Category Archives: Affordable Care Act

Stacking Transition Relief under the Final Employer Shared Responsibility Regulations

As we have recounted on this blog, employer shared responsibility rules under the Affordable Care Act originally were meant to go into effect on January 1, 2014, but have been put on hold two times.  The first time was in early July 2013 pursuant to IRS and White House bulletins later set forth more formally in IRS Notice 2013-45, and the stated purpose was to allow carriers and employers more time to understand and prepare for minimum essential coverage (MEC) and applicable large employer (ALE) reporting duties otherwise slated to begin in 2014.

The IRS Notice simply provided that both the employer shared responsibility provisions for applicable large employers (and information reporting related to same) would not apply in 2014 but would be “fully effective for 2015.”  It was silent on transition guidance contained in proposed regulations issued in December 2012, and thus left employers who had planned to rely on the transition guidance (including delayed start dates for non-calendar year plans) in temporary limbo.

This limbo period ended with the release of the final employer shared responsibility regulations (“Final Regulations”), which were published in the Federal Register on February 12, 2014.  The Final Regulations carry forward the transition relief set forth in the proposed regulations and expand on it in several ways.  This post summarizes the transition relief and explains some ways in which applicable large employers can “stack” the relief by using more than one type of transition relief at a time.  As with all my posts, this is for readers’ general information and is not intended to be relied upon in any specific factual setting.

By way of introduction I am going to assume that readers are familiar with basic definitions under the ACA including “applicable large employer” or “ALE,” full-time employee,” and “full-time equivalent or FTE”.  I am also going to assume reader familiarity with “assessable payments” under Internal Revenue Code (“Code”) Section 4980H(a) and (b).  Readers who are not familiar with those terms and rules can find definitions in this helpful IRS Frequently Asked Questions list, or by searching in my blog.

Additional Delay to 2016 for Mid-Sized Applicable Large Employers

The final regulations describe an additional year’s enforcement delay – from 2015 to 2016 – for mid-sized applicable large employers – those who average between 50 and 99 full-time employees, including FTEs, over their chosen 2014 measurement period.  For the enforcement delay to apply, an ALE must meet the full-time employee size requirement and each of the following additional requirements:

  • They must not modify their plan year after February 9, 2014 to start at a later date.
  • They must also make two written certifications as part of their ALE reporting due in early 2016.  Specifically they must certify that:
    • between February 9, 2014 and December 31, 2015 they have not reduced the size of their workforce or overall hours of service other than for “bona fide” business reasons, which include sale of a division, changes in the economic marketplace in which the employer operates, or terminations for poor performance.
    • they did not “eliminate or materially reduce” group health coverage that was in place on February 9, 2014 over the “coverage maintenance period” which ends December 31, 2015 for calendar year plans, and on the last day of the 2015-2016 plan year for non-calendar year plans.  “Material” reduction means a 5% or greater reduction in the dollar amount of the employer contribution towards individual premiums, or any reduction in the percentage of the employer’s share.

Mid-sized employers that qualify for the relief and meet the necessary criteria will not be subject to employer shared responsibility taxes until January 1, 2016, or the first day of their non-calendar plan year beginning in 2016.

New Transition Relief for ALEs with 100+ Full-time Employees

In 2015, employers who on average employ 100 or more full-time employees, including FTEs, over their chosen 2014 measurement period will not be subject to the “no coverage” pay or play penalty (IRC § 4980H(a)) if they offer minimum essential coverage to at least 70% of their full-time employees.  The offer of coverage includes dependents, subject to transition relief outlined below.  The permitted percentage of excluded full-time employees (30%) shrinks back down to the “greater of 5% or 5 employees” in 2016 and subsequent; i.e. MEC must be offered to at least 95% of full-time employees.

Further, if the 4980H(a) tax does apply in 2015 (because the employer fails to offer MEC to at least 70% of full-time employees), the employer may calculate the tax after excluding the first 80 full-time employees.  The excluded group shrinks back town to 30 in 2016 and subsequent.

Note that the IRC § 4980H(b) “some coverage” penalty will still apply if the coverage that is offered to at least 70% of full-time employees is either unaffordable or less than minimum value.   However, the (b) penalty can never exceed what the (a) penalty would have been, had no coverage been offered.

This relief applies to the 2015 calendar year and to non-calendar year plans for their 2015-2016 plan year.

Non-Calendar Year Transition Relief

The proposed regulations provided that ALEs that maintained a non-calendar year group health plan as of December 27, 2012 (just prior to release of the advance copy of the proposed regulations) would not be subject to employer shared responsibility penalty taxes between the original employer shared responsibility start date of January 1, 2014 and the beginning of their 2014-2015 non-calendar year plan, provided that certain conditions were met.  So, for instance, an employer that maintained a July 1 – June 30 plan as of December 27, 2012 would not be subject to excise taxes for failing to offer its full-time employees affordable, minimum value coverage between January 1, 2014, and June 30, 2014.  It would be subject to them for July 1, 2014 onward.

The non-calendar plan year transition relief offered under the proposed regulations has been extended to prevent application of penalties from January 1, 2015 to the first day of the 2015-2016 non-calendar plan year for certain qualifying applicable large employers.  The relief is only available if the employer maintained a non-calendar plan year as of December 27, 2012 and since that time has not changed the plan year to start as a later date.

This is not “across the board” transition relief for all employers with non-calendar plans.  Instead, it only applies with respect to full-time employees who would have joined the plan as of the first day of the 2015-2016 non-calendar year plan, or in instances where, prior to issuance of the regulations, a non-calendar year plan already covered a substantial percentage of its employees.   The specifics of these relief provisions are as follows:

  • Under “Eligible Employee” Relief, no pay or play penalty will be imposed with regard to full-time employees who, under plan rules that were in place on February 9, 2014, will be eligible on the first day of the 2015-2016 plan year.
  • Under “Substantial Percentage” Relief, no pay or play penalty will be imposed with regard to any full-time employees (whether or not they would become eligible in 2015 under current plan terms) if the employer:
    • actually covered at least 25% of its total employees under one or more non-calendar year plans as of any date during the 12 months ending February 9, 2014; or
    • offered coverage to at least 33.33% of its total employees during the most recent open enrollment period prior to February 9, 2014.

This transition relief is adapted from relief set forth in the preamble to the proposed shared responsibility regulations.  The final regulations add a variation on the theme of the “Substantial Percentage” Relief, measured only with regard to full-time employees, as follows:

  • No pay or play penalty will be imposed with regard to any full-time employees (whether or not they would become eligible in 2015 under current plan terms) if the employer:
    • actually covered at least 33.33% of its full-time employees under one or more non-calendar year plans as of any date during the 12 months ending February 9, 2014; or
    • offered coverage to at least half (50%) of its full-time employees during the most recent open enrollment period prior to February 9, 2014.

Non-calendar plan year transition relief is not available with regard to full-time employees eligible under a calendar year plan maintained by the same employer.

Other Transition Relief

Definition of ALE Status and Full-Time Employee Count

For the 2015 calendar year, an employer may measure its status as an ALE (and its full-time employee headcount) by counting full-time employees and FTEs over a period of at least 6 consecutive months in 2014, starting no later than July 1, 2014.  However, if the ALE is relying on the seasonal worker exception to ALE status, it must measure full-time and FTEs over all of 2014, not the shorter six-month period.  For 2016 and subsequent, ALE measurement and full-time employee headcounts must occur over an entire 12 month period.

Transitional Measurement Period

The proposed and final employer shared responsibility regulations contain special rules applicable to seasonal employees and “variable hour” employees, meaning employees who the employer cannot, at the time of hire, accurately class as full-time or part-time.  These rules are primarily of use in the retail and hospitality sectors.  They allow an ALE to measure a new employee’s working hours over a retroactive measurement period, and, based on hours worked during that time, lock in the employee as eligible or ineligible for group health coverage for a subsequent “stability period,” regardless of the hours he or she works during the stability period.

The rules generally do not allow a lock-in stability period to be significantly longer than the retroactive measurement period it is teamed with.  However, just for purposes of stability periods beginning in 2015, employers may adopt a transitional measurement period (“TMP”) in 2014 that is shorter than a year, but at least 6 consecutive months long, and still use a 12 month stability period in 2015.  Because the same rules require that there be a period of at least 90 days between the end of the TMP and the beginning of the stability period, employers who want the 2015 calendar year to serve as a stability period should begin their TMP no later than April 1, 2014.  (April 1 – September 30 TMP followed by October 1 – December 31 transition period, with stability period beginning January 1, 2015).

Transition Relief re: First Payroll Period in 2015

Solely for January 2015, the final regulations provide that no pay or play penalty will apply between January 1, 2015 and the first day of the first payroll period in January 2015.  This will allow employers to start group health coverage on a payroll period cycle.  No comparable relief is offered for non-calendar year plans.

Transition Relief re: Dependent Coverage

Generally to avoid pay or play penalties, an ALE must offer coverage to a full-time employee’s dependents, although, unlike individual coverage, the dependent coverage on offer does not need to be “affordable.”  Extending earlier transition relief in the proposed regulations, the final regulations provide that an ALE that currently does not offer dependent coverage but that “takes steps” towards offering such coverage during its 2015 plan year will not be assessed a penalty related to dependent coverage.  This transition relief will not apply to the extent that employers offered dependent coverage either during the 2013 or 2014 plan year; in other words an ALE may not use the transition relief if it formerly offered, than terminated, dependent coverage.  As defined above, “dependents” for this purpose mean biological or adopted children to age 26.

Stacking Transitional Relief

The preamble to the final regulations specifically state that applicable large employers can combine or, as described here, “stack” different types of transitional relief under certain circumstances.   Note that ALEs who qualify for the mid-sized employer transition guidance, and who therefore have no pay or play responsibilities in 2015, will not need and cannot use transition relief for non-calendar year plans, or any of the “Other Transitional Relief” described above with the exception of the first listed – counting full-time employees over a period of at least 6 consecutive months.  This is described in example 2, below.  Non-calendar plan year relief may also apply.

The following examples illustrate potential stacking techniques:

  • Non-Calendar Year and 100+ ALE Relief

A graphic design firm with 100 full-time employees (including FTEs) has had an April 1- March 31 non-calendar plan year since December 27, 2012 and has not changed plan years to delay the starting date.

The firm offered coverage to 50% of its full-time employees between February 9, 2013 – February 9, 2014 so it qualifies for non-calendar year transition relief and will not be subject to a pay or play penalty from January 1, 2015 through March 31, 2015.

In addition, for the April 1, 2015 through March 31, 2016 plan year, the firm will not be subject to the “no coverage” penalty so long as it covers at least 70% of its full-time employees.  Penalties could still apply if the offered coverage is unaffordable or does not provide minimum value.

  • Mid-Sized Employer and ALE Measurement/Full-Time Headcount Relief

A company with three bakery locations has about 75 employees in total.  It believes it might qualify for the shared responsibility transition relief available in 2015 to mid-sized employers.  To determine its status as an applicable large employer, it counts full-time and full-time equivalent employees over a six-month period in 2014 (May to October).  During that time it averages 60 full-time employees, including full-time equivalents, per month.  Thus it is an ALE and eligible for the mid-sized employer transition relief. Between February 9, 2014 and December 31, 2014, the end of its plan year, it does not reduce its workforce other than for terminations due to poor performance and does not reduce employees’ overall hours of service.  Also during that time, it maintains group health coverage on the same terms that were in place as of February 9, 2014.   The bakery company will be exempt from assessable payments for the 2015 calendar year.  It must make attestations related to workforce and coverage maintenance, in its ALE reporting due early in 2016.

  • Mid-Sized Employer and Seasonal Worker Exception.

Same facts as above, but the employer is a vineyard with a single location.  It has a seasonal work flow so counts its full-time employees and FTEs over each month of 2014.  It finds that it exceeded 50 full-time employees, including FTEs, on fewer than 120 days in 2014 (mainly during harvest time) and, during that time, the employees that exceeded the 50 full-time limit were seasonal workers (harvesters).  The employer is not an ALE for 2015 and does not need the transitional relief for mid-sized employers.

  • 100+ ALE Relief and Dependent Coverage Relief

Same facts as the graphic designer example except the employer has a calendar year plan.  The firm offers coverage in 2015 to 75% of its full-time employees and the coverage is affordable and provides minimum value.  Therefore assessable payments would be due only with regard to dependent coverage.  The employer takes steps towards 2015 to provide dependent coverage, and did not earlier provide, then stop, dependent coverage.  The employer will not be subject to assessable payments in 2015.

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California Bill Would Repeal 60-Day Cap on Waiting Periods

California Senate Bill 1034 sponsored by Senator Bill Monning (D-Carmel) would repeal language in the Health & Safety and Insurance Code that currently limits waiting periods under small and large group HMO contracts and health insurance policies to a maximum of 60 days.  The new bill, if enacted, would prohibit insurers and HMOs from imposing any waiting or affiliation period under group coverage in the small and large-group markets.

This would allow California employers to follow the Affordable Care Act’s maximum 90-day limit on eligibility waiting periods, recently confirmed in final regulations issued by the Departments of Labor, Treasury and Health and Human Services (the “Departments”).  In the preamble to the final regulations, the Departments make clear that state insurance laws may impose more stringent waiting period rules than the federal standard.

I previously wrote about the waiting period rule, found in California Assembly Bill 1083 (also sponsored by Sen. Monning when he was an Assemblymember), and the confusion it created for California employers who originally understood the rule to apply only to small group coverage.  AB 1083 was modified by Special Sessions bills SBX 1 2 and ABX 1 2 but the changes did not affect the 60-day cap on waiting periods.  AB 1083, as amended, went into affect with respect to plan years on or after January 1, 2014.

One of the most significant disconnects between California law and the ACA in this respect is with regard to substantive eligibility requirements.  The federal 90-day waiting period regulations define “waiting period” as the time period that must elapse before coverage begins for an “otherwise eligible” employee, and make it clear that employers may impose substantive eligibility requirements on employees – such as attainment of a certain job level – in order to receive group health coverage.  In such instances, the maximum 90-day waiting period would not begin to elapse until the employee first attained the required job level.  This dovetails neatly with the common 90-day “introductory” or “orientation” period employers use to gauge whether or not a new employee will work out on a long term basis.  Successful completion of the introductory period generally triggers eligibility for a number of employment benefits and not just group health insurance.

By contrast, the California Insurance and Health and Safety Code rules containing the 60-day limit do not reference application of any substantive eligibility criteria and would appear on their face to be triggered at hire.   I have counseled clients that state laws governing insurance policies and HMO contracts cannot deprive them of their right as employers to impose substantive eligibility requirements on group health coverage, but none of them welcome the complexity of layering employer-based eligibility rules over rules bolted onto the coverage itself.

The disconnect between the ACA and California law increased as a result of the final waiting period regulations, and a companion proposed regulation, published last month.  Specifically, the final regulations recognize a “reasonable and bona fide employment based orientation period” as a permissible substantive eligibility condition, completion of which would trigger the 90-day maximum waiting period.  The companion proposed regulation identifies one month as a reasonable orientation period, such that an employer could assess a new hire for 30 days before the 90-day waiting period began to elapse.

SB 1034 is on the radar screen of insurance and HMO regulators in the state for several weeks and, to date, no opposition to the bill has been raised.   The California Department of Insurance may or may not register a position on the bill and any opposition raised by the California Department of Managed Health Care generally would not appear until further along in the legislative process.   I am tracking the Bill’s progress and will continue to provide updates on its status.  If passed, it would go into effect for plan (policy) years beginning January 1, 2015.

UPDATE:  It has come to my attention that, notwithstanding the fate of SB 1034, at least one large insurer in California has removed 60-day waiting period language from their large group contracts so that employers in this market can impose the full 90-day waiting period permitted under the Affordable Care Act.   Apparently they have interpreted the waiting period language to be binding on carriers but subject to override by the employer purchasing the  large group policy.  I do not know if this is an isolated instance or a trend but it is welcome news to the many employers in the state in the large group market.

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March 7, 2014 · 6:41 pm

Guidance on Cost-Sharing Limits, Wellness, and Mental Health Parity in New ACA FAQs

On January 9, 2014 the Departments of Labor, Health and Human Services (HHS) and Treasury (collectively, the “Departments”) issued an 18th set of frequently asked questions about the Affordable Care Act, including issues raised by that law’s intersection with the Mental Health Parity and Addiction Equity Act (“MHPAEA”), as well as a grab-bag of other issues.  A summary of some of the points covered in the FAQs follows.

Coverage of Preventive Services re: Breast Cancer

  • For plan or policy years beginning on or after September 24, 2014, non-grandfathered group health plans must cover, with no cost sharing, medications that reduce the risk of breast cancer (such as tamoxifen or raloxifene), when recommended for preventive purposes to women at increased risk of breast cancer and at low risk for adverse side effects from the medicines.

Cost-Sharing Limitations

  • For plan or policy years beginning in 2014, the annual limitation on out-of-pocket costs for essential health benefits (EHB) provided under a non-grandfathered plan or policy is $6,350 for self-only coverage and $12,700 for coverage other than self-only.  Non-EHB items are not subject to the dollar limits.
  • In a previous FAQ, the Departments offered transition relief to plans and insurers that use more than one service provider to provide medical benefits.  The transition relief applies only to plan or policy years that begin on or after January 1, 2014.  For that plan or policy year only, the out-of-pocket maximum will be considered to be met by a plan using multiple service providers only if both of the following criteria are met:
    • Major medical coverage remains subject to the maximum out-of-pocket limits; and
    • Out-of-pocket limits that separately are imposed on coverage provided by other service providers (such as prescription drug coverage) do not exceed the maximum out-of-pocket limits.
    • The new FAQ makes clear that the transition relief is only available for plan or policy years beginning in 2014.  For plan or policy years beginning on or after January 1, 2015, all essential health benefits (EHB) are subject to the individual and non-individual out-of-pocket limits, regardless of the number of service providers used.
    • However, plans may allocate the dollar limit across multiple categories of benefits (e.g., pharmacy vs. major medical) in lieu of reconciling claims across multiple service providers, so long as the total amount does not exceed the maximum limits.  The guidance notes however that it would not be permissible, under the MHPAEA, to impose an out-of-pocket maximum on mental health or substance use disorder benefits that accumulates separately from an out-of pocket limitation on medical/surgical benefits.
    • Significantly, plans and policies may, but do not have to, count dollars spent on out-of-network items and services towards the maximum out-of-pocket limits.
    • Plans and policies also may, but are not required, to count an individual’s out-of-pocket spending for non-covered services, such as cosmetic services, towards annual maximum out-of-pocket costs.
    • Also keep in mind for this purpose that large-group and self-funded plans are not required to offer EHB, but EHB items or services they do offer are subject to the out-of-pocket maximum limits.  The FAQ provides that self-insured and large group health plans can use any definition of EHB that is authorized by the Secretary of HHS, which at this point primarily includes the state base-benchmark plans.

Wellness Programs

  • A wellness program need not provide the opportunity to avoid the tobacco surcharge to a participant who initially declines but later joins a tobacco cessation program, if the participant could have avoided the surcharge by joining the cessation program at the time of enrollment or annual re-enrollment.  The program may voluntarily provide the reward (i.e., avoidance of the tobacco surcharge) either in full or on a pro-rated basis to a participant that joins tobacco cessation program mid-year.
  • The FAQ describes an outcome-based, health-contingent wellness program (i.e., one that conditions the reward on attainment of a physical result or goal) in which a participant’s doctor advises the plan that the standard for attaining a reward is medically inappropriate for the participant, and suggests a weight-reduction program as a reasonable alternative.[1]  In such an instance, the FAQs state that the employer sponsoring the wellness program does retain a “say” in which weight-reduction program is used, but the wording of the answer suggests that the employer must “discuss different options” with the participant rather than dictate a particular weight loss plan.
  • The FAQ provides that employers and insurance providers may modify the sample notice of reasonable alternative standards that is provided in the wellness regulations so long as the modified version contains all of the required content described in the regulations.  All health-contingent wellness programs – whether activity only or outcome-based – must provide the notice of reasonable alternative standards in all written descriptions of a wellness program.  The sample notice in the regulations is set forth below; the regulations also contain other sample language for outcome-based wellness programs.

“Your health plan is committed to helping you achieve your best health.  Rewards for participating in a wellness program are available to all employees.  If you think you might be unable to meet a standard for a reward under this wellness program, you might qualify for an opportunity to earn the same reward by different means.  Contact us at [insert contact information] and we will work with you (and, if you wish, with your doctor) to find a wellness program with the same reward that is right for you in light of your health status.”

Excepted Benefits

  • The FAQ describes conditions under which fixed indemnity insurance in the individual market (such as hospital indemnity coverage) could pay benefits on a per-service basis, rather than the traditional per-period basis (e.g., per each day of hospitalization), and still qualify as “excepted benefits” that need not meet ACA market reform requirements.  The described conditions will apply only in states where HHS has direct enforcement authority over the individual market but the FAQ recommends that states with their own exchanges also treat fixed indemnity coverage meeting the conditions as an excepted benefit.

Effect of the ACA on the Mental Health Parity and Addiction Equity Act

  • The FAQ summarizes the intersection of these two laws, namely that EHB includes mental health and substance use disorder services, and Section 1563 of the ACA extends mental health parity protections to the entire individual market, including both grandfathered and non-grandfathered coverage.  As a consequence:
    • Non-grandfathered individual market coverage:  policies must provide mental health and substance use disorder benefits in accordance with interim final MHPAEA regulations  for policy years beginning on or after January 1, 2014.   For policy years beginning on or after July 1, 2014 (January 1, 2015 for calendar year policies), policies must comply with final MHPAEA regulations.
    • Individual policies that were to be cancelled by insurers but were covered by the HHS transition policy announced on November 14, 2013, are excepted.
    • Grandfathered individual market coverage:  these policies are not subject to EHB requirements and need not cover mental health or substance use disorder benefits.  However, beginning on or after July 1, 2014 (January 1, 2015 for calendar year policies) coverage must comply with final MHPAEA regulations to the extent that mental health or substance use disorder benefits are provided voluntarily.
    • Non-grandfathered small group market coverage:  Non-grandfathered small group coverage that is not subject to the cancellation transition policy must include coverage for mental health and substance use disorder benefits for plan years beginning on or after January 1, 2014, and the coverage must comply with the interim final MHPAEA regulations from February 2010.  The coverage must comply with final MHPAEA regulations for plan years beginning on or after July 1, 2014 (January 1, 2015 for calendar year plans.)
    • Grandfathered small group market coverage:  These plans are not required to comply with either EHB or mental health parity rules.


[1] Under final wellness regulations issued on June 3, 2013, employees in outcome-based wellness programs may request to involve a personal physician at any time, and if the physician agrees to participate, he or she may adjust recommendations at any time, consistent with medical appropriateness.

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Filed under Affordable Care Act, Benefit Plan Design, Health Care Reform, Mental Health Parity and Addiction Equity Act, PPACA, Preventive Services

Notice of Exchange Penalties: There Aren’t Any, But Timely Compliance is Key

The Department of Labor (DOL) has clarified in a Frequently Asked Question that no fine or penalty will apply to an employer who fails timely to provide a Notice of Exchange to employees.  The Affordable Care Act amended the Fair Labor Standards Act (FLSA) to require provision of the Notice of Exchange.  The FLSA imposes corrective measures on employers that violate its other mandates, including federal minimum wage rules, but does not contain an express penalty provision for failing timely to provide the Notice of Exchange.   I earlier outlined Notice of Exchange distribution duties, which require action on or before October 1, 2013, here, and here.

This information, at this late date, is more confusing than it is helpful to employers who have already invested significant resources in preparing to deliver the Notice of Exchange.  The wording of the FAQ says that employers “should” rather than “must” provide the Notice, which is misleading, because Section 18B of the FLSA (29 U.S.C. Sec. 218B) clearly states that employers “shall” provide the Notice within the time period specified, and all prior DOL communications have used consistent wording.   The FAQ did not change this nor did it modify any prior guidance on exchange notice duties in DOL Technical Release 2013-02, including instructions on how the Notice should be delivered.   Noting the lack of express Notice-related penalties in an online article that predated the FAQ, Boston ERISA attorney Alden Bianchi identified the still-remaining risk to employers:

 “This does not mean, of course, that noncompliance is a good idea or even a viable option. The lack of penalties does not translate into a lack of consequences.  Plan sponsors still have a fiduciary obligation to be forthcoming with plan participants and beneficiaries.”

Particularly for employers with pre-existing group health plans, the Notice of Exchange potentially could be viewed by the DOL as within the scope of the employer’s required disclosures to participants and thus within the scope of an ERISA audit, or separate penalties could be imposed through amendment to the FLSA or the ACA.  (I discussed some of the existing ACA penalties in this earlier post.)

