Part II: The ACA Effect
The Affordable Care Act has prompted employers to provide more tailored health coverage options to their workforce. Some employers have turned to offering medical benefits that are intended to qualify as “excepted benefits.” An excepted benefit is a medical benefit that is exempt from ACA requirements, such as the prohibition on annual and lifetime maximums, maximum waiting periods and other provisions causing risk of penalty.
In this second installment of our two-part blog (see Part I here), we discuss additional benefit options that will meet excepted benefit requirements. Part I addressed health flexible spending accounts, travel insurance, limited scope benefits and traditionally excepted coverage. In Part II, we address the remaining categories which have been enacted or clarified largely because of the passage of the ACA:
- Non-coordinated excepted benefits (such as hospital indemnity policies),
- Supplemental medical benefits,
- Wrap around benefits and
- A new qualified HRA option for small employers.
Confusion Galore: Fixed Indemnity Coverage
One category of excepted benefits (“independent, non-coordinated benefits”) includes specified disease or illness coverage (such as a plan that pays a flat dollar if the participant is diagnosed with cancer) and hospital indemnity and other fixed indemnity policies. To be an excepted benefit, a specified disease or fixed indemnity policy:
- Must be fully insured under a separate policy, certificate or contract of insurance,
- Cannot coordinate benefits, and
- Must pay benefits for an event regardless of whether the employer’s health plan pays for those same benefits.
Federal regulators have taken the position that hospital or other indemnity insurance must pay a fixed dollar amount based on a specific period (e.g., per day) and cannot provide payment based on a specific service or based on the cost of a specific service. Some insurers have been issuing policies that they purport to be excepted benefits under fixed indemnity rules. These policies are often filed with state insurance authorities as “indemnity insurance.” However, many of them tie indemnity to specific services, thereby violating the requirements to be an excepted benefit.
Employers have most commonly relied on the excepted benefits rule when implementing hospital indemnity and critical illness policies to supplement employer provided coverage. Employers should review the provisions of these policies carefully to assure that they do not run afoul of the requirements, thereby creating significant penalty risk.
What is a Supplemental Medical Benefit Exactly?
The supplemental benefit excepted benefit category is a catch all for many types of coverage that are intended to fill gaps in care that might not otherwise fit within another category of excepted benefit. Benefits must supplement other medical coverage such as a group health plan, Medicare, TriCare or Veteran’s coverage. Benefits must also be provided under a separate policy, certificate or contract of insurance. In other words, only insured benefits will qualify.
If supplemental coverage is provided as an adjunct to a group health plan, it must be designed specifically to fill gaps in primary coverage, such as payment of coinsurance or deductibles, and cannot be subject to a coordination of benefits provision.
Supplemental coverage may also cover items and services that are not covered in the primary health plan as long as they are not considered essential health benefits in the state the policy is issued. For example, coverage for infertility benefits would be excepted supplemental coverage in most states, as infertility coverage is rarely considered an essential health benefit.
Federal regulators have crafted a safe harbor provision that includes the following four criteria:
- The coverage must be issued by an insurer that does not provide the primary health coverage;
- The coverage must be designed specifically to fill gaps in coverage;
- The cost of the coverage cannot exceed 15 percent of the cost of the primary health coverage; and
- Coverage sold in the group insurance market must not differentiate in eligibility or benefits, nor can premiums be based on health factors of individual participants.
Some carriers continue to offer benefits, such as executive reimbursement plans, indicating that the plans are not subject to the ACA. Employers should be wary of these assertions and should review all supplemental medical benefits in light of the available safe harbor option outlined above or other provisions under which benefits can be classified as excepted benefits.
Wrap-Around Coverage – Why Bother?
Wrap-around coverage is coverage designed to offer additional benefits to ACA part-time employees who are enrolled in individual coverage. The agency regulations allow for wrap-around coverage under a pilot program if the coverage is first offered between January 1, 2016 and December 31, 2018. The pilot programs is scheduled to end three years from the date the coverage was first offered (or if offered under a collective bargaining agreement, the end date of the agreement).
