45 CFR § 147.126(a)(2). In the meantime, such plans are permitted to impose certain "restricted" annual dollar limits -- i.e., a minimum of $750,000, $1.25 million, and $2 million, respectively, for plan years beginning on or after September 23, 2010, September 23, 2011, and September 23, 2012. 45 CFR § 147.126(d)(1). CCIIO previously issued a series of notices, in the Fall and Winter of 2010, and in June 2011, describing a process by which group health plans and health insurance issuers offering certain types of coverage (such as limited benefit, or "mini-med," plans) could apply for a waiver from these "restricted" minimum annual limit rules. In general, a waiver would be granted if the applicant could show that complying with the "restricted" annual dollar limits would result in a significant decrease in access to benefits or a significant increase in premiums. Pursuant to the CCIIO guidance issued on June 17, 2011, no annual limit waiver application will be considered unless it was submitted and received by September 22, 2011. See our July 14, 2011 newsletter.
The application of the prohibition on annual limits to stand-alone, non-retiree-only HRAs has been the subject of speculation since PPACA's enactment. HHS and the Departments of Labor ("DOL") and Treasury (collectively the "agencies") have confirmed that HRAs that are integrated with coverage as part of a larger group health plan5 are exempt from the provisions relating to the annual limit prohibition, provided that the larger group health plan, itself, complies with those provisions. The agencies have also confirmed that "stand-alone" HRAs that are limited to retirees are exempt from the annual limit prohibition. Prior to the subject guidance, the agencies had not decided whether or how the annual limit prohibition would apply to stand-alone HRAs that cover active employees. In their interim final regulations, issued on June 28, 2010, the agencies requested comments from the public on that issue.
The new guidance states the CCIIO's belief that "[a]ll HRAs set limits on the amount that can be spent [and that] those limits would always be less than the applicable restricted annual limit amounts." The CCIIO further acknowledged that applying these limits to stand-alone HRAs "would result in a significant decrease in access to HRA benefits." Notwithstanding these premises, the CCIIO exempted specifically only those stand-alone HRAs that were in existence before September 23, 2010 from having to apply for an annual limit waiver for plan years beginning before January 1, 2014. However, these HRAs still must comply with the record retention and annual notice requirements set forth in CCIIO's June 17, 2011 guidance, meaning that the sponsors of these HRAs must retain sufficient records to show that complying with the restricted annual limit requirements (for plan years beginning before January 1, 2014) would have resulted in a significant decrease in access to benefits for employees, and must include in any plan materials that describe the coverage (e.g., summary plan descriptions) an annual notice that meets certain style, format and content requirements, for each plan year for which the HRA fails to comply with the restricted annual limit provisions.
Although the new guidance has been seen as welcome relief for those stand-alone HRAs that were in existence before September 23, 2010, it has also led some to believe that the agencies may be taking the position that all stand-alone HRAs will be subject to the complete prohibition on annual dollar limits for essential health benefits -- with no waiver program available -- for plan years beginning on or after January 1, 2014. This result would likely mean the demise of stand-alone HRAs. In addition, with respect to stand-alone HRAs established after September 22, 2010, the new guidance places them in an ambiguous position: is their fate yet to be decided or has it already been sealed?
In the absence of further guidance, employers that sponsor stand-alone HRAs should consider carefully their options in the short and long term. For HRAs established before September 23, 2010, employers must comply with the applicable record-keeping and annual notice requirements to rely on an "automatic" waiver from the restricted annual limit requirements, for plan years beginning before January 1, 2014. Such employers would also be well-advised to begin considering their options for plan years beginning on or after January 1, 2014, given that stand-alone HRAs may be deemed to be subject to the general prohibition on annual dollar limits at that time. Employers that have established stand-alone HRAs since September 22, 2010 -- or intend to do so in the future -- should consider (or reconsider) their options in light of the new guidance.
Health and Welfare: New Deadline Approaching to Distribute Creditable Prescription Drug Coverage Notices
Employers that sponsor group health plans providing prescription drug coverage should prepare to distribute their annual Medicare Part D creditable and/or non-creditable coverage notices, if they haven't already, before October 15, 2011. Please note that this deadline has been moved up by a full month from recent years.
