Possible Outcomes from King v. Burwell

On March 4, 2015, the United States Supreme Court heard oral argument in King v. Burwell, a case that variously has been characterized as an attack on the ACA and the potential death knell of that complicated law.  There is no question that the Supreme Court’s decision in this matter, which is expected to issue in late June 2015, will have immediate and significant ramifications for millions of individuals, their employers, and the health care industry.  Specifically at issue is whether the approximately 6 million individuals who receive federal subsidies towards the purchase of health insurance on the “federally facilitated exchange” or “FFE,” also known as healthcare.gov, can continue receiving those subsidies, or whether the subsidies may only be awarded in the approximately 17 states, including California and the District of Columbia, that sponsor their own health exchanges.  The impact of the King decision naturally will be largest in the approximately 34 states whose residents use the FFE, but its likely damage to the health insurance market as a whole will be felt in every state.  It also will have a major impact on “applicable large employers” (“ALEs”) under the ACA (those employing, on average, 50 or more full-time employees, including full-time equivalents).  That is because no employer “pay or play” penalty taxes apply to an ALE unless at least one of its full-time employees (30 or more hours/week) has qualified for premium tax credits on a health exchange.[1]  Below we look at the facts of the case, the legal arguments on both sides, possible outcomes in the Supreme Court decision, and finally what might happen if the Court decides in favor of the King plaintiffs.

Facts Relevant to the Case

There are fairly few facts relevant to King v. Burwell because it is essentially a “test case” funded by a conservative think tank, the Competitive Enterprise Institute.  The plaintiffs (technically, “Petitioners”) are several lower-income residents of Virginia, a state that did not establish its own exchange.  Lead plaintiff David King is a limousine driver.  The grievance that the plaintiffs have in common is that the Federally Facilitated Exchange that functions in Virginia gives them access to premium tax credits at www.healthcare.gov, which are received in the form of immediate subsidies towards coverage, then reconciled against actual household income each April.  As a consequence of access to tax credits, individual health coverage is “affordable” to them (premiums do not exceed 8.1% of income).  Because affordable coverage is available to them, effective January 1, 2014 they must either purchase the coverage or pay a penalty tax.  If the premium tax credits were not available in Virginia, a non-state-exchange state, coverage would be unaffordable to them and they would not have to either buy coverage or pay a tax penalty.  In essence they are arguing that access to premium tax credits in a non-exchange state exposes them to a tax they would not have to pay if there were no federally-run exchanges.  This argument failed to succeed in federal district court and the 4th Circuit Court of Appeals affirmed that decision.

The Legal Arguments

King v. Burwell is materially different from the Supreme Court’s prior major ACA case, National Federation of Independent Business (NFIB) v. Sebelius, 567 U.S. ___ , 132 S. Ct. 2566, 183 L. Ed.2d 450 (2012).  The NFIB case challenged the constitutionality of the individual mandate, which requires individuals to secure health insurance for themselves and their families, or pay a tax penalty.  The challengers to the law characterized this as an overreach of Congress’ powers under the U.S. Constitution.  In a 5 to 4 decision, the Supreme Court ruled that the individual mandate was within Congress’ powers to impose taxes on U.S. citizens.

In the King case, by contrast, the challengers are not claiming that the ACA violates the Constitution.  They are instead looking at a few lines of text of the 906-page law that relate to how premium tax credits are calculated. The language, which is codified at Internal Revenue Code (“Code”) Section 36B(b)(2)(A), is as follows (italicized text):


(b) Premium assistance credit amount

For purposes of this section—

(1) In general

The term “premium assistance credit amount” means, with respect to any taxable year, the sum of the premium assistance amounts determined under paragraph (2) with respect to all coverage months of the taxpayer occurring during the taxable year.

(2) Premium assistance amount

The premium assistance amount determined under this subsection with respect to any coverage month is the amount equal to the lesser of—

(A) the monthly premiums for such month for 1 or more qualified health plans offered in the individual market within a State which cover the taxpayer, the taxpayer’s spouse, or any dependent (as defined in section 152) of the taxpayer and which were enrolled in through an Exchange established by the State under 1311 of the Patient Protection and Affordable Care Act [. . . . ]

The challengers argue that Congress would not have defined the calculation of premium tax credits with specific reference to “State” exchanges unless it intended to limit access to premium tax credits to state-run exchanges.

The government argues that the ACA must be interpreted as a whole, and that other section of the law are meaningless or absurd if premium tax credits are limited to state-run exchanges.  In particular they point to Section 1321 of the ACA which authorizes the Secretary of Health and Human Resources to establish an exchange on behalf of a state, and argue that a federally-run exchange would have no function or purpose if it did not award premium tax credits.    The government also argues that, if the Court found the ACA to be ambiguous on this point, it must defer to the federal agency charged with interpreting the provision, and that agency, the IRS, had already issued final regulations under Code Section 36B stating that premium tax credits are equally available on state-run and federally-run exchanges.

Oral Argument in King v. Burwell

During approximately 90 minutes of oral argument on March 4, 2015, it became fairly clear that the four “liberal” Justices (Ginsburg, Breyer, Sotomayor and Kagan) favored the government’s arguments, and that the three “conservative” justices (Alito, Scalia and Thomas) favored the challengers’ position.   The swing votes that will decide the outcome belong to Chief Justice John Roberts, who was almost silent during oral argument, and Justice Kennedy, whose line of questioning could be viewed as potentially sympathetic to the government’s position.

One issue that appeared to have traction with Justice Kennedy, and thus could possibly determine the outcome, was whether, under the challenger’s interpretation of the law, the ACA “coerced” states into starting their own exchanges by making them the only route to premium tax credits.  Federal coercion of the states would present a serious Constitutional problem, in Justice Kennedy’s words.   In fact, the Supreme Court held in its prior ACA decision that the federal government could not coerce states into expanding access to Medicaid by conditioning their access to all Medicaid money on their agreement to expand Medicaid.

Further, all of the Justices who commented seemed very conscious that a decision for the challengers could push individual insurance markets in the non-exchange states into a “death spiral” and eventual collapse.  This is because the ACA’s three main components are insurance market reforms, such as prohibiting pre-existing condition exclusions, that increase insurers exposure to risk, the individual mandate, which brings young and healthy people into the individual insurance market to mitigate that risk, and finally the premium tax credits, which make individual coverage available to people who otherwise could not afford it.  Without premium tax credits to attract younger, healthier people towards insurance, the argument goes, only the sickest individuals would purchase insurance and the health insurance industry would enter a “death spiral.”   A similar phenomenon has occurred in the past in individual states that attempted aggressive market reforms without mitigating measures.

Most Supreme Court observers concluded that the government fared slightly better during oral argument than did the ACA challengers, but were quick to add that this has little predictive value with regard to the Court’s eventual written opinion.

Possible Outcomes from the Court

It is important to note that the Supreme Court did not need to hear the King v. Burwell case; it voluntarily agreed to review the 4th Circuit court decision against the challengers even though there was no direct conflict at the federal appeal court level.  (ACA challengers had succeeded in the D.C. Circuit court in Halbig v. Burwell, a similar ACA challenge case, but that “panel” decision by the D.C. Circuit had been vacated so that all sitting judges could hear the case.  The “en banc” hearing of Halbig is on hold pending decision in King v. Burwell. )   Thus it is fair to conclude that the Supreme Court is acutely aware of the case’s very high stakes for many newly-insured Americans, for the administration that championed the law, for applicable large employers, and for the insurance industry as a whole.

What that may mean is that, even if the Supreme Court upholds the ACA challenge, and prohibits premium tax credits from being awarded in non-exchange states, it may rule in such a way that protects stakeholders from the immediate withdrawal of premium tax credits.   Here are a few of the possible ways the decision could fall:

  • Majority Verdict for the Government: if Justice Kennedy or Chief Justice Roberts cast their vote for the government, the resulting decision will preserve the “status quo” under the Affordable Care Act as we know it. Healthcare.gov will continue to award premium tax credits in the non-exchange states and individual insurance markets in those states will remain intact. This outcome would make it harder for any alternatives to the ACA, which the Republican-controlled Congress is already proposing, to gain traction and succeed.
  • Majority Verdict for the Challengers: If Justice Kennedy or Chief Justice Roberts sides with the more conservative faction of the Court, the operation of healthcare.gov in 34 states would grind to a halt and individual insurance markets in those states would soon become dysfunctional. In the non-exchange states, it is possible that individuals and families who must drop their now-unaffordable health insurance coverage will assail Governors’ mansions and the offices of Republican lawmakers with demands that they restore access to coverage, including life-saving cancer treatments and the like. Because applicable large employers in the non-exchange states will not be subject to pay or play penalty taxes, they may drop coverage they had only recently extended to employees working 30 or more hours per week. It is also possible that there will be business flight to the non-exchange states, for this reason. At the same time, non-exchange state residents may try to relocate in states that have their own exchanges, in order to receive subsidies. In essence, jobs and workers to fill them would be propelled in opposite directions.
  • A Possible Third Way: Justice Alito, who almost certainly will vote for the ACA’s challengers, raised the possibility in oral argument of a verdict for the challengers, but one whose effect is delayed by a year in order to give non-exchange states time to develop an alternative to healthcare.gov.   As this would be a voluntary process, it runs the risk that no alternative measures would be available in some states whose Governors and other elected representatives firmly oppose the ACA. Even in states that were willing to find alternatives, one year may not be enough time in which to do so. Supporters of the ACA would view this outcome as preferable, however, to a ruling for challengers that takes effect immediately. It is also possible that the justices could rule in favor of the challengers but interpret “state exchange” to include federal-state partnership exchanges, several of which already exist, and more of which are in the works already. This is consistent with the Supreme Court’s prior decision in NFIB v. Sebelius that Medicaid expansion was not something that the federal government could coerce the states into doing.

Legislative Resolutions to the Problem

In oral argument Justice Scalia asserted that Congress would take action to avert massive loss of coverage leading to a death spiral of the individual insurance market in non-exchange states.  Arguing for the government, the Solicitor General’s comment was to pause and ask “this Congress…..? to wide laughter in the courtroom.  And in fact, were Congress not so deeply divided over the ACA a simple legislative amendment would have resolve the supposed “drafting error” at the heart of King v. Burwell.

However, it is not at all impossible that members of Congress would view a Supreme Court decision for ACA challengers as a prime opportunity to gain political ground with voters by “rescuing” their health insurance, and access to subsidies, through legislation.  In fact, some legislative proposals are already being drafted and considered in Congress, however only by traditionally anti-ACA factions.   The official word from the Department of HHS is that it has no ready fix or alternative to shutting down healthcare.gov (but it is likely that the administration is considering workarounds nonetheless.  While all eyes are on the Court and its likely late-June decision, those with political ground to gain will not be standing idle.

[1] The IRS postponed employer shared responsibility duties from 2014 to 2015 in Notice 2013-45.  Under separate transition relief, generally only employers with 100 or more full-time employees (including full-time equivalents) in 2014 must offer coverage or pay the penalty for 2015, but all applicable large employers must do so in 2016 and subsequent.  The transition relief is explained in Q&A 34 of this IRS FAQ.

 

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IRS Offers Limited Transition Relief for Certain Premium Reimbursement Plans

On February 18, 2015 the IRS issued Notice 2015-17 which provides limited transition relief from $100 per day, per employee excise taxes under Internal Revenue Code § 4980D that otherwise would apply in 2014 and 2015 to certain arrangements under which employers subsidize individual health insurance coverage, whether through reimbursing employees for premiums paid, or paying them directly to the carrier.  The guidance, which was issued with the support of the Departments of Labor and Health and Human Services, refers to these arrangements as “employer payment plans.”  The main problem that employer payment plans have is that they generally constitute “group health plans” for ACA purposes, but unless they are paired or “integrated” with ACA-compliant group health coverage they fail to meet ACA market reform requirements, including the requirement to cover preventive care, and the prohibition on an annual dollar limits.  I have attached an updated chart of “Disallowed Pay or Play Tactics” to reflect the transition guidance; this prior post discusses the chart in its original form.  The main takeaway points are listed below; please note in all regards that a “group health plan” is one that covers 2 or more active employees:

  • Employers that are not “Applicable Large Employers” (ALEs) will not be subject to excise taxes in relation to an employer payment plan that reimburses employees on a pre-tax basis for individual health insurance premiums (or pays the premium directly) that is maintained in 2014, or is maintained between January 1 and June 30, 2015.
    • For the relief to apply in 2014 the employer must not be an ALE for 2014, which means that they did not employ 50 or more full-time employees, including full-time equivalents (FT/FTE), on average, based on any period in 2013 of at least 6 consecutive months.
    • For the relief to apply from January 1 – June 30, 2015, the employer must not be an ALE for 2015, which means that they did not employ 50 or more FT/FTE employees, on average, based on any period in 2014 of at least 6 consecutive months.
    • Note that this is “transition” relief which implies that the employer payment plan predated the guidance issued on February 18, 2015.
  • There is no transition relief for employers that are Applicable Large Employers maintaining pre-tax individual premium reimbursement plans.  They are subject to the excise tax for 2014 and 2015 and must pay and report it on IRS Form 8928.
  • Post-tax reimbursement or payment of individual health premiums remains a non-ACA-compliant employer payment plan that is subject to excise taxes.  No transition relief applies.
  • However, no excise taxes will apply if an employer simply increases employees’ taxable compensation in order for them to pay for individual health premiums, without conditioning the extra compensation in any way on payment for premiums.  An employer may communicate with employees about health exchange coverage and premium tax credits without violating this rule.
  • Until further notice from the IRS, an arrangement that reimburses 2% S-Corporation shareholders for health premium costs, or pays them directly, is not subject to excise taxes as a non-ACA compliant group health plan.   The IRS plans to issue further guidance on these arrangements, and on federal taxation of health benefits to 2% S-Corporation shareholders generally.

Disallowed Tactics 2015 FINAL

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Updated SBC Rules Reflect Full ACA Implementation

As 2014 came to a close, the federal agencies charged with ACA implementation (the Treasury, Labor & Health and Human Services Departments) published proposed regulations governing the contents and delivery of Summaries of Benefits and Coverage or “SBCs,” and made corresponding changes to the SBC template, and related glossary of medical and insurance terms.   The proposed regulations, if finalized, would apply to SBCs required to be provided for open enrollment periods beginning on or after September 1, 2015, and as of the first day of the plan year beginning on or after September 1, 2015 (January 1, 2016 for calendar year plans) for other SBD disclosures (such as for special enrollments).   With the proposed regulations the agencies also released updated SBC templates (blank, and completed), and an updated uniform of key medical and insurance terms.  If finalized, the proposed regulations would amend final SBC regulations published on February 14, 2012.

SBC Update:  Contents

In essence, the proposed regulations refresh SBC contents and terminology to reflect full ACA implementation, in particular its group market reforms and the rollout, over 2014 – 2016, of both individual and employer shared responsibility regimes.   Prior to the proposed regulations, these upgrades occurred piecemeal, in the form of Frequently Asked Questions, no fewer than six of which addressed SBC issues since the final regulations were published.  (See ACA Implementation FAQs Parts VII, VIII, IX, X, XIV and XIV, located here.)  The proposed regulations helpfully consolidate all that earlier guidance and make additional changes consistent with the post-ACA coverage landscape.  With particular regard to SBCs provided to participants and beneficiaries for group health coverage (insured, or self-insured) they include the following:

  • The mandated contents of the SBC template are reduced from 4 double-sided pages to only 2 ½ double-sided pages, freeing up 1 ½ pages for voluntary disclosures such as premium costs, if practical for the coverage arrangement, or additional “coverage examples,” as described below.   There is no requirement that the extra space be filled so long as all required template disclosures are made.
  • The extra space is gained in part by removing references to annual limits on essential health benefits and pre-existing condition exclusions, which are now obsolete.
  • Added to the SBC template is a third “coverage example” which is a hypothetical walk-through of likely covered and out-of-pocket expenses an individual would experience under the benefit package or plan for specific health issues. The new coverage example is a simple foot fracture with emergency room visit.
  • The SBC template also updates pricing data for the other two coverage examples, which are normal delivery of a baby, and well-regulated Type 2 diabetes. As mentioned, carriers and self-insured plan sponsors could add additional coverage examples so long as they remain within the maximum length of 4 double-sided pages (with at least a 12 point font).
  • Added to the uniform glossary are definitions for the following medical terms: “claim,” “screening,” “referral,” “specialty drug” as well as ACA terms such as “individual responsibility requirement,” “minimum value,” and “cost-sharing reductions.” These additions increase glossary page length from 4 to 6.
  • For insured or HMO coverage, the SBC must provide a web address at which individuals can view actual insurance policies, certificates, or HMO contracts related to the SBCs. (A sample certificate for group coverage may be posted while the terms of the actual certificate are under negotiation.) Existing regulations require web addresses for lists of in-network medical providers and drug formularies as well as the uniform glossary of insurance and medical terms.
  • The proposed regulations require that the SBC state whether or not the benefit package qualifies as “minimum essential coverage” or “MEC,” or whether or not it provided at least “minimum value”; these were not required by the 2012 final regulations, but were later added for coverage effective on or after January 1, 2014.
    • Note: Although this information was somewhat esoteric in 2012 and 2013, it has now become essential for most employees to complete their income tax returns for 2014. The MEC disclosure is needed to demonstrate they met individual mandate duties first in effect last year, and the minimum value disclosure is needed in relation to advance payment of premium tax credits. This tax season is the first time that individuals who received tax credits must reconcile them against actual household income, through use of the very complicated IRS Form 8962.  Compliance with the individual mandate is also required to be demonstrated on Form 1040, at line 61, or through reporting of an exemption from the mandate via Form 8965.

SBC Update:  Delivery

The proposed regulations are intended to streamline SBC delivery rules and prevent duplicate delivery of SBCs in certain situations:

  • When an insurer/HMO (“issuer”) or self-funded plan provides an SBC upon request to someone before they have applied for coverage, it need not re-supply one upon actual application for coverage unless the SBC contents have changed in the meantime (or if the person applies for a different benefit package).
  • When a plan sponsor provides an SBC to an applicant during negotiation of terms of coverage, and the terms of coverage change, the sponsor need not provide an updated SBC until the first day of coverage (unless separately requested).
  • A group health plan that uses two or more benefit packages, such as major medical coverage and a health flexible spending account, may synthesize the information into a single SBC, or provide multiple SBCs.
  • The rule permitting a plan sponsor or issuer, upon renewal or reissuance, to provide a new SBC only with respect to the benefit package that is being renewed or reissued is extended to apply to cases in which a plan or issuer automatically reenrolls participants and beneficiaries.
  • Where a plan sponsor or carrier required to provide an SBC with respect to an individual (“original provider”) enters into a binding contract with a third party (“contracted provider”) to provide the SBC to the individual, the original provider will be considered to have met their SBC delivery duties if all of the following requirements are met:
    • The original provider monitors the contracted provider’s performance under the contract;
    • The original provider corrects noncompliance by the contract provider under the SBC delivery contract as soon as practicable, if it has knowledge of the noncompliance and has all information necessary to correct the noncompliance; and
    • The original provider communicates with participants and beneficiaries about noncompliance of which it becomes aware, but which it is unable to correct, and takes significant steps as soon as practicable to avoid future violations.
  • In instances where an insured group health plan uses two or more insurance products provided by separate issuers to insure benefits under the plan, the plan administrator will be responsible for providing complete SBCs but may contract with one of the carriers or another service provider to provide the SBC; absent such an agreement one carrier has no obligation to provide SBCs describing benefits provided by the other carrier. (It remains permissible under prior FAQ guidance to also provide several separate partial SBCs under cover of a letter or notation on the partial SBCs explaining their interrelation.)
  • The proposed rules also incorporate prior FAQ guidance that “providing” an SBC means “sending” an SBC, and an SBC is timely provided if it is sent within seven business days of request, even if it is not received within that time period. This same timing rule applies to requests to receive copies of the uniform glossary. Provisions in the final regulations on electronic delivery of the SBCs continue to apply.

