Sage Benefit Group

Health care reform imposes a new $2,500 limit on annual
salary reduction contributions to health FSAs offered under cafeteria plans.
When is this change effective?

Under
Code Section 125(i), as amended by PPACA, Pub. L. No. 111-148 (2010) and HCERA,
Pub. L. No. 111-152 (2010), this change is effective for taxable years
beginning after December 31, 2012. Also, Code Section 125(i) provides that in
order for the health FSA to be a qualified benefit under the cafeteria plan;
consequently, it must be set forth in the applicable plan documents.

Code
Section 125(i)(2) provides that the $2,500 amount will be indexed for inflation
for taxable years beginning after December 31, 2013. All health FSAs offered
under cafeteria plans must comply with this new requirement

For
purposes of the limit, the IRS indicated in Notice 2010-38 that the term
“taxable year” refers to the taxable year of the employee
participating in the health FSA. In most cases, this will be the calendar year.
Thus, it appears that the $2,500 limit is effectively a calendar-year limitation
that applies beginning January 1, 2013. For plans that currently permit health
FSA salary reductions in excess of $2,500, plan amendments and changes to
employee communications will be required before the January 1, 2013 effective
date.

This
new $2,500 limit raises special issues for non-calendar-year health FSAs. The
plan administrator must monitor compliance with the limit on a calendar-year
basis. These non-calendar year plans must be advised to take the limit into
account when conducting enrollment for the plan year that includes the January
1, 2013 effective date.  

My client wants to establish a “free standing” Health Reimbursement Arrangement (”HRA”) for its employees for medical, dental and vision expenses incurred after December 31, 2011. Under this plan, participants would be reimbursed up to $5,000 for medical, dental and vision expenses and/or premiums for individual insurance premiums. Is it possible for an employer to sponsor such a plan considering the changes under health reform?

No, unless the employer amends the HRA to only reimburse dental and vision expenses and/or premiums. See the discussion below:

The health care reform law prohibits group health plans from establishing “lifetime limits on the dollar value of benefits for any participant or beneficiary” for plan years beginning on or after September 23, 2010, as provided under PHSA §2711(a)(1)(A), For plan years beginning on or after September 23, 2010 and prior to January 1, 2014, the health care reform law allows “restricted annual limits” on essential health benefits, but for plan years beginning on or after January 1, 2014, no annual limits on essential health benefits are permitted.

HRAs are group health plans that provide reimbursements up to a maximum dollar amount for a coverage period and generally, though not always, allow unused amounts to be carried forward to increase the maximum reimbursement in subsequent coverage periods as provided in IRS Notice 2002-45, 2002-28 I.R.B. 93. In essence, then, HRAs are account-based benefits which by their very nature impose upper limits on the dollar value of benefits.

There are three exemptions for HRAs from these annual limit requirements. These include:  

·         Retiree-only HRAs, as provided in 75 Fed. Reg. 34537, 

·         Those HRAs that provide excepted benefits under the HIPAA portability rules, as provided in Treas. Reg. §54.9831-1(c); DOL Reg. §2590.732(c); and 45 CFR §146.145(c). HRAs that provide only limited-scope dental or vision benefits will not be subject to the annual limit rules.

·         HRAs that are integrated with other coverage as part of a (more comprehensive) group health plan will not violate the annual limit rules so long as the other coverage on its own would comply, as provided in Preamble to Interim Final Rules Relating to Preexisting Condition Exclusions, Lifetime and Annual Limits, Rescissions, and Patient Protections Under PPACA, 75 Fed. Reg. 37188, 37190.

For any HRA that does not come under one of the above exemptions, there are offer two ways to obtain a temporary exemption from the annual limit restrictions: by applying for a waiver or by satisfying the requirements of a class exemption. The window of opportunity for filing waiver applications closed on September 22, 2011; and both the waiver and class exemption apply only to HRAs that were in effect prior to September 23, 2010. This is provided in the CCIIO Supplemental Guidance (CCIIO 2011-1D): Concluding the Annual Limit Waiver Application Process and CCIIO Supplemental Guidance (CCIIO 2011-1E): Exemption for Health Reimbursement Arrangements that are Subject to PHS Act Section 2711.

