In regulations dated July 14, 2015, federal agencies took the next step in addressing religious objections to coverage of contraceptives by issuing final regulations under which certain closely held, for-profit businesses may avoid a requirement that their health plans cover contraceptives.
Non-grandfathered group health plans generally must provide contraceptive coverage in order to comply with the Affordable Care Act (ACA) preventive care mandate. Under that mandate, group health plans must cover a long list of preventive care – including contraception – when it is delivered in-network and cannot require deductibles, copayments, coinsurance or other cost sharing. As explained in our Alert, the agencies previously proposed to extend an accommodation process for avoiding the contraceptive mandate to closely held, for-profit entities, but did not propose a definition for such entities. The July 14 regulations finalize availability of the accommodation and supply that definition.
The new regulations make the accommodation available to a for-profit entity that is closely held (see the discussion below of the requirements for claiming the accommodation). Closely held, for this purpose, means:
- No ownership interest in the for-profit entity is publicly traded; and
- More than 50 percent of the value of the for-profit entity is owned directly or indirectly by five or fewer individuals (or a “substantially similar” ownership structure applies).
This change is effective for plan years beginning on or after September 14, 2015.
The Contraceptive Controversy
FDA-approved contraceptive methods for women, as prescribed by a healthcare provider, were first added to the list of preventive care services for which coverage is mandated in 2011, and the requirement was effective for plan years beginning on or after August 1, 2012. (See our Blog for details on required coverage of contraceptives.) Since the 2011 advent of the contraceptive mandate, there has been a steady stream of controversies and developments concerning religious objections to the requirement. That history is reviewed in our Alert, and generally involves employers contending that the “religious employers” exempted from the requirement should be defined more broadly.
Lockton comment: “Religious employers” (generally, churches, associations or conventions of churches and religious orders) are the only employers whose plans are entirely exempt from the contraceptive mandate. The exemption also applies to an insurance policy issued to a religious employer. Such employers need not take any action to become exempt, nor provide any notice to their employees. The final regulations make no changes to this definition or exemption.
The Accommodation Solution
Rather than expand the definition of a religious employer, the agencies crafted a series of delays and, finally, an “accommodation” for plans sponsored by certain non-profit employers with religious objections to some or all contraceptives. Speaking generally, the accommodation allows a qualifying employer to notify its insurer or third-party administrator (TPA) or, since August 2014, the U.S. Department of Health and Human Services (HHS), that it has religious objections to coverage of some or all of the mandated contraceptives. The employer’s plan would then provide no contraceptive coverage, and the insurer or TPA would provide that coverage, notify participants of its availability and offset the cost of that coverage against other tax liabilities owed to the federal government. (See our Alert for details on insurers’ and TPAs’ responsibilities in implementing the accommodation.)
Hobby Lobby and the Accommodation
The accommodation was initially created for non-profit organizations, but in June 2014, the U.S. Supreme Court ruled in Burwell v. Hobby Lobby Stores, Inc., that the federal government cannot compel closely held, for-profit corporations to offer contraceptive coverage through their health plans, if doing so conflicts with a sincerely held religious belief of the corporation’s owners. (See our Alert.) The Supreme Court’s opinion appeared to suggest that the contraceptive mandate could be applied to such corporations if the accommodation for non-profit organizations was extended to closely held businesses with religious objections. The agencies quickly moved in that direction (see our Alert), and have now fully implemented this approach by defining the closely held businesses that can use the accommodation.
New Regulations Define Closely Held
As noted above, a business is closely held for this purpose, if no ownership interest in the business is publicly traded and more than 50 percent of the value of the business is owned by five or fewer individuals or a “substantially similar” ownership structure applies. The first part – not publicly traded – is determined under federal securities laws governing public trading of securities. The second part – more than 50 percent owned by five or fewer – may become confusing because the regulations require use of attribution rules including the following:
- If another entity (such as a corporation, partnership, estate or trust) owns all or part of a business, that entity’s ownership interests are considered owned proportionately by its shareholders, partners or beneficiaries.
Example: Company A is a wholly owned subsidiary of Company B, and Company B has eight shareholders, each owning 12.5 percent of Company B. Each of those shareholders is considered to own 12.5 percent of Company A for purposes of determining whether Company A is a closely held business.
- If a nonprofit entity owns all or part of a business, the nonprofit entity is considered a single owner.
Example: Company C, a nonprofit organization, owns 25 percent of Company D, a for-profit company. Company D is considered to be 25 percent owned by a single individual for purposes of determining whether Company D is a closely held business.
- An individual is considered to own whatever parts of the business are owned, directly or indirectly, by or for that individual’s spouse, lineal descendants (children, grandchildren, great-grandchildren, etc.), ancestors (parents, grandparents, great-grandparents, etc.), siblings and half-siblings. According to the agencies, this means that “the family members count as a single owner” for this purpose.
- An individual who holds an option to purchase all or part of a business is considered to own as much of the business as is subject to the option.
The agencies note that the test is intended to be more flexible than it appears at first glance in order to make sure that businesses with unusual ownership structures may qualify for the accommodation because they have substantially similar ownership structures. The agencies note that an entity that has 49 percent of its value owned directly by six individuals could also qualify as a closely held for-profit entity because its ownership structure is substantially similar to the 5/50 rule noted above.
A for-profit business may, but is not required to, seek further information about whether it qualifies for the accommodation by sending a letter describing its ownership structure to email@example.com. If there is no response from HHS within 60 calendar days, the business will be considered to qualify for the accommodation as long as it maintains the structure described in the letter.
Demonstrating a Sincerely Held Religious Belief
To establish that a closely held for-profit employer has sincere religious objections to contraception, the agencies require that the employer’s highest governing body (such as a corporation’s board of directors) adopt a resolution or take other similar action in the case of businesses that are not corporations, stating the owners’ religious objection to providing some or all contraceptive coverage. This resolution of other action need not be provided to the federal government or to any other party in order for the business to use the accommodation. The fact of the decision set out in the resolution or other action is communicated to the insurer, TPA or HHS in order to claim the accommodation, but no particular documentation need be provided. Documentation of the resolution or other action must be retained according to ERISA record retention requirements (even if the plan is not subject to ERISA).
Invoking the Accommodation
To claim the accommodation so that contraceptive coverage can be excluded from its plan, a closely held, for-profit entity would notify its insurer or TPA of its objections using EBSA Form 700. As explained in our Alert, the employer has the alternative of notifying HHS, and may use a model form for doing so or may send the following information to HHS without using that form:
- The employer’s name and the basis on which it qualifies for an accommodation
- The employer’s objection based on sincerely held religious beliefs to covering some or all contraceptive services, including identification, if applicable, of the subset of contraceptives to which the employer objects
- The name of the plan for which the accommodation is claimed and whether it is a church plan
- The name and contact information for the plan’s TPAs and health insurance issuers.
Giving the notice that triggers the accommodation does not automatically remove contraceptive coverage from the employer’s plan. The employer should formally amend its plan to remove that coverage and also provide notice to participants as required. For example, dropping contraceptive coverage may be considered a material change in the information required in a summary of benefits and coverage. If such a change occurs mid-year, 60 days advance notice of the change would be required.
A Few Tweaks to the Preventive Care Mandate
While issuing final regulations on the business entities that can use the accommodation process, the agencies also made a few changes to clarify obligations under the preventive care mandate.
- The guidance related to the preventive care mandate has always provided that, if a plan has a network, the mandate applies only to preventive care obtained from in-network providers. The final regulations clarify that, if a plan’s network does not have a provider who can provide a particular required preventive service, the plan must cover the item with no cost sharing when obtained from an out-of-network provider.
- The list of required preventive services changes from time to time based on changes in various organizations’ recommendations. When items are added to the list, plans have at least a year to begin providing them. When items are dropped from the list, plans generally must continue to provide them through the end of the plan year in which they were dropped. The final regulations provide an exception, allowing a plan to drop coverage of an item mid-year if the organization recommending it downgrades it to a “D” rating or if the item is subject to a safety recall or an applicable federal agency determined that there are significant safety concerns. As with the elimination of contraceptive coverage, elimination of such preventive services may require a formal plan amendment and notice to plan participants.