Accordingly, even in the absence of any current, known monetary penalty or fine, employers must take all measure necessary timely to provide the Notices of Exchange on or before the October 1, 2013 deadline, and to each new employee upon hire thereafter (the DOL has clarified that in 2014, providing the Notice within 14 days of hire will constitute timely delivery).

Finally the FAQ directs readers to Spanish-language versions of the DOL model Notices of Exchange.  As with the English versions there is one model notice for use by employers that do not offer group health coverage and one version for employers that do offer coverage.

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Filed under Affordable Care Act, Health Care Reform, Health Insurance Marketplace, Plan Reporting and Disclosure Duties, PPACA, Summaries of Benefits and Coverage

IRS Details Benefit Parity for Same-Sex Spouses

In U.S. v. Windsor, the Supreme Court struck down Section 3 of the Defense of Marriage Act as a violation of the 5th Amendment’s guarantee of equal protection under the law.  Section 3 defined “marriage” and “spouse” for purposes of Federal law as limited to a legal union between one man and one woman as husband and wife.  Elimination of this standard impacts a multitude of Federal laws, and guidance from a number of Federal agencies will be needed before the ruling fully is integrated into the U.S. Code.

Some of the first of that guidance explains Federal tax treatment of same-sex spouses under certain employment benefits plans and arrangements.  The guidance was released on August 29, 2013 by the Treasury Department and the Internal Revenue Service, in the form of Revenue Ruling 2013-17 and two sets of Frequently Asked Questions (FAQs.)  I addressed this guidance briefly in my prior post.  Below I go into more detail on the key compliance points of relevance to employers:

Treatment of Same-Sex Marriage under Federal Tax Law

  • Same-sex marriages lawfully performed in any U.S. state, the District of Columbia, or a foreign county are valid as marriages under Federal tax law, regardless of where the couple reside.
    • This means that employers with operations in states that do not recognize same-sex marriage, such as Texas, must treat same-sex spouses residing in those states equal to opposite-sex spouses for Federal tax purposes, so long as the couple legally was married in a state or other locale that recognizes same-sex marriage.
    • Obviously, equal Federal tax treatment is also required in those states that currently recognize same-sex marriage: California (since June 28, 2013; also some unions prior to November 5, 2008); Connecticut, Delaware (eff. July 1, 2013); Iowa, Maine, Maryland, Massachusetts, Minnesota (eff. Aug. 1, 2013); New Hampshire, New York, Rhode Island (eff. Aug. 1, 2013); Vermont; Washington; District of Columbia.
    • For Federal tax purposes, the terms “spouse,” “husband and wife,” “husband” and “wife” and “marriage” include reference to lawful same-sex marriage as defined above.
    • Registered domestic partnerships, civil unions, or other relationships formalized under state law as something other than marriage are not treated as marriage for Federal tax purposes, whether between same-sex or opposite sex individuals.
      • The Internal Revenue Code (“Code”) permits tax-free treatment of employer-sponsored benefits, including health care, offered to employees, their spouses (now including same-sex spouses) and dependents.  Employer-sponsored benefits provided to individuals not meeting these categories constitutes taxable income to the employee; specifically “imputed” income generally equal to the value of the benefits provided.
      • These rulings take effect September 16, 2013 and subsequent, but have some retroactive effect as described below.

Compliance Point:  As a result of these rulings, employers must identify employees who are in legal same-sex marriages, and, for those employees, adjust income tax withholding, and Social Security and Medicare taxes for 2013, so that the cost of benefits provided to same-sex spouses are treated as excluded from gross income.  Employers must continue to impute income to employees for Federal tax purposes, equal to the value of benefits provided to registered domestic partners, partners in a civil union, and other non-marital relationships, whether same-sex or opposite sex.

Tax Refunds and Credits for Prior “Open” Tax Years

Individuals in Lawful Same-Sex Marriages

  • Individuals in legal same-sex marriages must file their income tax returns for 2013 and subsequent as either “married filing jointly” or “married filing separately.”
  • These individuals may – but are not required to – amend or re-file their income taxes, and claim tax refunds or credits, for all “open” tax years in which they were in a legal same-sex marriage.
    • Generally, for refund or credit purposes a tax return remains “open” for three years from the date the return was filed or two years from the date the taxes reported in the return were paid, whichever is later.
      • For individuals who timely filed their Form 1040 tax returns and paid related taxes by the April deadline each year, returns for 2010, 2011 and 2012 likely remain open, however readers must confirm with their own accountants or other tax advisors which tax years remain open for them.
      • The retroactive tax relief is as follows:
        • As mentioned, individuals in lawful same-sex marriages may re-file their federal tax returns as “married filing jointly,” or “married filing separately,” which was not previously an option under Federal law.
          • Note:  this change in filing status could significantly change the amount of  federal taxes owed and readers must consult with their own accountants or other professional tax advisors about the impact to their own bottom line.
  • Individuals may request a refund of income taxes they paid on “imputed income” resulting from benefits provided to same-sex spouses.  This relief can also take the form of a credit against future income taxes owed.
    • Example:  Alex legally was married to a same-sex spouse for all of 2012.  Alex’s employer offers group health coverage to employees, their spouses and dependents, and pays 50% of the cost of coverage elected by the employee.  The value of the employer-funded portion of coverage for Alex’s spouse was $250 per month.  Alex may file an amended Form 1040 (Form 1040X) for 2012 that reduces gross income by $3,000 ($250 x 12 months) and be refunded the taxes paid on that amount.
    • Employees who paid for their own health coverage with pre-tax dollars under a Code § 125 cafeteria plan have the option of treating after–tax amounts that they paid for same-sex spouse coverage as pre-tax salary reduction amounts.
      • Example:  Alex’s employer sponsors a group health plan under which employees must pay the full cost of spousal and dependent coverage.  However, they may do so with pre-tax dollars under a Section 125 cafeteria plan.  During open enrollment in late 2011 Alex enrolled in self-only coverage for 2012, but she entered into a legal same-sex marriage on March 1, 2012.  Alex enrolled her spouse in health coverage beginning March 1, 2012.  The monthly premiums were $500.  Alex may file an amended Form 1040 (Form 1040X) for 2012 that reduces her gross income by $5,000 ($500 x 10 months).  This puts her in the position she would have been in, had she been able to increase her salary reductions under the cafeteria plan to cover spousal coverage beginning in March 2012.
    • Other benefit plans with regard to which retroactive tax relief is available include qualified scholarships under Code § 117(d), fringe benefits under Code § 132, dependent care benefits under Code § 129, and employer-provided meals or lodging under Code § 119.
    • Note:  individuals who seek a tax refund or credit related to imputed income credited to them in past, open tax years must adjust their tax returns for those years consistent with the tax status (i.e., married filing jointly or separately) that they are claiming with respect to the refund or credit.  In other words, an individual cannot seek a refund of taxes paid for imputed income credited to them in 2012, but retain their status as a single taxpayer for 2012.

Compliance Point:  Employers need to be aware that employees in same-sex marriages may be filing amended returns and seeking tax refunds related to these benefits, and take steps to quantify the imputed income or provide other information to employees to assist in retroactive tax relief.

Employers

  • Retroactive income tax relief is only available to individuals; employers may not seek refunds for overwithheld income taxes in prior years.
  • Employers may seek a refund of Social Security and Medicare taxes paid on imputed income resulting from same-sex coverage, or claim a credit against future taxes owed.
  • The relief is available for “open” tax years which generally are the same as for individual tax returns (3 years from date of filing return or 2 years from date of paying taxes, whichever is later).
    • For purposes of calculating the open period, quarterly Form 941s are treated as if they were all filed on April 15 of a given calendar year.
    • The relief generally applies to the employer and employee portions of Social Security and Medicare taxes, however employers are limited to recovery of the employer portion only in two instances:
      • In relation to an employee who cannot be located, or
      • When the employer notifies an employee that it is seeking a refund but the employee declines, in writing, to participate in same.
    • The IRS will establish a “special administrative procedure” for employers to seek refunds or claim credits for Social Security and Medicare taxes related to same-sex spousal benefits, to be defined in future guidance.

Compliance PointEmployers should be alert to future guidance from the IRS on  the “special administrative procedures” that will apply to Social Security and Medicare tax refunds, and should take steps to quantify the amounts involved for open tax years.

