McGuireWoods Healthcare Reform Guide: Installment No. 14 – Further Guidance Issued on Insurance Market Reforms; Tax Reporting Relief Granted

McGuireWoods Healthcare Reform Guide: Installment No. 14

October 20, 2010

This is the 14th in a series of WorkCite articles concerning the Patient Protection and Affordable Care Act and its companion bill, the Health Care and Education Reconciliation Act of 2010 (referred to collectively as the Act). This WorkCite discusses:

  • Recently-released frequently asked questions (FAQs) in which the Departments of Health and Human Services, Labor and the Treasury offer additional guidance as to the implementation of the Act. The FAQs verify the events that jeopardize grandfathered status and clarify the grandfathered-status implications for certain plan modifications related to cost-sharing features, benefit options, coverage tiers and wellness programs. In addition, the FAQs provide limited guidance on general implementation issues related to preventive health services, policy rescission, dental and vision benefits, policy years and effective dates and compliance exemptions for retiree health plans.
  • IRS Notice 2010-69, which grants relief from the Act’s requirement for employers to report the cost of coverage under a group health plan for 2011.

Preserving Grandfathered Status

Six Plan Modifications Causing Loss of Grandfathered Status

The FAQs confirm that under the previously-issued interim grandfather regulations, only the following six types of plan modifications will cause a group health plan to lose grandfathered status:

  1. