Excepted Benefits and Canceled Policies Tackled by Feds in Latest ACA Guidance

Written by Mark Holloway, J.D.

‘Twas the Friday before Christmas, and federal regulators upheld their tradition of issuing regulatory guidance just before a major holiday. This latest installment proposes changes to the federal health reform law’s (the Affordable Care Act, or ACA) exemption for “excepted benefits”—specifically, including employee assistance programs (EAPs) and so-called “wraparound coverage,” and modifying the rules for self-funded dental and vision programs.

In addition, under pressure from the U.S. Senate, the Centers for Medicare and Medicaid Services (CMS) announced yet another exemption from the ACA’s individual mandate for 2014. The latest guidance allows individuals with cancelled individual health insurance policies to avoid the penalty next year.  Alternatively, these people can choose to purchase a catastrophic plan on the public health insurance exchanges or “marketplaces,” even though they might not otherwise be eligible (due to age) to purchase such policies.

Each of these exemptions is discussed in greater detail below.

Additional Coverages Treated as “Excepted Benefits”

Certain types of ancillary coverage—such as dental and vision plans that provide limited services are considered “excepted benefits” under the ACA and not required to comply with the its insurance mandates, including the prohibition on annual and lifetime dollar limits on essential health benefits. Under the current rules, insured dental or vision coverage generally is an excepted benefit, even if bundled with major medical coverage. But in order for self-funded dental or vision coverage to qualify, employees must pay a separate premium if they elect that coverage.  In other words, if employees pay a single premium for their medical coverage and it includes dental or vision benefits, with no opportunity to opt out of the dental or vision coverage and pay a lower premium for the medical coverage only, then the dental or vision coverage is not an “excepted benefit” and is required to comply with the ACA mandates.

In an example of some good, rational regulatory thinking, the agencies have proposed to eliminate the requirement that employees pay an additional premium for self-funded dental or vision coverage in order for that coverage to qualify for the ACA exemption. If employees are merely given the opportunity to opt out of the self-funded dental or vision coverage, those benefits will be considered excepted benefits.

In a previous Alert, we reported on the federal agencies’ promise to propose treating employee assistance plans (EAPs), that do not provide significant medical benefits, as excepted benefits.  Now we have the officially proposed criteria. In order for EAP coverage to be treated as an “excepted benefit,” the coverage:

• Cannot require an employee premium payment, apply cost-sharing or provide “significant” benefits in the nature of medical care. The agencies have asked for comments on this and have hinted that 11 or more EAP outpatient visits per year may be required for the benefit to quality as significant.
• Cannot be coordinated with benefits under another plan:
  • Participants cannot be required to exhaust EAP benefits before qualifying for benefits (e.g., mental/nervous or substance abuse benefits) under any other group health plan.
  • Participant eligibility for EAP benefits cannot be dependent on participation in another group health plan.
  • EAP benefits must not be financed by another group health plan

“Wrap Around” Coverage as an Excepted Benefit

Some employers had asked the agencies whether it would be possible for an employer to provide supplemental coverage for employees who purchase individual insurance coverage through a marketplace. The agencies have now proposed an ACA exemption beginning in 2015 for this supplemental wraparound coverage. However, the proposed exemption comes with multiple strings attached, as noted below. The strings are so onerous that we are dubious that many, if any, employers will be interested:

1. The individual policy purchased through the marketplace cannot be grandfathered and cannot consist solely of excepted benefits.
2. The wraparound coverage must provide coverage of benefits that are not “essential health benefits,” or must reimburse the cost of healthcare providers that are considered out of network under the individual policy, or do both of these things. The wraparound coverage may also provide benefits for cost sharing under the individual policy.
3. The wraparound coverage must not provide benefits only under a coordination-of-benefits provision. For example, the wraparound coverage cannot be designed to pay only where the individual health policy does not cover all or part of a medical expense.
4. The plan sponsor of the wraparound coverage must also offer coverage (the “primary plan”) that provides minimum value (actuarial value of at least 60 percent; we’ve referred to this as “qualifying” coverage) and that is affordable (no more than 9.5 percent of household income) for the majority of employees who are eligible for the primary plan. Only individuals eligible for this primary plan may be eligible for the wraparound coverage (even if the primary plan is not necessarily affordable to them).
5. The total cost of coverage under the wraparound coverage must not exceed 15 percent of the cost of coverage under the primary plan.
6. The wraparound coverage, whether insured or self-funded, cannot discriminate on the basis of health status and cannot have any preexisting condition limits. In addition, both the wraparound plan and the primary plan, to the extent self-funded, must satisfy the Tax Code’s rules found in Section 105(h) that prohibit discrimination in favor of highly compensated individuals. To the extent that the wraparound plan and the primary plan are insured, they must satisfy similar nondiscrimination rules that were added by the ACA with respect to insured plans.

Most employers, particularly those subject to the ACA’s “play or pay” mandate on employers, won’t be interested in offering this wraparound coverage due to the byzantine requirements. In addition, any full-time employees who are offered unaffordable coverage by the employer and qualify for subsidized coverage through a marketplace will result in an annual $3,000 nondeductible excise tax for the employer. It’s difficult to see why an employer would be interested in providing supplemental benefits to those employees with respect to whom the employer is paying a penalty.

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 unaffordable 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.

The Individual Mandate: Another Exception for 2014

Federal authorities last week carved out yet another exception to the health reform law’s individual mandate for 2014.  Individuals who had an individual policy canceled because it did not comply with the ACA will be eligible for a hardship exemption from the individual mandate in 2014.  Alternatively, these individuals have the option to purchase a catastrophic plan (plans with mega-deductibles) through a marketplace after completing a hardship exemption form and submitting documentation regarding their insurance policy cancellations.  Previously, catastrophic plans were only available on the marketplaces to individuals under age 30.