Retirement Plan Issues

The IRS Frequently Asked Questions for individuals in lawful same-sex marriage begin to address same-sex spouse treatment under qualified retirement plans (QRPs), including 401(k) and profit sharing plans.  Much more guidance in this area will be needed both from Treasury and from the Department of Labor.  The following guidance applies as of September 16, 2013 and subsequent.  Future guidance will address any retroactive application of Revenue Ruling 2013-17 to retirement plans and other tax-qualified benefits, including with regard to plan amendments and plan operation in the interim between September 16, 2013 and the date such future guidance is published.

  • QRPs must treat a same-sex spouse as a spouse for all Federal tax purposes relating to QRPs, regardless of where the same-sex spouses reside.
    • For instance, a QRP maintained by an employer in Florida, which does not recognize same-sex marriage, must pay a survivor annuity to a surviving same-sex spouse of a plan participant, unless the spouse consented in writing to another beneficiary prior to the participant’s death.
    • QRPs are not required to treat registered domestic partners, partners to a civil union, or partners to other formalized but non-marital relationships as spouses, whether the partners are same-sex or opposite sex.
      • For instance, a QRP need not pay a surviving spouse annuity to a registered domestic partner upon a participant’s death.  However a plan may treat a registered domestic partner as a default beneficiary who will receive a plan benefit if the participant failed to choose another beneficiary.  Plans must also treat registered domestic partners as designated beneficiaries when they are named as such by the participant.

Compliance PointEmployers should be on the alert for future guidance on QRP administration related to same-sex spouses.  In the interim, check with your company’s accountant or other tax professional if same-sex spouse benefit questions arise.

Affordable Care Act Issues

Not all of the consequences of Federal tax recognition of same-sex marriage are positive.  Under the Affordable Care Act, couples in a legal same-sex marriage now must combine their incomes for purposes of determining eligibility for premium tax credits and cost sharing on the healthcare exchanges, beginning in 2014.  This may prevent some persons in same-sex marriages from receiving federal financial aid they would have qualified for, as unmarried individuals.

The reason for this is that financial aid towards health coverage on the exchanges is based on “household income” and household income must be between 100% and 400% of federal poverty level for financial aid to apply.  Couples whose combined income exceeds 400% of the Federal Poverty Level (currently $62,040 for a 2-person household) will be ineligible for any financial aid toward the cost of coverage even if, individually, the same-sex spouses might have qualified for coverage on their own.

Additionally, “dependent” coverage which must be offered by applicable large employers in 2015 applies to children up to age 26, but not to “spouses,” and hence not to same-sex spouses.

Hopefully, future guidance from the IRS and from Health and Human Services will address in more detail the impact that Federal tax treatment of same-sex marriages has under the Affordable Care Act.

Compliance Point:  Employers need to be aware that household income for employees in legal same-sex marriages will include their spouse’s compensation and will likely impact their eligibility for financial aid towards coverage on the health exchanges.

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Filed under 401(k) Plans, Affordable Care Act, Benefit Plan Design, Cafeteria Plans, Defense of Marriage Act, Employer Shared Responsibility, ERISA, Fringe Benefits, Health Care Reform, Health Insurance Marketplace, Payroll Issues, PPACA, Profit Sharing Plan, Registered Domestic Partner Benefits

California’s 60-Day Cap on Eligibility Waiting Periods

California Assembly Bill 1083 (chaptered September 30, 2012) brings California law governing group health insurance products and HMOs, into conformity with insurance market reforms and other provisions of the Affordable Care Act.

AB 1083 varies in some respects from the ACA.  Perhaps the most notable difference is in the maximum eligibility waiting period for group health plan participation, which the ACA sets as no more than 90 days after the date on which an individual satisfies all requirements for eligibility (which occur upon hire).

AB 1083 imposes a shorter maximum waiting period not to exceed 60 days, with regard to group health insurance policy or HMO contract years beginning on or after January 1, 2014.

At first it was believed that this rule applied only to group policies or HMO contracts for small employers, with “small” defined as having at least 1 but no more than 50 eligible employees (i.e., 30 or more hours per week) on at least 50% of work days during the preceding calendar quarter or calendar year.  (In California this definition of small employer applies for 2014 and 2015, after which the eligible employee limit increases to 100.)

However, a close reading of AB 1083 reveals that the language setting forth the maximum 60-day limit on waiting periods is not confined to the provisions applicable to small group products.

Specifically, AB 1083 includes the 60-day limit in portions of the bill that amend and replace subsections of Health and Safety Code § 1357.51 and Insurance Code § 10198.7.  Neither of those code sections are limited to small group products, and they each currently permit a 60-day waiting period to be imposed under policies and contracts that impose no pre-existing condition exclusions.  Given that the ACA prohibits pre-existing condition exclusions for plan years beginning on or after January 1, 2014, the California Departments of Insurance and Managed Health Care appear to have viewed this as an opportunity to make the 60-day maximum limit generally applicable to all group coverage, rather than expand prior California law to permit the longer waiting period that the ACA allows.

The new provisions setting forth the 60-day limit take effect January 1, 2014 and will be applied to “plan” years beginning on or after that date.  AB 1083 defines “plan year” in the same way as HHS regulations  – as the year that is designated as the plan year in any applicable group health plan documentation.  In the absence of self-standing group health plan documentation (as is often the case with fully insured group health plans), the plan year is the annual cycle on which deductible amounts or other dollar limitations renew.  In the absence of any annual deductibles or limits under the plan, the plan year is the policy year that is designated in policy documentation.

AB 1083 states that the maximum 60-day waiting period is available if it is “applied equally to all eligible employees and dependents,” and if it is “consistent with PPACA.”  This last phrase is the source of some confusion.  Because the PPACA allows waiting period that do not exceed 90 days, the shorter waiting period under AB 1083 is “consistent” with the ACA.  Similarly, a state law that banned waiting periods of any length would likely be determined to be “consistent” with the ACA’s outside limit of 90 days.

As of the date of this post, I have not seen any formal written guidance from the California Department of Insurance or the Department of Managed Health Care, confirming application of the 60-day waiting limit to large group products.  However I have reviewed email forwarded from the DMHC and from a large carrier in the state, both indicating that the maximum 60-day limit would apply in the large and small group markets in California, with the carrier further stating that it would be applied as of renewals on or after January 1, 2014 (rather than as a “hard deadline” on 1/1).

Note:  It is not out of the question that the California Departments of Insurance and Managed Health Care (the “agencies”) could back away from this interpretation of AB 1083 and declare that large group products remain subject only to the maximum 90-day waiting period under the ACA.  Any such retrenchment would likely be the result of pressure from the business sector rather rather than a wholly voluntary change by the agencies.  If there are any developments along these lines I will update this post accordingly.

Please note in this regard that both the California 60-day limit, and the 90-day limit under the ACA, are maximum consecutive day limits, such that employers may not delay enrollment until “first of month following” attainment of the 60 or 90 day anniversary of the date on which an individual meets all eligibililty requirements (which may be the date of hire).  As a consequence, many California employers are using first of month following 30 days after hire as the enrollment deadline, as a way to permit timely enrollment for all eligible employees at the beginning of a coverage month.

Please also note that AB 1083’s maximum limit on waiting periods applies to group insurance policies and HMOs that are grandfathered, or non-grandfathered, under the ACA.  Self-funded employers are not subject to California’s Insurance or Health and Safety Codes, hence may impose a maximum 90-day waiting period under their plans.

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Filed under 90-Day Waiting Period, Affordable Care Act, California AB 1083, California Insurance Laws, Health Care Reform, PPACA

Podcast Interview: How the ACA is (Re)Shaping the Delivery of Healthcare

I had recently had the pleasure of interviewing attorney Mark F. Weiss of The Advisory Law Group on how he sees the Affordable Care Act shaping the delivery of healthcare in the present and coming years. Mark represents doctors’ groups, hospitals, and other healthcare providers, and he provides real-world insights into the way that provider payment systems under the ACA, and other aspects of the law, are driving significant changes in the delivery of healthcare. Press “play” below and listen to Mark’s comments on, among other points:


-how and why “accountable care organizations” or “ACOs” under the Act are driving consolidation of healthcare providers;
-how the ACA is impacting pricing and R&D competition among physicians groups and other caregivers; and
-whether (or when) the ACA will flatten or drive down the healthcare “cost curve.”

