Category Archives: State Exchange

Exchange Subsidy Notices: Prelude to ACA Tax Assessments

After a one-year delay, the federally-facilitated exchange (www.healthcare.gov) has begun mailing Applicable Large Employers (ALEs) notices listing employees who qualified for and received advance payment of premium tax credits or cost sharing reductions (collectively, “exchange subsidies”) for one or more months to date in 2016.  There is a model federal subsidy notice; state-facilitated health exchanges may use their own subsidy notices. In 2016, the notices will go to mailing addresses that employees supplied while enrolling on an exchange and hence may include worksite addresses rather than an employer’s administrative headquarters.  For that reason, ALEs should track all work locations for receipt of the exchange notices.

Each notice will identify one or more employees who received subsidies in 2016, and if the names include those of full-time employees who were offered affordable, minimum value or higher coverage (or enrolled in coverage, even if unaffordable) for the period involved, an appeal is appropriate and must be made within 90 days of the date on the exchange subsidy notice. This Employer Appeal Request Form may be used for http://www.healthcare.gov as well as the following state-based exchanges:  California, Colorado, D.C., Kentucky, Maryland, Massachusetts, New York and Vermont.  The appeals process is carried out via mail or fax this year but will eventually convert to a digital format.

Remember, these exchange subsidy notices are not themselves assessments of ACA penalty taxes which is a separate process carried out by IRS. And the IRS will assess ACA penalty taxes for 2015 without benefit of subsidy notices for that year.   However the subsidy notices now being released do provide a “heads up” regard to potential 2016 tax liability, and by filing an appeal an ALE can build the file it will need in the event of a later penalty tax assessment. Not only will a timely appeal document the fact that no ACA penalty tax should apply, it may also prevent the employee in question from later having to refund subsidy amounts to IRS, either through a reduced tax refund or with out-of-pocket funds.

In this regard, ALEs should keep in mind that coverage that is unaffordable for exchange purposes (i.e. entitles an individual to exchange subsidies) may be affordable for employer safe harbor/penalty assessment purposes (i.e., prevents assessment of an ACA employer penalty tax). They both use the same affordability percentage – 9.66% in 2016 – but apply it to different base amounts.  The exchanges look at the employee’s modified adjusted gross income (MAGI), which may be higher than the employer’s safe harbor definition (for instance when the employee’s household includes other wage earners), or may be smaller than the employer’s safe harbor definition (for instance, when the employee has large student loan interest expenses and/or alimony payments, both of which are excluded from MAGI).  Thus there will be instances in which an employer bears no ACA penalty liability with regard to coverage that is unaffordable for exchange purposes. The appeals process will make available to an employer information as to whether an employee’s household income exceeded the affordability threshold for exchange subsidies, along with other data used to establish eligibility for exchange subsidies.  A flowchart of the exchange subsidy notice and appeals process follows:Flowchart for Handling Exchange Subsidy Notices

We do not yet have details on how the IRS will go about assessing ACA penalties on ALEs for 2015 and subsequent years, other than that employers will have an opportunity to contest a tax assessment. All the more reason to engage in the appeal process, where appropriate, with regard to subsidy notices.

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Filed under Affordable Care Act, Covered California, Employer Shared Responsibility, Federally Facilitated Exchange, Health Care Reform, Health Insurance Marketplace, Premium Tax Credits, State Exchange

California Scheduled to Expand Small Group Definition Despite PACE Act

On October 7, 2015, President Obama signed into law the Protecting Affordable Coverage for Employees (PACE) Act which repeals provisions of the Affordable Care Act, and the Public Health Service Act, that effective January 1, 2016 would otherwise mandate expansion of the definition of “small employer” subject to insurance market reforms, from employers with 1 to 50 employees, to those with up to 100 employees. (This is actually a “look-back” test based on employee headcounts over the prior calendar year).  As discussed in this prior post, the market reform provisions, including modified community rating to determine premiums, and prohibitions on dollar limits on essential health benefits, are expected to significantly increase the cost of coverage for employers with 51 to 100 employees who will be joining the small group market for the first time.

Although the PACE Act repeals the federally-mandated expansion of the “small employer” definition, it leaves states the discretion to expand the definition on their own schedule.  As previously reported, California already enacted legislation in 2012, A.B. 1083, that expands the definition of small employer to employers with 1 to 100 employees, effective for plan or policy years beginning on or after January 1, 2016.  And in S.B. 125, earlier this year, California also adopted the use of the ACA’s full-time and full-time equivalent method of counting employees towards the small employer threshold.  When enacting S.B. 125, California had the opportunity to postpone small group expansion but did not do so.  Therefore the California small group market expansion will occur in 2016 unless California legislators take quick action by the end of the year to repeal the expansion, now codified in the California Insurance and Health and Safety Codes, or extend its effective date.  Of course, if is possible that the California legislature will not make any changes to the small employer definition, and small group expansion will occur in 2016.

We will continue to monitor developments on this topic.

Please note that an additional provision of S.B. 125 – changing open enrollment under the California state health exchange – Covered California, to match the November 1 – January 31 open enrollment period used by the federally-facilitated exchange, is scheduled to take effect November 1, 2015.

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Filed under Affordable Care Act, Benefit Plan Design, California Insurance Laws, California SB 1034, California SB 125, Covered California, Federally Facilitated Exchange, Health Care Reform, Health Insurance Marketplace, PACE Act of 2015, PPACA, Small Group Coverage, Small Group Expansion, State Exchange

Possible Outcomes from King v. Burwell

Update:  The Supreme Court upheld the provision of subsidies on the federal exchange in a 6-3 decision issued on June 25, 2015.

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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Filed under Affordable Care Act, Employer Shared Responsibility, Federally Facilitated Exchange, Health Care Reform, Health Insurance Marketplace, PPACA, State Exchange

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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Filed under Affordable Care Act, Employer Shared Responsibility, Federally Facilitated Exchange, Health Care Reform, Health Insurance Marketplace, Individual Shared Responsibility, Plan Reporting and Disclosure Duties, PPACA, State Exchange, Summaries of Benefits and Coverage

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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Filed under Affordable Care Act, Benefit Plan Design, Cafeteria Plans, Covered California, Employer Shared Responsibility, Federally Facilitated Exchange, Health Care Reform, Health FSA, Health Insurance Marketplace, PPACA, State Exchange

Agencies Release Exchange-Related COBRA Guidance

Recent weeks have seen the publication of several pieces of agency guidance that reflect the increasing prominence of individual coverage on the health exchanges as an alternative to continuation of group coverage under COBRA. The new guidance consists of:

  • updated model COBRA notices from the Department of Labor (both the initial or “general” notice, and the qualifying event notice) which describe exchange coverage as a COBRA alternative and mention the possible availability of exchange subsidies (both notices are available here);
  • DOL proposed regulations that streamline issuance of future model COBRA notices;
  • an announcement of, and links to, the new model COBRA notices and proposed regulations, in Affordable Care Act FAQ XIX, together with guidance on other ACA issues; and
  • announcement, in a Department of Health and Human Services bulletin, of a limited special enrollment period permitting those who elected COBRA coverage under outdated election forms to drop it, between now and July 1, 2014, and enroll in coverage on a federally facilitated exchange (FFE); and
  • an FAQ published by the Centers for Medicare and Medicaid Services (CMS) Centers clarifying the circumstances under which COBRA qualified beneficiaries may switch to exchange coverage.

Each development is discussed in turn, below.

Updated COBRA Notices

On May 2, 2014, the Department of Labor, the agency responsible for COBRA notice and disclosure duties, published online updated versions of both the “general” notice (given upon initial plan eligibility), and the “election” notice (triggered by a qualifying event). The election notice now expressly identifies the availability of exchange coverage, including access to premium tax credits for those eligible, as an alternative to COBRA coverage. The model notices currently are posted online at the DOL website in English, and Spanish language versions will soon follow.

Proposed DOL Regulations re: COBRA Notices 

Also on May 2, 2014, the Department of Labor issued an advance copy of proposed regulations (technically, a “Notice of Proposed Rulemaking”) pursuant to which future model COBRA notices may appear in written agency guidance, including through online posting, rather than as “appendices” to proposed and final regulations published in the Federal Register. One of the stated reasons for this approach is to “eliminate confusion that may result from multiple versions of the model notices being available at different locations.” And in fact, if view the online version of DOL Technical Release 2013-02, which in May of last year announced earlier exchange-related revisions to the model COBRA election notice, the link to the model notice link now clicks through to the most recent update posted last week, rather than to the version that originally was issued with the Technical Release.

 Summary of COBRA Developments in ACA FAQ Part XIX

May 2, 2014 also saw publication online of Affordable Care Act FAQs Part XIX, of which Q&A 1 summarizes the above developments and directs readers to the new model COBRA notices and the proposed regulation.

FAQ Part XIX contains additional guidance on a number of ACA issues including cost-sharing limitations, coverage of preventive services, and Summaries of Benefits and Coverage. I will cover this new guidance soon in a separate post.

Special Enrollment Period to Transfer from COBRA to FFE Coverage

Generally, an individual may enroll him or herself in exchange coverage upon first becoming eligible for COBRA, during an exchange open enrollment period, or upon exhausting COBRA coverage. However, persons currently enrolled in COBRA may have elected to do on the basis of COBRA notices that did not identify exchange coverage as a COBRA alternative in these situations. Accordingly, on May 2, 2014 the Department of Health and Human Services issued a bulletin announcing a limited special enrollment period, lasting until July 1, 2014, during which COBRA qualified beneficiaries in states that use the Federally Facilitated Exchange or Marketplace may drop COBRA coverage and enroll on the FFE. The guidance does not mandate that state-run exchanges extend the same special enrollment period.

CMS FAQ re: Transition from COBRA to Exchange Coverage

Lastly, on April 21, 2014 the Centers for Medicare and Medicaid Services (CMS) posted an online FAQ https://www.regtap.info/faq_printe.php?id=1496 asking whether someone who voluntarily drops COBRA coverage during an exchange open enrollment period may enroll in the exchange (and, if eligible, qualify for premium tax credits). CMS made clear that this transition is possible even for someone whose COBRA has not expired, and that enrollment on the exchange is permitted any time during the year for someone whose COBRA coverage has expired. The FAQ made it clear that a qualified beneficiary whose COBRA coverage had not yet expired could not enroll in exchange coverage outside the annual exchange open enrollment period. (The next exchange open enrollment period is from November 14, 2014 to February 15, 2015.)

 Speculation as to COBRA’s Future

Against that background, some speculation as to COBRA’s future is warranted. COBRA continuation coverage, enacted in 1985, was in essence a legislative response to pricing and underwriting barriers to individual coverage that the Affordable Care Act has either eliminated (for instance, by banning pre-existing condition exclusions) or made less burdensome (for instance, through access to premium tax credits and cost sharing on the exchanges).   Without question, the health exchanges are a “disruptive technology” to the COBRA model, but COBRA continuation coverage likely will remain in some demand until such time as individual exchange coverage is comparable, in terms of provider networks and in other respects, to current group coverage.  That tipping point may not occur for some years, or even at all.      What is likely in the short term is that COBRA’s already steep adverse selection rate will continue to climb, as continuation of group coverage becomes more and more about retaining access to a broad network of healthcare providers.

 

 

 

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Filed under Affordable Care Act, COBRA, Federally Facilitated Exchange, Health Care Reform, Health Insurance Marketplace, Plan Reporting and Disclosure Duties, PPACA, Pre-Existing Condition Exclusion, State Exchange, Summaries of Benefits and Coverage