New Regulations Permit Employers to Offer Limited Wraparound Health Coverage as Excepted Benefit

This is the 48th in a series of WorkCite articles concerning the Patient Protection and Affordable Care Act and its companion statute, the Health Care and Education Reconciliation Act of 2010 (referred to collectively as the Act). This article discusses the joint regulations (Regulations) recently issued by the Departments of the Treasury, Labor and Health and Human Services (collectively, the Departments) establishing a pilot program set to begin in 2016 under which limited “wraparound” health coverage offered by employers to certain individuals can be considered an “excepted benefit” under the Act. Excepted benefits are not subject to many of the Act’s requirements.

Excepted benefits generally do not qualify as minimum essential coverage (MEC) under the Act, meaning that individuals who receive this limited coverage can still qualify for premium tax credits to purchase individual coverage through a health insurance exchange (Exchange) established under the Act. The pilot program is intended to serve as a tool for employers to aid individuals who are not enrolled in the primary employer group health plan – for example, part-time employees or retirees (and their dependents) who may not be able to afford the primary coverage – without eroding employer-sponsored coverage. The limited coverage permitted by the pilot program would wrap around eligible individual or Multi-State Plan Program (MSPP) health insurance coverage already in place for these individuals, thereby providing them overall coverage that is as generous as the core group health plan provided to others.

(The MSPP was authorized by the Act to foster competition among plans available in the individual and small group health insurance markets on the Exchanges. Under the MSPP, the U.S. Office of Personnel Management (OPM) contracts with private health insurance issuers to offer at least two multi-state plans on the Exchanges in each state.)

Because excepted benefits are not considered MEC, employers who offer only limited wraparound coverage may be subject to penalties under the Act for not offering MEC to full-time employees (or to part-time or variable-hour employees who work on average at least 30 hours per week), i.e., the so-called “employer mandate.”

What is limited wraparound health coverage?

Limited wraparound coverage must meet five requirements under the Regulations in order to qualify as an excepted benefit:

Providing “meaningful benefits”

The wraparound coverage must provide “meaningful benefits” beyond coverage of cost-sharing under the eligible individual health insurance or MSPP coverage. The coverage must include a risk-sharing element, and may not provide benefits solely under a coordination-of-benefits provision or through an account-based reimbursement arrangement. Examples of coverage providing meaningful benefits that have been approved by the Departments include the following:

• Reimbursement for the full cost of primary care
• The cost of prescription drugs not on the primary plan’s formulary
• Ten physician visits per year
• Services considered out-of-network by the primary plan
• Access to onsite clinics or specific health facilities at no cost
• Benefits targeted to a specific population (such as coverage for certain orthopedic injuries)
• Home health coverage
• Coverage of other benefits that are not covered essential health benefits under the primary plan

Maximum cost

The annual cost of the wraparound coverage per individual (and covered dependents) may not exceed the greater of (1) the maximum permitted annual salary reduction toward a health flexible spending account (FSA), as indexed for inflation ($2,550 in 2015); or (2) 15 percent of the cost of coverage under the primary plan. The cost of coverage under the plan providing limited wraparound coverage and the primary plan takes into account both employer and individual contributions, and is determined in the same manner as the applicable premium is determined for COBRA continuation coverage. The annual cost of coverage per individual must be determined on an aggregate basis using sound actuarial principles.

Nondiscrimination

The wraparound coverage may not impose any preexisting condition exclusion or discriminate in eligibility, benefits or premiums based on any health factor of an individual (or any dependent of the individual). In addition, neither the wraparound coverage nor any other group health plan sponsored by the employer may (1) violate prohibitions against discrimination in favor of highly compensated employees; or (2) fail to be excludible from the individual’s income pursuant to the Internal Revenue Code.

Plan eligibility requirements

Limited wraparound coverage must meet several plan eligibility requirements:

• Individuals who are enrolled in excepted benefit coverage that is a health FSA may not be treated as eligible for the limited wraparound coverage.
• If the coverage wraps around eligible individual insurance for individuals who are not full-time employees, the following conditions apply:
  • For each year in which limited wraparound coverage is offered, the employer must offer MEC that meets the Act’s requirements regarding minimum value and affordability to at least 95 percent (or all but 5) of its full-time employees. This requirement is deemed satisfied if an employer does not have any full-time employees and is offering the limited wraparound coverage to retirees or part-time employees.
  • Eligibility for the limited wraparound coverage must be limited to retirees; employees who are determined at the time of enrollment to be part-time employees (i.e., are not reasonably expected to work at least an average of 30 hours per week); and their dependents.
  • Other group plan health coverage that is not limited to excepted benefits must be offered to the individuals eligible for the limited wraparound coverage. Only individuals eligible for the other group health plan coverage may be eligible for the limited wraparound coverage. This does not mean that employers must offer group health plan coverage to part-time employees or retirees; however, the ability to offer wraparound coverage as an excepted benefit is limited to individuals otherwise eligible for group health plan coverage.
• If the wraparound coverage is offered in conjunction with MSPP coverage, these conditions apply:
  • The coverage must be reviewed and approved by OPM to provide benefits in conjunction with an MSPP program.
  • For the plan year beginning in either 2013 or 2014, the employer must have offered its full-time employees coverage that was substantially similar to the MEC it would have had to offer in order to avoid employer mandate liability, had the mandate been in effect and applied to the employer.
  • For the plan year beginning in either 2013 or 2014, the employer must have offered coverage that met the Act’s requirements regarding minimum value and affordability to a substantial portion of full-time employees.
  • For the duration of the pilot program, the employer’s annual aggregate contributions for both primary and limited wraparound coverage must be substantially the same as (i.e., at least 80 percent of) the employer’s total contributions for coverage offered to full-time employees in either 2013 or 2014. This test is applied on an average, full-time worker basis in order to allow for fluctuations in the employer’s workforce.

Reporting

The wraparound coverage must meet certain reporting requirements:

• The sponsor of a group health plan offering limited wraparound coverage must report certain information to the Department of Health and Human Services to enable it to determine whether the coverage complies with the Regulations.
• A self-insured group health plan, or a health insurance issuer offering MSPP wraparound coverage, must provide certain information to OPM to enable OPM to determine whether the plan or issuer qualifies to offer such coverage and whether the coverage complies with the Regulations.

Pilot program implementation deadline and sunset date

Limited wraparound coverage may be offered pursuant to a pilot program as an excepted benefit only if it is first offered during the period between Jan. 1, 2016, and Dec. 31, 2018. The Regulations require that the pilot program end by the date that is three years after the date the wraparound coverage is first offered, or if later, the date on which the last collective bargaining agreement relating to the plan terminates after the date wraparound coverage is first offered.

For further information, please contact either of the authors of this article, Jessica S. Sackin and Robert M. Cipolla, or any other member of the McGuireWoods employee benefits team.