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Summary Chart of Disallowed Pay or Play Tactics

With the January 1, 2015 employer shared responsibility deadline fast approaching, the three government agencies charged with ACA compliance (IRS, DOL and HHS) have provided recent guidance on several strategies or tactics that have been marketed to applicable large employers as legitimate ways to reduce their coverage costs and exposure to shared responsibility penalty taxes (assessable payments).   Employer reimbursement of individual health insurance premiums is a common but not universal feature of these arrangements.  The Internal Revenue Service ruled out pre-tax reimbursement of individual health premiums in Notice 2013-54, but more recent guidance in ACA FAQ XXII and in IRS Notice 2014-69 expands the prohibition to include after-tax individual premium reimbursements, as well as other shared responsibility cost reduction strategies.  The chart attached below summarizes:

  • the disallowed strategies;
  • the reasons why they were disallowed;
  • the penalties that may apply to applicable large employers that persist in pursuing these strategies; and
  • other relevant facts and concerns.

Disallowed Tactic Chart

As with all content provided on this blog, the chart is meant to serve as a general summary of legal developments and the information it contains should not be applied to any particular factual situation without first consulting experienced tax or benefits counsel.

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IRS Announces Increased 2015 Retirement Plan Contribution Limits

On October 23, 2014 the IRS announced 2015 cost-of-living adjustments for annual contribution and other dollar limits affecting 401(k) and other retirement plans.   A 1.7% rise in the September CPI-U over 2013 triggered $500 increases to the annual maximum salary deferral limit for 401(k) plans, and the catch-up limit for individuals age 50 or older. Citations below are to the Internal Revenue Code.

Limits That Increase for 2015 Are As Follows:

–The annual Salary Deferral Limit for 401(k), 403(b), and most 457 plans, currently $17,500, increases $500 to $18,000.

–The age 50 and up catch-up limit also increases $500, to $6,000 total. This means that the maximum plan deferral an individual age 50 or older in 2015 may make is $24,000.

–Maximum total annual contributions to a 401(k) or other “defined contribution” plans under 415(c) increased from $52,000 to $53,000 ($59,000 for employees aged 50 and older).

–Maximum amount of compensation on which contributions may be based under 401(a)(17) increased from $260,000 to $265,000.

–The compensation threshold for determining a “highly compensated employee” increased from $115,000 to $120,000.

–The compensation threshold for SEP participation increased from $550 to $600.

–The SIMPLE 401(k) and IRA contribution limit increased $500 to $12,500.

–The Social Security Taxable Wage Base for 2015 increased from $117,000 to $118,500.

Limits That Stayed The Same for 2015 Are As Follows:

–Traditional and Roth IRA contributions and catch-up amounts remain unchanged at $5,500 and $1,000, respectively.

–The compensation dollar limit used to determine key employees in a top-heavy plan remains unchanged at $170,000.

–The maximum annual benefit under a defined benefit plan remained at $210,000.

 

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New Cafeteria Plan Guidance Eases Transitions to Exchange Coverage

IRS Notice 2014-55, issued September 18, 2014, permits two new types of mid-year changes in cafeteria plan elections (other than health flexible spending account elections) that will enable employees to drop employer group coverage in favor of individual coverage offered on state and federally-facilitated health exchanges (collectively, “the Exchange.”)  Making that transition primarily will appeal to employees with household incomes in ranges that qualify them for financial assistance on the Exchange, in the form of premium tax credits and cost sharing.  Those ranges are between 100% and 400% of federal poverty level in states that have not expanded Medicaid, and between 138% and 400% of federal poverty level in states that have expanded Medicare.

Recap of Existing Change in Status Rules

Under existing cafeteria plan regulations, a participant may make a mid-year change in their plan elections only in the event of a “change in status,” and only to the extent that the election change is both “on account of” and “corresponds with” the change in status.  This latter requirement is referred to as the “consistency rule.”  An example of a change in election that satisfies the consistency rule is removing a spouse from coverage as a result of a change in status that is a legal separation or divorce.  By contrast, the participant dropping his or her own coverage in that situation would not satisfy the consistency rule.

Existing regulations set forth a finite list of changes in status that trigger the right to a mid-year cafeteria plan election.  The list does not currently include a change in employment status – such as a transition from full-time to part-time status – that is not accompanied by a loss of group health plan eligibility. In addition, under special enrollment rights that were introduced with HIPAA, employees may enroll in their employer’s plan in the event they lose other coverage (for instance, through exhausting COBRA coverage), may add to their coverage a dependent newly acquired through birth, marriage, or adoption, and may make mid-year cafeteria plan changes that are consistent with these events.  HIPAA’s special enrollment rights do not contain provisions that relate to availability of individual coverage on the Exchange.

Please note that references below to “changing cafeteria plan elections” may more accurately be described as revoking an election to make pre-tax salary deferral elections towards the purchase of group health premiums.

Notice 2014-55

Effective immediately, although at the option of employers, Notice 2014-55 permits mid-year cafeteria plan election changes in two different situations that are related to Exchange coverage.

The first situation applies when an employee who has been classified as full-time for ACA coverage purposes (averaging 30 or more hours of service per week) has a change in status which is reasonably expected to result in the employee averaging below full-time hours, without resulting in a loss of their group health coverage.  Under the look-back measurement method, as set forth in final employer shared responsibility regulations, an employee who averages full-time hours during an initial (following hire) or standard (ongoing) look-back measurement period generally will be offered coverage for the entire related initial or standard stability period (and associated administrative period) without regard to the actual hours worked during the stability period, such that a schedule reduction would not impact coverage.

Now, under Notice 2014-55, full-time employees whose average weekly hours are “reasonably expected” to remain below 30 – and whose reduced earnings may now qualify them for premium assistance on an Exchange, or increased assistance –  may revoke group coverage for themselves and covered dependents, provided it is for the purpose of enrolling in Exchange coverage or other “minimum essential coverage” that will take effect no later than the first day of the second month following the revocation.   (Minimum essential coverage is not limited to exchange coverage and may, for instance, include group health coverage offered by a spouse’s employer.)  Employers may rely on employee’ representations regarding the purpose of the election change.  Changes to health FSA elections are not permitted in this situation.

The second situation has two variations.  The first applies when an employee has special Exchange enrollment rights, including as a result of marriage, birth or adoption.  Similar to HIPAA special enrollment rights, these permit purchase of Exchange coverage outside of Exchange open enrollment. The second applies under a non-calendar year cafeteria plan when an employee wants to enroll in Exchange coverage during the Exchange open enrollment period, effective as of the first of the following calendar year.

In either instance an employee may prospectively revoke group health coverage for him or herself and family members, provided it is for the purpose of enrolling in Exchange coverage that will take effect no later than the day immediately following the last day of the original coverage that is revoked.  Employers may rely on employee’ representations regarding the purpose of the election change.  Changes to health FSA elections are not permitted in this situation.

Plan Amendments and Effective Dates

The IRS intends to amend cafeteria plan regulations to reflect the guidance in Notice 2014-55.  Employers may rely on the terms of the Notice until new regulations issue.

Employers who want to incorporate the new election changes into their cafeteria plans must amend their plan documents in order to do so.   Employers who put the changes into effect between now and the end of 2014 may amend their plan documents any time on or before the last day of their 2015 plan year (December 31, 2015 for a calendar year plan).  The amendment may be retroactive to the date the change went into effect, provided that participants are informed of the amendment and provided that, in the interim, the employer operates its plan in accordance with Notice 2014-55, or with subsequent issued guidance.

Employer Shared Responsibility Considerations

As mentioned, the first permitted change primarily relates to applicable large employers who use the look-back measurement period to identify full-time employees.  To minimize “pay or play” liability, these employers should continue to monitor, over subsequent measurement periods, the average hours worked by employees who migrate to Exchange coverage, and offer affordable, minimum value coverage over corresponding stability periods to those whose hours average 30 or more per week, or 130 or more per month.

Interestingly, this portion of Notice 2014-55 refers to individuals who were “reasonably expected” to average 30 or more hours of service prior to the change, but who are “reasonably expected” to average below that after the change.  This “reasonably expected” language  – which implies a measure of employer discretion – appears in the final shared responsibility regulations only in connection with assessment of an employee’s likely status (full-time, part-time, seasonable or variable hour) upon initial hire.   After an employee has remained employed throughout an entire standard stability period (which generally corresponds to the plan or policy year), he or she is an “ongoing employee” and his or her status as full-time or not full-time is determined solely based on average hours worked over the preceding look-back measurement method, or, under the “monthly” measurement period, over the preceding calendar month.  In other words, employer discretion is removed from the ongoing measurement process.  Now, it is reintroduced by Notice 2014-55 in the limited context of a schedule reduction during a stability period.