Mark brings a wealth of experience to these topics and it is worth a few minutes of your time to share his vantage point on the ACA and how it is changing the healcare industry from within. You can get more information on the topics discussed at Mark’s blog, “Wisdom. Applied.” at http://www.advisorylawgroup.com/blog1.

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ACA Developments: Individual Mandate Transitional Relief; Nondiscrimination Regulations Yet to Issue

The IRS recently issued Notice 2013-42, which grants transition relief from the individual shared responsibility penalty for persons whose employers offer group health coverage on a non-calendar year basis.  Specifically, individuals who are eligible under an employer’s non-calendar year plan with a plan year beginning in 2013 and ending in 2014 will not be liable for the individual shared responsibility for the period from January 1, 2014, through the month in which the employer’s 2013-2014 plan year ends.  This frees these individuals from the duty to enroll in the plan in 2013, simply in order to have secured minimum essential coverage as of January 1, 2014.  Examples set forth in the notice suggest that an employee whose plan is on a non-calendar year cycle can wait to enroll in the 2014-2015 plan year, even when the employee’s spouse is eligible for coverage under a calendar year plan.

Secondly, June 30, 2013 came and went without the Treasury Department publishing proposed regulations on nondiscrimination rules for insured health plans.  The ACA imposes these rules but the Treasury Department has suspended enforcement of them, pending issuance of regulatory guidance.  As tax regulations generally cannot go into effect earlier than 6 months after publication, they needed to have been published by June 30 in order to take effect January 1, 2014.  It now appears possible if not likely that the nondiscrimination rules will not take effect until 2015, to allow employers who must commit to insurance policies on a 12-month cycle adequate time in 2014 both to understand the new regulations and to make plan design changes as needed. in order to comply with them.

Both of these developments transpired before the Treasury Department announced that it would not enforce until 2015 employer shared responsibility tax penalties, or tax reporting duties related to the employer and individual mandates, originally required in 2014.   It is likely that the individual mandate will go into effect on January 1, 2014 as scheduled.  What is not clear at this point is whether nondiscrimination rules will go into effect concurrently with the delayed employer mandate penalties, in 2015, or will be delayed an additional year, to 2016.    Given the Treasury’s expressed goal, in its memo, of implementing the ACA in a “careful, thoughtful manner,” it is possible that more time for compliance will be provided.

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Filed under Affordable Care Act, Benefit Plan Design, Employer Shared Responsibility, Individual Shared Responsibility, Nondiscrimination Rules for Insured Health Plans, PPACA, Uncategorized

Employer Pay or Play Penalties Postponed Until 2015

This post was updated on July 14, 2013 to reference publication of IRS Notice 2013-45, Transition Relief for 2014 Under Secs. 6055 (Sec. 6055 Information Reporting), 6056 (Sec. 6056 Information Reporting) and 4980H (Employer Shared Responsibility Provisions).

In an online memo titled “Continuing to Implement the ACA in a Careful, Thoughtful Manner,” Mark Mazur, the Treasury Department’s Assistant Secretary for Tax Policy, announced July 2, 2013 that Treasury would not be enforcing “employer shared responsibility payments” – the pay or play penalty taxes – in 2014 as originally required under the ACA (now codified at Internal Revenue Code Section 4980H).  Instead, the penalties will apply to “applicable large employers” for the first time in 2015. (See end of post for definition of this term.)  In 2014, eligible employees will be able to obtain premium tax credits and cost-sharing payments under the state and federally facilitated health exchanges in 2014, but financial aid provided to full-time employees will not trigger tax penalties for applicable large employers during that year.

The same memo also postpones, for one year, tax reporting duties under Section 6055 of the Internal Revenue Code (relating to minimum essential coverage provided by insurers and self-funded employers), and Section 6056 (relating to minimum essential coverage provided by applicable large employers).

The IRS shortly thereafter published IRS Notice 2013-45 which provides formal transition relief for reporting under Code Sections 6055 and 6056 as well as for employer shared responsibility payments under Code Section 4980H.

The reporting duties under Code Sections 6055 and 6056 have not received nearly the level of attention as the pay or play penalties, but they are onerous.  (The reporting duties have not yet been described in proposed regulations.  What we know of them at this juncture is drawn from IRS Notices 2012-32 and 2012-33, which solicit public comments on the reporting regime.)  The burdensome nature of the reporting duties was the impetus for the Administration to postpone pay or play enforcement, as described below.

  • Code Section 6055 requires insurers, self-funded employers and certain other entities to report to the IRS information that will allow the IRS to track compliance with the individual mandate (individual shared responsibility duties).  The individual mandate requires individuals to obtain “minimum essential coverage” in 2014 and subsequent, or pay a penalty.  In addition to reporting to the IRS, providers of minimum essential coverage must provide individuals receiving the coverage with an annual written report that documents their compliance with the coverage requirement.  Reporting for coverage provided in 2014 was originally first required to be filed in 2015.  Once proposed reporting regulations issue later this summer, reporting likely will not be required until 2016 (for coverage provided in 2015).  However, the Treasury memo and IRS Notice 2013-45 both state that Treasury strongly will encourages voluntary compliance with reporting duties during 2014.
  • Code Section 6056 reporting will provide information to the IRS on compliance, by applicable large employers, with the employer shared responsibility/pay or play requirements.   It includes not only reporting to the IRS on the terms and conditions of coverage the employer offers to full-time employees, but also an annual written disclosure to full-time employees summarizing the information provided to the IRS.

These expansive reporting duties – and the significant administrative and other costs they will impose on employers -  generated considerable concern in the business community.  In the process of negotiating these issues with the Administration it apparently became clear that further work was needed to streamline and simplify the reporting process, and that without Treasury’s access to the information due to be reported in 2014, implementation of the pay or play penalty regime was unworkable.

The Treasury memo states that formal guidance describing the transition relief for tax reporting, and shared responsibility payments, will be published in the next week.  (And was published in the form of IRS Notice 2013-45).  It also states that more guidance on tax reporting duties will be published in the summer, after a “dialogue with stakeholders,” including employers already providing full-time employees with adequate coverage, that hopefully will result in some simplification if not reduction in the scope of reporting duties.  As mentioned, IRS Notice 2013-45 states that, once reporting guidance issues later this summer, voluntary compliance with reporting duties by self-funded employers, insurers, and applicable large employers is strongly encouraged.  It also clarifies that no other aspects of the Affordable Care Act will be affected by the delay, including individuals’ ability to obtain premium tax credit and other financial aid on the health care exchanges.

Although the memorandum is silent on the state of health exchange readiness (or, more accurately, non-readiness) across the nation, the decision to postpone pay or play penalties may result in some part from concerns about exchange implementation delays, particularly with regard to the 34 states that will either default to a federally-facilited exchange, or will partner with the federal government to establish an exchange.  Anemic carrier involvement in the exchanges may also be a factor.

It is too early to assess the full impact of the enforcement and reporting delay, but one possibility is that it will afford applicable large employers a opportunity to observe, in 2014, the degree to which employees not currently offered coverage seek exchange coverage, and qualify for premium tax credits and cost-sharing.  (The exchanges are supposed to report to applicable large employers when full-time employees qualify for financial aid starting in 2014, but it is not clear whether this can occur while employer and carrier reporting duties are suspended).  Employers may also anecdotally be able to observe the degree to which its non-benefited workforce obtains expanded Medicaid coverage, in those states that offer it beginning in 2014.  As a consequence the delay may allow applicable large employers to better design and tailor their health insurance coverage offerings, in 2015 and subsequent, to those full-time employees for whom employer-sponsored coverage is the best fit.

We will be posting updates as further guidance related to this significant ACA development becomes available.

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“Applicable large employer” means an employer that employed, on business days during the preceding calendar year, an average of at least 50 full-time employees, including full-time equivalent employees.  Full-time employee means someone working at least 30 hours per week or 130 per month.  (Sole proprietors, partners in a partnership, 2% or more S-corporation shareholder, and “leased employees” as defined in IRC Section 414(n) are not counted.)  Full-time equivalent employees are hypothetical employees counted by totaling all non-full-time employee hours worked per month (but crediting no one employee with more than 120 hours for the month), and dividing the total by 120.)

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Filed under Affordable Care Act, Benefit Plan Design, Employer Shared Responsibility, Individual Shared Responsibility, Nondiscrimination Rules for Insured Health Plans

Final Wellness Regulations Expand Employer Compliance Duties

On June 3, 2013, the departments of the Treasury, Health and Human Services, and Labor (the “Agencies” or “Departments”) published final regulations defining how wellness programs may comply with the Affordable Care Act’s prohibition against discrimination based on one or more “health factors,” a term that includes an individual’s health status, medical condition, disability, and claims experience. The final regulations make some significant changes to proposed wellness regulations published in November 2012, which were the subject of an earlier post on this blog.  I outline the key changes, which take effect for plan or policy years[1] beginning on or after January 1, 2014, in the following Frequently Asked Questions list.

Q. 1.       What is the most significant change the final regulations make to wellness program compliance duties?

A.1.     The final regulations treat certain wellness programs that formerly were classed as “participatory-only” programs as “health contingent” programs that must meet five criteria designed to permit individuals with health limitations to still qualify for the wellness reward.  Examples include walking programs or other programs that do not require that employees attain a specific result, but that do require their physical participation or other activity that may be ruled out by health issues.

Q. 2.       How do the final regulations change the terminology of wellness programs?

A. 2.    As referenced above, wellness programs generally were classed in two categories: “participatory” or “participation only” programs that merely required the employee to take part in wellness programs and activities in order to attain the related reward, and “results-based” programs that conditioned a reward on the employee meeting a standard or criteria that is related to a health factor, such as actually reducing Body Mass Index (BMI) or blood pressure readings.  The proposed regulations introduced the term “health-contingent wellness programs” to replace “results-based” programs (which was never an official regulatory term to begin with), but did not change the definition of participatory plans.  The final regulations retain the participatory category, but break the “health contingent” category down into two sub-categories:  “activity-only” health-contingent wellness programs – many of which formerly met the “participatory-only” category, and “outcome-based” health-contingent wellness programs, as follows:

Q. 3.       How do the final regulations define “activity-only” health-contingent wellness programs?

A. 3.    An activity-only health contingent wellness program requires an individual to perform or complete an activity related to a health factor in order to obtain a reward, but does not require the individual to attain or maintain a specific health outcome.  Examples include walking, diet or exercise programs, which some individuals may be unable to participate in or complete, or have difficulty in doing so, due to health factors such as asthma, pregnancy, or recent surgery.

Q. 4.       How do the final regulations define “outcome based” health-contingent wellness programs?

A. 4.    An outcome-based health-contingent wellness program requires an individual to attain or maintain a specific health outcome, such as smoking cessation, or reducing BMI or blood pressure below a set threshold, in order to obtain a reward.  As the regulations explain, however, such programs usually contain an “activity-only” subcomponent for individuals who do not attain the desired health outcome.  For instance, if the program provides a reward to employees who reduce their BMI or blood pressure by a set amount, employees who, for health reasons, cannot or should not attempt to attain those results may receive the same reward by participating in a walking program or by attending healthy cooking classes.  As a consequence, the special rules for activity-only health-contingent wellness programs generally will apply to that subcomponent of outcome-based health-contingent wellness programs.

Q. 5.       When is a participation-only or “participatory” wellness program nondiscriminatory under the final regulations?

A. 5.    A participatory wellness program – such as a program that provides a 10% reduction in premiums to employees who take part in biometric testing, without any required result – is nondiscriminatory provided that it is made available to all similarly situated individuals, regardless of health status.  The “similarly situated” rule permits differences among “bona fide employment-based classifications” such as work location, union versus non-union, etc.   There is no dollar or percentage limit on financial rewards for taking part in a participatory-only wellness program.

Q. 6.       When is a “health-contingent” wellness program nondiscriminatory under the final regulations?

A. 6.    All health-contingent wellness programs – whether activity-only or outcome-based, must meet five separate requirements designed to make wellness rewards attainable regardless of health factors such as disabilities or medical conditions.   The five criteria are: (a) that employees be able to qualify for the reward at least annually; (b) that the financial reward not exceed certain thresholds, as applied to the total premium cost for individual coverage; (c) that the wellness program be reasonably designed to promote health or prevent disease; (d) that the wellness program be made available to all similarly situated individuals, including through waiver of the health goal or offer of a reasonable alternative means of attaining the reward when health factors present an obstacle; and (e) that all written plan materials disclose the availability of other means of qualifying for the reward. These criteria are found in final nondiscrimination regulations under HIPAA from 2006 as well as in Section 2705(j) of the Public Health Service Act, which was incorporated into the Affordable Care Act (ACA § 1201(4)).  Most of the changes in the final regulations involve criteria (d), which is referred to below as the “universal availability/reasonable alternative standard” requirement.

Q. 7.       What is the maximum financial reward that a health-contingent wellness program may provide?

A. 7.    Under current law the maximum financial reward is an amount equal to 20% of the total premium cost (employer and employee portions) for individual coverage under a group health insurance policy or self-funded plan. (The percentage may be based on family or self plus one coverage costs only to the extent that the added spouse/dependents may participate in the results-based wellness program.[2])   For plan or policy years beginning on or after January 1, 2014, the final regulations increase the maximum to 30% of the total premium cost.  An additional 20% incentive is allowed (for a total incentive of 50%) but only if it is offered in connection with a program that reduces or stops tobacco use.  Employers must be sure that their results-based wellness program incentives do not exceed the 30% and 50% thresholds either separately or when added together.  Examples are described in my earlier post on the proposed regulations.

Q. 8.       What special requirements apply to activity-only, health-contingent wellness programs?

A. 8.    The five criteria listed above all apply, but special rules apply under the universal availability/reasonable alternative means requirement, as follows:  The program must either waive the activity requirement, or offer a reasonable alternative standard for obtaining the reward, for any individual for whom it is either (a) unreasonably difficult due to a medical condition to participate in the activity or (b) medically inadvisable to attempt to do so.  For example, for individuals recovering from hip replacement surgery, a requirement to participate in a walking program would need to either be waived, or a substitute offered.  The following additional rules apply:

  • Employers do not need to “pre-design” reasonable alternative standards but instead  may design them once an employee requests alternative standards.
  • If the reasonable alternative standard is completion of an educational program, the employer must make the educational program available or assist the employee in finding such a program, and may not require the individual to pay for the program.
  • The time commitment must be reasonable.  The regulations state that requiring attendance at a nightly one-hour class would not be reasonable.
  • If the reasonable alternative standard is a diet program, the employer does not need to pay for the cost of food but must pay any membership or participation fee.
  • If the reasonable alternative standard that is offered meets the definition of an activity-only wellness program, it must independently comply with the five requirements, including the universal availability/reasonable alternative standard criteria, as if it were a self-standing program.
  • If the reasonable alternative standard that is offered meets the definition of an outcome-based wellness program, it must independently satisfy the five requirements, including the universal availability/reasonable alternative standard criteria, as if it were a self-standing program.

Q. 9.       What special requirements apply to outcome-based, health-contingent wellness programs?

A. 9.    The five criteria listed in response to Q. 5 all apply, but special rules apply under the universal availability/reasonable alternative means requirement, as follows:  The program must either waive the required health outcome, or offer a reasonable alternative standard for obtaining the reward, for any individual for whom it is either (a) unreasonably difficult due to a medical condition to attain the health outcome or (b) medically inadvisable to attempt to do so.  For example, a requirement to lower blood pressure below a certain threshold would need to either be waived, or a substitute offered, to individuals with chronic hypertension.  The following additional rules apply:

  • Employers do not need to “pre-design” reasonable alternative standards but instead may design them once an employee requests alternative standards.
  • If the reasonable alternative standard is completion of an educational program, the employer must make the educational program available or assist the employee in finding such a program, and may not require the individual to pay for the program.
  • The time commitment must be reasonable.  The regulations state that requiring attendance at a nightly one-hour class would not be reasonable.
  • If the reasonable alternative standard is a diet program, the employer does not need to pay for the cost of food but must pay any membership or participation fee.
  • The reasonable alternative standard cannot be a requirement to meet a different level of the same standard without additional time to comply that takes into account the individual’s circumstances.  The final regulations use an example of an initial standard of reducing BMI below 30, and state that a reasonable alternative standard cannot be to achieve a BMI less than 31 on the same date that the original standard was required.  Instead, reducing BMI by a small amount or percentage over a realistic period of time, such as a year, is a permitted alternative goal.
  • An individual must be given the opportunity to comply with the recommendations of the individual’s personal physician as a second reasonable alternative standard to meeting the reasonable alternative standard defined by the plan, but only if the physician joins in the request.  The individual can make a  request to involve a personal physician’s recommendations at any time and the personal physician can adjust his or her recommendations at any time, consistent with medical appropriateness.
  • If the reasonable alternative standard that is offered meets the definition of an activity-only wellness program, it must independently comply with the five requirements, including the universal availability/reasonable alternative standard criteria, as if it were a self-standing program.
  • If the reasonable alternative standard that is offered meets the definition of an outcome-based wellness program, it must independently satisfy the five requirements, including the universal availability/reasonable alternative standard criteria, as if it were a self-standing program.

Q. 10.    When may an employer request verification, from an employee’s medical provider, that health factors prevent the employee from earning a reward under a health-contingent wellness program?

A. 10.  Employers may request such verification only in connection with activity-only wellness programs (or in connection with activity-only subcomponents of outcome-based wellness programs).  The proposed regulations would have permitted employers to make such requests whenever it was “reasonable under the circumstances” to do so, but the final regulations conclude that it is never reasonable to require verification that an employee’s inability to attain, or attempt to attain, a specific health outcome is based on one of the enumerated health factors such as a medical condition or disability.  As mentioned, however, if an employee who cannot attempt to lower his or her blood pressure under an outcome-based program is offered the alternative of a walking program or other activity-only program, an employer may request verification that a health factor prevents the employee from taking part in the walking program, as it is an activity-only subcomponent of the outcome-based wellness program.  Under the final regulations, verification requests still must be “reasonable under the circumstances,” and further must be sought only when it is “reasonable to determine that medical judgment is required to evaluate the validity of the request” for a reasonable alternative standard.

Q. 11.    How do the final wellness regulations increase the role and authority of employees’ personal physicians?

A. 11.    The proposed regulations limited the role of an employee’s personal physician to that of rebutting the alternative compliance methods recommended, under a health-contingent wellness program, by a medical professional hired or employed by the employer.  The final regulations permit an employee’s personal physician to prescribe reasonable alternative standards for earning a wellness reward in any instance where original health-contingent program standards are deemed to be medically inappropriate for an employee, including, but not limited to, instances in which the plan or employer’s medical professional has recommended an alternative method.  As described above, outcome-based wellness programs also must include, as a second reasonable alternative standard (in place of the reasonable alternative standard proposed by the plan), the opportunity to comply with recommendations of the employee’s personal physician.  Employees in outcome-based programs also may request to involve a personal physician’s recommendation at any time, and if the physician agrees to participate he or she may adjust recommendations at any time consistent with medical appropriateness.
Regular insurance co-pays or costs will apply to medical items and services furnished in accordance with the physician’s recommendations.[3]

Q. 12.    Must health-contingent wellness programs provide a never-ending series of reasonable alternative standards?

A. 12.  No.  This was a possible interpretation of the preamble to the proposed regulations, which stated that employers must continue to offer alternative standards despite a low success rate, particularly where addictive behavior is involved, and which gave the example of offering different weight loss programs or different nicotine replacement therapies when predecessors failed to have an effect.  The final regulations make clear that employers need not get caught in an endless cycle of suggesting alternative standards, and introduce two new requirements for outcome-based programs designed to shortcut the reasonable alternative standard process.  These requirements are described more fully in Q&A 9, above; the first requirement is that a reasonable alternative standard cannot be a requirement to meet a different level of the same standard without additional time to comply that takes into account the individual’s circumstances, and the second is that the individual be given the opportunity to comply with the recommendations of the individual’s personal physician in lieu of meeting an alternative standard set by the program or a program physician.

Q. 13.    How do the final regulations change the notice requirements for wellness programs?

A. 13.  The proposed regulations contain several alternative model notices that reasonable alternative standard will be offered to individuals who cannot attain health-contingent program goals, and required that the notice be set forth in all written materials that describe a wellness program, but not to materials that simply make reference to the existence of the program. For instance, it need not be set forth in the Summary of Benefits and Coverage document (which is provided by carriers to employers with insured plans).  The final regulations maintain the notice requirement but add to the model notice language reference to the role that personal physicians may play in designing reasonable alternative standards, as follows:

“Your health plan is committed to helping you achieve your best health.  Rewards for participating in a wellness program are available to all employees.  If you think you might be unable to meet a standard for a reward under this wellness program, you might qualify for an opportunity to earn the same reward by different means.  Contact us at [insert contact information] and we will work with you (and, if you wish, with your doctor) to find a wellness program with the same reward that is right for you in light of your health status.”

Q. 14.    Do the final regulations expand on notice requirements for wellness programs?

A. 14.  Arguably, yes.  A footnote to the preamble provides that, if compliance with a wellness program affects premiums, cost sharing, or other benefits under the terms of a group health plan, then the wellness program terms (including the availability of any reasonable alternative standard) are generally required to be disclosed in governing plan documents as well as in the summary plan description (SPD).  This is not a new rule as much as it is a valid interpretation of the required contents of an SPD, including a description of employee contributions (which are impacted by wellness program participation).  However group health plan documents and SPDs – particularly for fully insured group plans – do not always integrate wellness program terms with the provisions for employee contributions and cost sharing.  As a result, many employers will need to revisit their group health plan documentation and revise as necessary to describe the impact of wellness program participation.

Q. 15.    Do the final regulations shed any light on when or whether a wellness program is “voluntary” as required under the Americans with Disabilities Act?

Q. 15.  No.  Clarification on this topic will have to come from the Equal Employment Opportunity Commission (“EEOC”), which regulates compliance with the Americans with Disabilities Act.  EEOC has not yet clearly defined what makes a wellness program “voluntary” or not, but did recently hold a meeting at which business and advocacy groups spoke to the issue and urged the Commission to provide guidance on this point without future delay.

Q. 16.    What can be done when smoking cessation/reduction rewards are provided to an employee who is later found to have lied about stopping or reducing smoking?

A.16.

Q. 1.       What can be done when smoking cessation/reduction rewards are provided to an employee who is later found to have lied about stopping or reducing smoking?

A.16.   The Affordable Care Act prohibits rescission of coverage under any group or individual plan other than instances of fraud or misrepresentation of a material fact.  With regard to small group and individual policies subject to the tobacco rating surcharge, insurance market reform regulations prohibit rescission on the basis of misrepresentation of smoker status, but permit the plan to seek recovery of premium amounts that would have been paid to the plan if the employee had provided accurate information about tobacco use.  It is possible that future guidance will address the rescission remedy in this context for large group and self-funded plans, but a footnote to the regulations states that the Departments view is that misrepresentation of this type would not be a “material” fact that would trigger rescission, because the lesser remedy of recouping premiums is available.  Please note that the right to recoup the surcharge would need to expressly be permitted in the governing health plan documentation and would otherwise need to be carried out in compliance with ERISA.  State wage and hour laws may prevent or limit the use of payroll deductions to recover the surcharge amounts.  In a related note, final insurance market reform regulations published in February 2013 propose a definition of “smoking” as use of tobacco on average of four or more times per week within a period no longer than the prior six months.

Q. 17.    Are all wellness programs subject to the final regulations?

A. 17.  The final regulations apply to wellness programs that are teamed with small and large group health plans, whether grandfathered or non-grandfathered, insured or self-funded.  They do not apply to wellness programs teamed with individual health insurance policies.  The 50% maximum wellness incentive that includes a smoking cessation or reduction program teams with the tobacco use surcharge (up to 50% of the applicable premium) that applies in the small group market beginning in 2014, such that tobacco users who participate in the cessation or reduction programs can cancel out the effect of the surcharge.  The surcharge would apply to large group plans only when such plans are offered on an exchange; in California this would pertain to plans with more than 50 participants and only in 2016 and subsequent (the California exchange is closed to groups of more than 50 in 2014 and 2015.)


[1] As wellness programs generally do not comprise self-standing group health plans, the applicable plan or policy year is that of the group health plan to which the wellness program relates.

[2] The regulations do not provide direct guidance on how to apportion the reward among employee family members when they are allowed to participate in wellness programs, but the Agencies will likely issue future “soft” guidance – for instance in the form of an FAQ – on that topic in the future.

[3] The final regulations do not directly address the privacy concerns under GINA, HIPAA and comparable state laws, raised by the personal physician’s increased role in wellness program design.

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Filed under Affordable Care Act, Benefit Plan Design, GINA/Genetic Privacy, HIPAA and HITECH, PPACA, Wellness Programs