A copy of each can be obtained by clicking on the links below:

CCIIO Supplemental Guidance (CCIIO 2011-1D): Concluding the Annual Limit Waiver Application Process: 

http://cciio.cms.gov/resources/files/06162011_annual_limit_guidance_2011-2012_final.pdf

CCIIO Supplemental Guidance (CCIIO 2011-1E): Exemption for Health Reimbursement Arrangements that are Subject to PHS Act 2711:

http://cciio.cms.gov/resources/files/final_hra_guidance_20110819.pdf

For the purpose of the waiver and the class exemption, the term “in effect” is not defined, but it presumably means the HRA had been formally adopted (and perhaps even providing benefits or accumulating account balances) prior to September 23, 2010. The exemption clearly does not apply to an HRA that was created significantly after that date-for example, a company that designs an HRA in 2011 to be effective January 1, 2012.

In order for any “free standing” HRAs adopted prior to September 23, 2010 to rely on the exemption, they must comply with the record retention and annual notice requirements that apply under the waiver program (which are discussed above). This is true even though that waiver program may not be available to the HRA (e.g., because the HRA did not submit an application prior to September 22, 2011).

When can an employer allow a participant under a cafeteria plan to change his or her election during the coverage period?   

A participant ’s elections under a cafeteria plan must be  irrevocable and cannot be changed during the period of coverage.  This is generally the 12-month requirement. Employers are not required to allow any exceptions to this rule.  It is very common for most employers allow participants to change their elections during the plan year if the participant experiences an event that falls under one of several exceptions allowed by the IRS under the regulations. It is up to the employer to specify less than all of the exceptions or make the exceptions more restrictive than the tax laws require.

The IRS regulations generally provide 12 different permitted election change events that can warrant a mid-year election changes.  These events must be provided in the plan document and the employee summaries.

Please remember that some events provided below do not apply to all of the benefits offered under a cafeteria plan. The right to change elections in the case of a significant cost increase or coverage changes does not apply to health FSAs.

In addition, under proposed cafeteria regulations, a participant must be allowed to change his or her HSA contribution election at least once a month for any reason.

The following events permit a participant to change his or her election under the federal tax laws if the plan so provides (and if permitted for that particular benefit by the tax laws):

1. Change in Status

If certain “changes in status” occur for the participant, or for his or her spouse or dependents, then the participant may change the appropriate election, if the plan so provides. The following events are considered changes in status by the IRS under the regulations:

* a change in the participant’s marital status;

* a change in number of dependents;

* a change in employment status;

* a dependent’s satisfying or ceasing to satisfy dependent eligibility requirements;

* a change in residence; and

* commencement or termination of adoption proceedings.

The election change generally must be on account of and correspond with a change in status that affects eligibility for coverage under an employer’s plan (including a change in status that results in an increase or decrease in the number of a participant’s family members or dependents who may benefit from coverage under the plan).  

 2. Cost Changes, With Automatic Election Increases/Decreases

If benefit premiums for  a employer’s plan go up by an insignificant amount (e.g., 1%) in the middle of the plan year, then an employer can automatically adjust payroll so that the excess will be paid with pre-tax dollars, assuming that the cafeteria plan so provides in documentation. This is permitted because automatic increases and decreases to participants’ elected contributions for a qualified benefits plan may be made to reflect changes in the cost of the plan.

3. Significant Cost Changes

If an employer’s benefit premiums increase by a significant amount (e.g., 30%) in the middle of a plan year, participants may make corresponding election changes, if the plan so provides. These include:

* commencing participation in the plan for the option that decreased in cost; or

* in the case of a cost increase, revoking an election for that coverage and either receiving coverage under another benefit package option providing similar coverage or dropping coverage if no other benefit package option providing similar coverage is available.

As a result, participants may elect to increase their salary reductions for coverage. Alternatively, if a employer offers more than one coverage option, participants may revoke their elections for the option that has increased in cost and switch to another option. And if no other option providing similar coverage is available, then employees can drop their coverage entirely.

4. Significant Curtailment of Coverage

If a participant (or his or her spouse or dependent) has a significant curtailment of coverage during a coverage period that is not a “loss of coverage,” a participant may revoke his or her election for that coverage and elect instead to receive coverage under another benefit package option providing similar coverage. If the curtailment constitutes a loss of coverage, the participant may revoke the election for that coverage and either receive coverage under another benefit package option providing similar coverage or drop coverage if no similar benefit package option is available. In both cases, a participant’s election may be changed only if the plan so provides.  

5. Addition or Improvement of Benefit Package Option 

If a plan adds or significantly improves a coverage option, and if the plan so provides, participants may revoke their elections and elect coverage under the new or improved benefit package option. If a new health coverage option is added, participants can elect to drop coverage under the old option and switch to the new one. This change of election is allowed even for employees who had not previously participated in the cafeteria plan or elected the coverage option, assuming that the plan so provides.

6. Change in Coverage of Spouse or Dependent Under Another Employer Plan 

A participant may make an election change that is on account of and corresponds with a change in coverage under another employer plan (including a plan of the same employer or a plan of a spouse’s or dependent’s employer) if one of two conditions are met (and if the employee’s cafeteria plan provides for such an election change):

*Either the other cafeteria plan or qualified benefits plan must permit participants to make an election change that would be permitted under the IRS election change rules, or

*the period of coverage under the employee’s cafeteria plan must be different from the period of coverage under the other employer plan.

 7. Loss of Certain Other Health Coverage

A participant may make a prospective election to add coverage under a cafeteria plan for him or herself, his or her spouse, or other dependents if any of them lose group health coverage sponsored by a governmental or educational institution. Such coverage includes a state’s children’s health insurance program (SCHIP); a medical care program of an Indian tribal government, the Indian Health Service, or a tribal organization; a state health benefits risk pool; or a foreign government group health plan. The plan document must also permit the change.

8. HIPAA Special Enrollment Rights

HIPAA requires group health plans to provide special enrollment opportunities for certain persons after the initial enrollment period. A special enrollment right can arise as a result of a loss of eligibility for coverage under a group health plan or through health insurance. A special enrollment right can also arise if a new spouse or dependent is acquired by marriage, birth, adoption, or placement for adoption. The cafeteria plan may allow a participant to make an election change under the cafeteria plan to correspond with these HIPAA special enrollment rights.

9. COBRA Qualifying Event

The cafeteria plan may permit a participant to increase pre-tax contributions for coverage if a qualifying event under COBRA occurs with respect to him or her or his or her spouse or other dependent-such as loss of eligibility for regular coverage due to loss of dependent status under the health plan or a reduction of hours.

10. Judgments, Decrees, or Orders

If a judgment, decree, or order (including a qualified medical child support order) resulting from a divorce, legal separation, annulment, or change in legal custody requires accident or health coverage for a participant’s child, then he or she may change his or her election to:

* add coverage if the order requires coverage for the child under the participant’s plan; or

* drop coverage if the order requires another individual to provide coverage for the child and the coverage is actually provided.

11. Entitlement to Medicare or Medicaid

If a participant (or the participant’s spouse or dependent) becomes entitled to Medicare or Medicaid coverage (i.e., becomes enrolled), then the participant may make a prospective election change to cancel or reduce health coverage under the employer’s plan and to make a corresponding change in salary reductions. Loss of Medicare or Medicaid entitlement also allows a participant to make a new election or increase health coverage under the employer’s plan. In each case, the plan must provide for the election change.