If the second permitted change is adopted by an applicable large employer, presumably that employer will continue to monitor employees who have migrated to the Exchange using the measurement method under which the employee previously qualified for an offer of group health coverage.

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Waiting Period Limits for California Small Group Early Renewals

The following post was published on September 5, 2014 and updated on September 23, 2014.

As we posted a few days ago, some uncertainty remains for California employers regarding eligibility waiting period limits for “late renewal” insured group health plans that follow, most commonly, a December 1 through November 30 cycle.   Many small to mid-sized California employers switched from a calendar year policy cycle to a late renewal cycle in 2013, in an effort to postpone their exposure to increased health premiums resulting from ACA coverage mandates and insurance market reforms taking effect in 2014.

The ACA permits an eligibility waiting period of up to 90 days for plan years beginning on and after January 1, 2014.  California law governing insurers and HMOs restricted the waiting period to 60 days under legislation that very recently has been repealed effective January 1, 2015.  The repeal left open the issue of whether carriers would hold employers renewing late in 2014 to the 60-day waiting period limit.

At least with regard to small group coverage (2 to 50 employees), the original answer to that question appeared to be “yes” for two major carriers in the state whose approach may be a bellwether for other carriers:  Anthem and Blue Shield.   Originally upon announcement of S.B. 1034’s passage, neither would permit a 90-day eligibility waiting period on small group policies or HMO contracts that are renewed or first issued during the remainder of 2014.  The permissible waiting period choices were to have been limited to first of month following date of hire, or first of the month following 30 days from the date of hire.  However Anthem later modified its position in this regard, and will permit employers to request, in writing, a waiting period extension (not to exceed 90 days total) to go into effect as of January 1, 2015.  Blue Shield appears to be sticking to the renewal options listed.

For small group policy renewals and new sales occurring on or after January 1, 2015, the carriers will permit waiting periods equal to 90 days from date of hire, first of month following date of hire, and first of month following 30 days from the date of hire.   One of the carriers may also offer first of month following 60 days, but this is not yet certain.  Another carrier will prorate premiums when the 91st day after hire falls in the middle of the month.

So far these carriers are silent on waiting periods for large group renewals and new sales occurring in the remainder of this year.  Employers in this category likely can establish their own waiting period limits within the overall ACA 90-day cap.

The carriers are permitting the 90-day waiting period limit for individuals whose small group coverage takes effect on or after January 1, 2015.  Therefore, coverage for individuals whose waiting period bridges the end of 2014 and the beginning of 2015 should begin at the end of the waiting period that began in 2014, rather than after “tacking on” additional wait time permitted in 2015.  Although not expressly required by carriers, this would seem to be a logical strategy for large group employers to take with regard to employees whose waiting periods began to elapse at a time when the maximum limit was 60 days, but end after the point at which the employer increased the maximum limit to 90 days.   This would also have the advantage of meeting ACA requirements so long as the total waiting period does not exceed 90 days.

The final regulations on the maximum ACA waiting period state that carriers (technically, “health insurance issuers”) may rely on eligibility information reported by the employer or other plan sponsor, and will not be considered to have violated the ACA waiting period rule in instances where both of the following requirements are met:

  • the carrier requires the employer/plan sponsor to disclose the terms of any eligibility conditions or waiting period, and to provide notice of any changes to these rules; and
  • the carrier has no specific knowledge of the imposition of a waiting period that would exceed the maximum 90-day period.

Imposing eligibility waiting periods in excess of the ACA 90-day cap other than will trigger excise taxes equal to $100 per day, per impacted plan participant, up to a maximum of $500,000.  Employers and other plan sponsors must voluntarily disclose and pay the tax on IRS Form 8928, Section II.   The excise tax may be abated in whole or in part if the violation was due to reasonable cause and not willful neglect.

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