In response to the coronavirus pandemic, state insurance departments have issued directives prohibiting insurers from canceling certain kinds of policies due to the nonpayment of premiums, requiring the insurer to provide a grace period before canceling, or strongly encouraging carriers not to cancel policies.
- Georgia Office of Insurance and Safety Fire Commission: Issued a directive that health insurers must “refrain from canceling health policies for the cause of non-payment until further notice.”
- Mississippi Insurance Department: Issued a bulletin ordering a 60-day moratorium on the cancellation or nonrenewal of any policies issued in that state.
- California Department of Insurance: Issued a notice requesting that carriers provide their policyholders with “at least” a 60-day grace period before canceling coverage for nonpayment.
Similar requests or admonitions have been made by other, but not all, state insurance authorities.
Lockton comment: The state guidance affects only premiums for fully insured plans; employers with self-funded plans may not have the same protection for stop-loss premiums. Self-funded plans will continue to be liable to pay claims as they are incurred by their covered members.
Employer plans and insurance policy cancellation moratoriums
Employers sponsoring ERISA welfare benefits plans, particularly medical plans, may be tempted to take advantage of an opportunity to delay premium payments, to retain as much cash as possible for the time being. In the current environment many employers are concerned with conserving cash and retaining staff to the extent possible.
If the state prohibits or pointedly encourages the carrier from canceling the policy, deferring premium payments appears to be a win-win – employers retain cash for other immediate needs and employees don’t lose coverage. However, employers and their plans’ fiduciaries should be cautious for several reasons.
ERISA plan assets and how they must be used
Most employers require employees to contribute a portion of the premium cost. Where the plan is an ERISA plan, these employee contributions are considered assets of the plan, and ERISA imposes strict guidelines regarding the handling of employee contributions.
These employee contributions are considered plan assets as soon as they can be separated from employer funds, but no later than 90 days after they’re withheld from employees’ pay.
Lockton comment: Some readers will recall that the IRS considers pretax employee contributions to be employer contributions for tax purposes, but ERISA does not adopt a similar fiction.
Plan assets are subject to ERISA fiduciary rules and must be used solely for the benefit of plan participants and beneficiaries by providing benefits or defraying reasonable expenses of plan administration.
Withholding employee contributions, but then failing to promptly use them to pay premiums risks a misuse of plan assets – what ERISA calls a “prohibited transaction” – even if the contributions are used to benefit the plan participants outside of the plan – for example, to fund payroll. Plan fiduciaries can face personal civil and even criminal liability for the misuse of plan assets.
Lockton comment: While ERISA plan sponsors can designate the plans’ fiduciaries, such as a benefits committee, many employers do not, and in that event the members of the employer’s board of directors are deemed to be plan fiduciaries. This often comes as a surprise to the directors.
The ERISA issues posed by taking advantages of premium payment moratoriums or grace periods
So, what’s the problem with hanging on to employee contributions for up to 90 days, if the insurer can’t or isn’t likely to cancel the policy during that time? The problem arises later, when the employer’s expectation that it will catch up premium payments, goes awry.
- The employer leaves two or three months of employee contributions in its general asset account, thinking that it (the employer) will get caught up with the carrier shortly. But suddenly the employer is insolvent, and creditors are freezing that general asset account, or the employer has exhausted that account by paying salaries, rent and utilities just to stay afloat.
- The carrier then cancels the insurance contract and does so retroactively for nonpayment of premium. (Note: While the Affordable Care Act bars retroactive coverage cancellations in the absence of fraud, federal regulators allow retroactive cancellation for nonpayment of premium.)
- Meanwhile, the plan’s fiduciaries have led the plan’s participants to believe they had coverage. Suddenly the participants find their claims have been pended and are now rejected (or find that the claims were paid but those payments are now reversed).
- If the plan’s fiduciaries have breached their fiduciary duties here – and they almost certainly have – employees left with unpaid claims will likely look to the fiduciaries to pay those claims … personally.
- And where’s the employee money? If the employees’ premium payments were not sent to the carrier, were not refunded to the employees, but are nowhere to be found in the employer’s general asset account, the plan’s fiduciaries are going to have additional liability under ERISA for their misuse of plan assets.
Similar issues exist even with plans to which employees do not contribute. From a fiduciary perspective, leading employees to believe they have coverage under a plan with respect to which the employer is not paying the premium for several weeks can create fiduciary breach issues if, in fact, the insurer is merely pending coverage or retroactively terminates coverage when the employer is not able to pay the back premium on time.
A better way forward
To avoid concerns about misuse of plan assets, employers have a few better options:
- Stop collecting employee funds at all during the premium payment moratorium period. The challenge here of course is the significant administrative inconvenience and the insurer might still retroactively cancel coverage after the moratorium ends.
- If the employer is not confident it will be able to make full premium payments within the grace period offered, terminate the coverage and immediately notify participants. Any contributions deducted from pay should be promptly refunded.
- Employers might consider sending employee contributions to the insurer even when the employer portion has not been remitted. The issue here is that employees will still think they have coverage when, in the end, they might not, if the insurer cancels the policy retroactively. Then, those dollars will need to be recouped somehow from the insurer and returned to the employees.
Lockton comment: We do not know how carriers will even react to receiving partial payments. If an employer elects to send partial payment representing only employee contributions, it is critical the carrier agree to provide coverage during the grace period and, if it winds up retroactively terminating the coverage, returning those employee contributions.
Employers should bear in mind that although forbearance programs may be available, failure to timely pay premiums can create other concerns and liabilities, even if such action does not result in immediate cancellation of the employer’s welfare benefits policies.