12. FMLA Leav

A participant may revoke an existing election of group health plan coverage and make such other election for the remaining portion of the period of coverage as provided under the FMLA and IRS rules. For a participant continuing group health plan coverage during an unpaid leave, three payment options can apply, depending on how the plan is drafted. Participant can:

* prepay their contributions on a pre-tax basis (provided that the leave does not straddle two plan years);

* make payments on a pay-as-you-go basis; or

* catch up on the contributions after returning from leave. 

Under the Health Care Reform laws, which individuals qualify for tax free health coverage? 

The Health Care Reform laws expanded the group of individuals who can receive accident or health benefits on a tax-free basis to include children “of the taxpayer” who have not attained age 27 as of the end of the taxable year, as provided in Code Section 105(b). This change means that, in addition to the employee and his or her spouse, the following individuals may now receive employer-provided health coverage on a tax-free basis:

·         any child of the employee, until the end of the year the child turns age 26;  

·         an employee’s qualifying child; and                                       

·         an employee’s qualifying relative.  

For purposes of this exclusion, a “child” means “a son, daughter, stepson, or stepdaughter of the taxpayer, or an eligible foster child of the taxpayer, “as provided under Code §152(f)(1) The terms “qualifying child” and “qualifying relative” are defined using the modified Code §105(b) definition.

 Please remember that the tax-treatment provisions apply to all employer-provided accident or health coverage, including plans that provide only HIPAA-excepted benefits, such as limited-scope dental or vision benefits and most health FSAs.

 Special Note: Under these new rules, coverage for a child of a civil union spouse or domestic partner will only be tax free if he or she meets the requirements for being a qualifying relative. In many situations, the child of a civil union spouse or domestic partner may not be the “child” or the “qualifying child” of the employee.

Further Note:  For distributions from  a Health Savings Account (HSA) to be tax free for account holder, the medical expense must be incurred by an individual who meets the requirements for being either a “qualifying child” or a “qualifying relative,” as defined using the modified Code §105(b) definition. Code §223 was not amended by the Health Care Reform laws to add a provision allowing expenses for children under age 27 who are not Code §105(b) dependents, so unlike health FSAs, HRAs, and HDHPs, HSAs cannot pay the expenses of such children tax-free.

July 27, 2011    

When any qualified beneficiary (including the covered employee) first becomes entitled to Medicare after electing COBRA coverage, his or her COBRA coverage can be terminated early (i.e., before the end of the maximum coverage period). This rule does not, however, affect the COBRA rights of other qualified beneficiaries in a family unit who are not entitled to Medicare (for example, the spouse and dependent children of a Medicare-entitled former employee). 

For COBRA purposes, what does “entitlement to Medicare” mean?

Under COBRA, the term “entitlement” means that an individual who is eligible for Medicare has actually become enrolled in Medicare, as provided under Treas. Reg. § 54.4980B-7, Q/A-3(b)

In other words, an individual is entitled to Medicare only if he or she may currently receive benefits. If the individual must take additional steps to enroll in Medicare before receiving benefits, then that individual is not “entitled” to Medicare for purposes of the COBRA rules until the steps have been taken and the enrollment has become effective.

A qualified beneficiary becomes entitled to Medicare benefits upon the effective date of enrollment in either part A or B, whichever occurs earlier. 

July 15, 2011

 Plan Sponsor

By Rebecca Moore 

editors@plansponsor.com

The U.S. Department of Health and Human Services (HHS) has proposed a framework to assist states in building insurance exchanges, which will be available in 2014 under the Patient Protection and Affordable Care Act.

 HHS proposed new rules offering states guidance and options on how to structure their Exchanges in two key areas: 

• Setting standards for establishing Exchanges, setting up a Small Business Health Options Program (SHOP), performing the basic functions of an Exchange, and certifying health plans for participation in the Exchange, and 
• Ensuring premium stability for plans and enrollees in the Exchange, especially in the early years as new people come in to Exchanges to shop for health insurance. 

 According to and HHS news release, the proposed rules set minimum standards for Exchanges, give states the flexibility they need to design Exchanges that best fit their unique insurance markets, and are consistent with steps states have already taken to move forward with Exchanges. They allow states to decide whether their Exchanges should be local, regional, or operated by a non-profit organization, how to select plans to participate, and whether to partner with HHS to split up the work.  

Forty-nine states, the District of Columbia and four territories accepted grants to help plan and operate Exchanges, the announcement said. In addition, over half of all states are taking additional action beyond receiving a planning grant such as passing legislation or taking Administrative action to begin building exchanges. States will continue to implement exchanges on different schedules through 2014.  

HHS is accepting public comment on the proposed rules over the next 75 days.  

The proposed rules are scheduled for publication in the July 15 Federal Register.   

More information about the insurance exchanges is at http://www.healthcare.gov/law/provisions/exchanges/index.html.  .

By Jerry Markon

Washington Post

A federal appeals court on Wednesday upheld the most contentious provision of the health-care overhaul law, ruling that Congress can require Americans to carry insurance coverage.

In backing the individual mandate, the U.S. Court of Appeals for the 6th Circuit in Cincinnati became the first appellate court to rule on President Obama’s signature domestic initiative. The decision also marked the first time a Republican-appointed judge has sided with the administration in evaluating the law’s constitutionality.

“We find that the minimum coverage provision is a valid exercise of legislative power by Congress under the Commerce Clause,” Judge Boyce F. Martin Jr., a Democratic appointee, wrote for the majority. He was joined by Republican appointee Jeffrey Sutton.

The 2 to 1 ruling was hailed by the Justice Department and administration allies, who called it an important bipartisan test of the law’s ability to withstand numerous legal challenges. Opponents of the health-care act disputed the ruling’s significance, calling it one incremental step in a legal struggle widely expected to wind up at the Supreme Court.

“It’s an unfortunate decision,” said David Rivkin, a lawyer representing 26 states in a Florida-based lawsuit that also challenges the law. “By the time this gets to the Supreme Court, it’s not going to matter which decision was first or second,” added Rivkin, who predicted that the law will be overturned.

The differing interpretations reflected the deep divisions over a measure that has provoked vehement opposition and equally strong support among the public and politicians alike. More than 30 lawsuits have been filed since the Patient Protection and Affordable Care Act was pushed through Congress by Democrats in March 2010, resulting in several rulings by lower-court judges that, until now, have cleaved along partisan lines.

As a result, the ultimate fate of the statute, which aims to bring about the broadest changes to the nation’s health-care system in several decades, may not be known for a year or more. Lawyers for the plaintiffs in the 6th Circuit case said they will appeal directly to the Supreme Court but acknowledged that the justices probably will not take the case right away.

Most contested provision

The health-care law seeks to extend medical coverage to 30 million uninsured Americans and make major changes in public and private health insurance. By far the most contested provision is the individual mandate, which requires most Americans to purchase at least a minimum level of health insurance starting in 2014 and imposes a tax penalty if they don’t.

Like other legal challenges, the lawsuit filed by the Thomas More Law Center – a Christian-oriented law firm in Michigan – says Congress overstepped its constitutional authority to regulate commerce.

A three-judge panel of the 6th Circuit disagreed. The mandate is constitutional, Martin wrote, because “Congress had a rational basis to believe” that the provision would affect interstate commerce and that it was “essential” to the law’s broader goals of reforming the health-care market.

Judge James Graham, a Republican appointee, dissented, but it was the concurrence of Sutton – a George W. Bush appointee and former law clerk for conservative Supreme Court Justice Antonin Scalia – that was most noteworthy.

Sutton wrote that “the government has the better of the arguments” and that “Congress did not exceed its power” in passing the individual mandate. But he also appeared to acknowledge that his word would not be final, writing, “The Supreme Court has considerable discretion in resolving this dispute.”

And in a phrase that heartened conservative opponents of the law, Sutton questioned whether the legislation will have other, perhaps unintended, consequences. “That brings me to the lingering intuition – shared by most Americans, I suspect – that Congress should not be able to compel citizens to buy products they do not want,” he wrote.

“If Congress can require Americans to buy medical insurance today, what of tomorrow? Could it compel individuals to buy health care itself in the form of an annual check-up or for that matter a health-club membership?”

Tracy Schmaler, a Justice Department spokeswoman, said that the government welcomed the ruling “and its finding that Congress acted within its authority in passing this landmark health-care reform law.” She vowed that the department will continue to “vigorously defend” the law and said department officials believe that efforts to challenge it will fail.

Her words were echoed by a variety of Democrats and supporters of the law.

“Congress clearly has the authority to regulate the health insurance market, including protecting consumers from insurance industry abuses,” said Ethan Rome, executive director of Health Care for America Now. “Every step of the way, the health-care debate has been polluted by partisan politics. Today’s decision, made by judges appointed by both Republican and Democratic presidents, is immune to that criticism.”

No ‘ringing endorsement’

But Rivkin, citing some of the wording in Sutton’s concurrence, said the decision is “not at all a ringing endorsement of the constitutionality of the individual mandate.” And David Yerushalmi, a lawyer for the Thomas More Law Center, said that while the ruling was “disappointing,” Sutton “essentially kicked this thing upstairs to the Supreme Court.”

Yerushalmi said he is already drafting a petition asking the high court to hear the case, though he acknowledged that the justices will probably “put it aside” until other appellate court decisions are issued.

Two other federal appellate courts – the Richmond-based 4th Circuit and the 11th Circuit, based in Atlanta – recently heard oral arguments in lawsuits challenging various aspects of the health-care law’s constitutionality, and they are expected to issue decisions in the coming weeks or months. The U.S. Court of Appeals for the District of Columbia Circuit has scheduled oral arguments for September.

Three U.S. district judges have ruled in favor of the administration on the constitutionality of the individual mandate, while two district court judges have said it is unconstitutional. Those decisions were all along partisan lines, with Democratic-appointed judges supporting the administration and Republican appointees opposing it.  

Court Rules That Financial Incentives For Wellness Programs Do Not Violate ADA

The U.S. District Court for the Southern District of Florida dismissed a lawsuit alleging that financial incentives to participate in a voluntary wellness program as part of a health plan provided to employees by Broward County, Florida, violated the Americans with Disabilities Act.

In Bradley Seff v. Broward County, U.S. District Judge K. Michael Moore granted summary judgment to Broward County on April 25, ruling that the wellness program falls under the safe harbor provision of the ADA and is based on insurance and risk management principles.

In 2009, Broward County implemented a wellness program to address rising health care costs and its aging workforce, according to court documents. Under the program, employees were required to take a health assessment test and produce a blood sample to determine glucose and cholesterol levels.

In 2010, the county decided to incentivize its workforce by applying a $20 surcharge per paycheck for individuals not participating in the wellness program.

Former Broward County employee Bradley Seff filed a class-action complaint alleging that the county violated the ADA by requiring employees to undergo medical examinations and making medical inquiries about them, arguing that the wellness program was implemented not to manage risks but to further a wish to keep employees healthy, according to court documents.

“It is clear to this court that the wellness program is not a subterfuge; it was not designed to evade the purpose of the ADA,” Moore said. “Rather, it is a valid term of a benefits plan that falls within the ambit of the ADA’s safe harbor provision.”  

Filed by Mike Tsikoudakis of Business Insurance-Europe, a sister publication of Workforce Management. To comment, email editors@workforce.com.