By way of background, employers that sponsor group health plans providing prescription drug coverage are generally required to distribute notices at certain specified times, indicating whether or not their prescription coverage is "creditable"6. (A limited exemption applies to employers that either contract with Medicare directly to establish a Part D plan, or contract with a Part D plan to provide qualified prescription drug coverage.) Prescription drug coverage generally is creditable if the "actuarial value" of the coverage is at least equal to the actuarial value of standard Medicare Part D prescription drug coverage (as shown through the use of generally accepted actuarial principles, and in accordance with actuarial guidance from the U.S. Department of Health and Human Services' Centers for Medicare and Medicare Service ("CMS")). This notice requirement is intended to help individuals avoid becoming subject to a "late enrollment" penalty, which may be imposed if they do not enroll in Medicare Part D prescription drug coverage during -- and fail to maintain creditable coverage for a continuous period of 63 days or longer after -- their Medicare Part D "initial enrollment period" (i.e., the period in which they are first eligible to enroll in Medicare Part D coverage). An individual may use copies of creditable coverage notices, among other items, as proof that he or she maintained creditable prescription drug coverage continuously after his or her initial enrollment period, and therefore is not subject to a late enrollment penalty.
The creditable and non-creditable coverage notice(s), as applicable, must be issued at the following times to all individuals who (1) are covered under, or apply for, the group health plan's prescription coverage (whether as an active employee or dependent, disabled participant or dependent, COBRA beneficiary or dependent, or retiree or dependent), and (2) are eligible for and have applied for Medicare Part A, are enrolled in Medicare Part B, or both.
- Annually, prior to the Medicare Part D Annual Coordinated Election Period. For 2011, this period begins on October 15, rather than November 15 (as in previous years), thus effectively pushing up the deadline to provide the notice by a full month.
- Prior to the individual's initial enrollment period for Medicare Part D.
- Upon joining the plan, prior to the individual's effective date of coverage.
- Whenever there is a change in the creditable or non-creditable status of the plan's prescription drug coverage.
- Upon the individual's request.
CMS will consider the first two items to be satisfied if the notice is provided to all participants prior to October 15 of each year. Accordingly, rather than attempting to track which employees, spouses, and dependents are or become Medicare-eligible, employers often provide the "regular" notice as part of their employee new-hire/orientation and annual open enrollment materials. However, if an employer's annual open enrollment materials will not be distributed before October 15, 2011, then the creditable and/or non-creditable disclosure notice(s) will need to be furnished separately this year. CMS has indicated that employers may be able to provide the notices electronically in certain situations, pursuant to Department of Labor guidance regarding the electronic distribution of notices required under ERISA.
Model creditable and non-creditable coverage notices are available at https://www.cms.gov/CreditableCoverage/Model%20Notice%20Letters.asp. Employers may, but are not required to, use these notices to disclose their plans' Medicare Part D creditable coverage status.
Employment Taxes: IRS Announces New Voluntary Classification Settlement Program
On September 21, 2011, the Internal Revenue Service (IRS) announced its new Voluntary Classification Settlement Program ("VCSP"), which permits taxpayers who may have erroneously classified workers as independent contractors to voluntarily reclassify the workers as employees for federal employments tax purposes. Under the VCSP, an eligible taxpayer that voluntarily reclassifies its workers as employees is entitled to relief similar to that obtained under the current Classification Settlement Program, a program that enables certain taxpayers under IRS examination to favorably resolve federal employment tax issues related to worker misclassification.
To be eligible to participate in the VCSP, a taxpayer must have consistently treated the workers as nonemployees, and must have filed all required Forms 1099 for the workers for the previous three years. The taxpayer cannot currently be under audit by the IRS or under audit concerning the classification of the workers by the Department of Labor or by a state government agency. A taxpayer who was previously audited by the IRS or the Department of Labor concerning the classification of the workers will only be eligible if the taxpayer has complied with the results of that audit.