Six criteria must be satisfied for wrap around coverage to be considered an excepted benefit:
- The coverage must provide a meaningful additional benefit that supplements other coverage beyond cost sharing, for example covering the cost of prescription drugs not in a formulary or benefits that were not essential health benefits under the health plan.
- The cost must be limited to the maximum salary reduction permitted to a health FSA ($2,500 as indexed) or 15 percent of the cost of the primary plan.
- General nondiscrimination requirements apply, including on the basis of health status or in favor highly compensated individuals, even if the coverage is insured.
- To be eligible for the coverage, the employee cannot enroll in a health FSA that qualifies as an excepted benefit (see part I of the blog).
- If the wrap-around is for individual health insurance policies, the only individuals who can receive the coverage are retirees or employees who are not expected to be ACA full time. Those individuals must be eligible for other employer health coverage that is not an excepted benefit. Finally, the employer must offer its full time employees health coverage that meets both the ACA’s minimum value and affordability standards, even if the plan sponsor is exempt from the employer mandate.
Note: employers who purchase small group coverage of the exchanges are allowed to offer wrap-around coverage for coverage that qualifies as a Multi-State Plan. Specific requirements apply to the employer’s offer of health coverage and its aggregate contributions toward the wrap around coverage.
- The employer sponsoring the wrap-around coverage must agree to comply with yet unspecified reporting requirements to HHS
Some small employers (those with fewer than 50 full-time equivalent employees) may have the greatest interest in pursuing wraparound coverage, since they will not incur the “play or pay” excise tax if individuals for whom employer-sponsored coverage is not affordable obtain subsidized coverage through a marketplace. But we wonder how many small employers will be interested in complying with the byzantine prerequisites for offering wraparound coverage.
Hot Off the Presses: A New Excepted Benefit…HRA Option for Small Employers
A new federal law gives us a new form of excepted benefit. Prior to the ACA, it was common for small employers that didn’t offer a group medical plan to reimburse employees for some or all of the premiums they paid for individual medical insurance policies. IRS regulations issued under the ACA effectively barred that practice after mid-2015. The 21st Century Cures Act (the Act) permits small employers not subject to the ACA’s employer mandate, and not offering a group medical plan, to reimburse employees on a tax-free basis for medical care expenses, including insurance premiums, incurred by the employee. The new law applies for 2017 and later years.
The Act coins the term “qualified small employer health reimbursement arrangements” (we’ll call them QHRAs) to describe the reimbursement programs authorized by the Act. QHRAs, the employers that sponsor them and employees who participate in them must meet several requirements:
- QHRAs must provide benefits on substantially the same terms to all “eligible employees” as further defined in the Act;
- QHRAs must be funded solely by the employer;
- To be eligible for reimbursements, the employee must be enrolled in minimum essential coverage (MEC);
- The maximum reimbursement is $4,950 per year if only the employee is covered by the QHRA, but $10,000 per year if the QHRA also covers the employee’s family members; and
- Sponsors of QHRAs must provide to eligible employees a notice about the arrangement at least 90 days before the beginning of the year (for small employers looking to install a QHRA for early 2017, the notice needs to be given within 90 days of the Act’s enactment).
This is welcome relief for small employers not otherwise subject to penalty for failure to offer coverage. This new law allows small employers the opportunity to reinstate or continue the practice of subsiding health costs for their employees rather than sponsoring group health plans which come with significant reporting and disclosure requirements.
The Bottom Line
The ACA has created an environment where employers are seeking alternatives to traditional healthcare. Supplementing benefits can be an effective way to accomplish this goal. However, it is critical to assure that any benefits supplementing traditional healthcare will qualify as an excepted benefit. Failure to do so can result in significant fines and penalties. In particular, a plan subject to the ACA that is non-compliant can subject the employer to a penalty of up to $100 per day, per occurrence.