Part I – Traditional Excepted Benefits
The Affordable Care Act (ACA) 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.” The good news: an excepted benefit is exempt from ACA requirements such as the prohibition on annual and lifetime maximums, maximum waiting periods, coverage of preventive care and other provisions causing risk of penalty. The bad news: an excepted benefit cannot be used to satisfy the employer mandate or the individual mandate under the ACA.
The federal agencies recently issued some final regulations that will apply for plan years beginning in 2017 for some types of excepted benefits. Hence, this two-part blog post is a wonderful opportunity to revisit the issue of excepted benefits under the ACA.
- Part I addresses limited scope benefits and traditionally excepted coverage, as well as health flexible spending accounts.
- Part II will address specified disease and indemnity policies, supplemental and wraparound benefits.
So What is an “Excepted Benefit?”
The ACA was intended to regulate major medical insurance. When passing the law, Congress recognized that certain types of health insurance that provides limited complimentary medical coverage should not have to satisfy the onerous ACA requirements. These benefits include:
- Accident only policies, such as AD&D benefits;
- Income replacement for disabilities such as long and short term disability coverage;
- Liability insurance, including general liability and auto liability insurance or coverage supplemental to liability insurance;
- Workers’ compensation or similar coverage;
- Automobile medical payment insurance;
- Credit-only insurance;
- Coverage for on-site medical clinics; and
- Other similar coverage, specified in regulations, under which benefits for medical care are secondary or incidental to other insurance benefits.
In the context of the ACA, employers that offer health coverage that does not satisfy the ACA’s minimum value threshold often wish to provide additional benefit coverage to supplement the limited coverage or to address gaps in care. Employers offering high deductible health plans may want to offer coverage to assist with unexpected claims costs (by offering benefits such as critical illness or hospital indemnity policies) while still maintaining the ability of employees to contribute to Health Savings Accounts (HSAs).
Finally, some employers wish to offer a broader range of benefits simply to attract and retain employees (such as dental or vision benefits). It is important that those additional medical benefits qualify as “excepted benefits” to avoid the unpleasant surprise that the coverage is subject to more stringent ACA requirements and potentially large penalties.
Good News: Self-Funded Limited Scope (Dental/Vision) Benefits Can be Excepted Benefits
Dental and vision coverage is typically intended to qualify as an excepted benefit. One of two criteria must be met for a limited scope dental or vision benefit to qualify as an excepted benefit.
- The benefit must be offered under a separate policy, certificate or contract of insurance; or
- The benefit cannot be an integral part of the major medical plan.
The first criterion can be satisfied only by offering a fully insured policy. In other words, insured dental or vision coverage generally is an excepted benefit, even if bundled with major medical coverage. Previously, in order for self-funded dental or vision coverage to qualify, employees were required to pay a separate premium if they elected that coverage. In an example of some good, rational regulatory thinking, the agencies have eliminated 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.
More Good News: Travel Insurance Has Been Added to the List of Traditional Excepted Benefits
The regulators have added travel insurance as an excepted benefit, defined as insurance coverage for personal risks incident to planned travel, which may include, but is not limited to: interruption or cancellation of trip or event; loss of baggage or personal effects; damages to accommodations or rental vehicles; and sickness, accident, disability or death occurring during travel (provided that the health benefits are not offered on a stand-alone basis and are incidental to other coverage). Note, however, that this exception does not include traveler coverage under the employer’s major medical plans for employees traveling for six months or longer such as expatriates.
A Reminder: Be Sure Your Healthcare FSA Qualifies as an Excepted Benefit!
Because of the ACA, it is critically important that a healthcare Flexible Spending Account (FSA) be structured so that qualifies as an excepted benefit. In order to qualify, the following rules must be adhered to for a healthcare FSA to be an excepted benefit:
- The FSA may ONLY be offered to employees who are otherwise eligible to enroll in an employer sponsored major medical plan (whether they elect to enroll or not); and
- The maximum amount an employer may contribute to an excepted benefit FSA as a “seed” contribution (which cannot be taken as cash by the employee) is two times the participant’s pretax contribution amount (for example, a dollar for dollar matching contribution), or, if greater, the amount of the employee’s pretax contribution election for the year, plus $500. For example, the employer maximum contribution should be no more than $500 unless the employer is matching the employee’s pretax contributions.
Many employers, not understanding the risk, have continued to offer FSAs to employees that are not otherwise eligible for health coverage. It is time to revisit eligibility and any employer contributions made to your FSA. Employers that don’t offer major medical coverage cannot offer a FSA without a significant risk of penalty ($100 per day per occurrence).
Stay Tuned for Part II
Following the above guidelines will assist in avoiding ACA liability for a number of commonly offered excepted benefits. In Part II, we will discuss excepted benefit categories that have been added or significantly modified or clarified in light of the passage of the ACA. Part II also includes discussion relating to non-coordinated excepted benefits (such as hospital indemnity policies), supplemental medical benefits and wraparound benefits.