A taxpayer who participates in the VCSP and agrees to prospectively treat the class of worker as employees for future tax periods, will, in exchange, be required to pay only 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, determined under the reduced employment tax rates of Code section 3509, and will not be subject to a worker classification tax audit for prior years. The participating taxpayer will agree to a three year extension of the period of limitations on assessment of employment taxes for the first three calendar years following the date the taxpayer agreed to treat the workers as employees.
An eligible taxpayer who wishes to participate in the VCSP must submit an application for participation in the program. A taxpayer whose application has been accepted will enter into a closing agreement with the IRS and make payment of any amount due under the closing agreement. The IRS retains discretion whether to accept a taxpayer's application for the VCSP. The new VCSP is an effort by the IRS to formalize its prior practice of applying CSP settlement principles to taxpayers that voluntarily approach the IRS.
Health and Welfare: IRS Issues Revised Form 8928 and Instructions
As has been expected, the IRS recently issued a revised Form 8928, Return of Certain Excise Taxes Under Chapter 43 of the Internal Revenue Code, and accompanying instructions. The form and instructions have since 2009 been available for use in reporting excise taxes for failure to comply with various health care related mandates, such as those in COBRA and HIPAA, as well as the Code's requirements relating to comparable MSA and HSA contributions. The Form 8928 and instructions have now been updated to reflect Form 8928's use in reporting failures to comply with the new market reform provisions enacted in the health care reform legislation, such as the requirement that group health plans provide coverage for adult children until age 26. The Instructions for Form 8928 provide that the form must be filed only by employers liable for the excise taxes for failure to comply with the specified health care mandates. However, consideration should be given to filing the form even where no excise tax is owed, by showing zeroes, in order to begin the running of the statute of limitations on these excise taxes. For most health care mandates, the Form 8928 is due on or before the due date of the employer's federal income tax return. The portion of the Form 8928 related to comparable MSA and HSA contributions is due, however, by the fourth month following the calendar year in which the noncomparable contributions were made.
1 Given the relatively short turn-around for the proposed effective date, the agencies requested comments on whether and how practical considerations might affect the feasibility of this implementation timeline.
2 The proposed regulations also include detailed rules describing when and how a group health insurer must issue an SBC to a group health plan administrator (in case of a fully-insured group health plan), and when and how an insurance company must issue an SBC to prospective and current enrollees in the individual health insurance market. This Alert focuses on the plan's or issuer's requirement to deliver an SBC to participants and beneficiaries in the context of a group health plan.
3 A material modification is defined to include any modification to coverage that, itself, or in conjunction with other contemporaneous modifications, "would be considered by an average plan participant…to be an important change in covered benefits or other terms of coverage under the plan or policy." A material modification could even include enhancements (as well as reductions) in covered benefits or services.
4 An HRA is an "account-based" medical reimbursement plan funded solely by employer contributions and not through salary reduction, that (1) reimburses some or all of the qualified medical expenses of participating employees, spouses and dependents up to a maximum dollar amount for a coverage period, and (2) may allow participants to carry forward unused amounts remaining at the end of the coverage period for use in subsequent coverage periods (i.e., HRAs are not subject to the "use it or lose it" rule that applies to health flexible spending arrangements). See IRS Notice 2002-45, 2002-2 C.B. 93, and Rev. Rul. 2002-41, 2002-2 C.B. 75.
5 Initially, most HRAs were integrated with a larger group health plan, i.e., to make employer funds available to employees, on a tax-advantaged basis, to help cover certain out-of-pocket expenses incurred under a group health plan (such as copayments, coinsurance, and deductibles). More recently, however, employers have begun adopting stand-alone HRAs to fill gaps in coverage, e.g., some employers with employees in San Francisco are using stand-alone HRAs as a method of complying with the San Francisco Health Care Security Ordinance's "pay-or-play" mandate.
6 Employers also must submit an annual disclosure to CMS to report the creditable coverage status of their prescription drug plans, by no later than 60 days after the beginning of a plan year (i.e., March 1, 2012 for calendar year plans), within 30 days after the termination of a prescription drug plan, or within 30 days after any change in a plan's creditable coverage status.
For further information, please contact:
Garrett Fenton, email@example.com, 202-626-5562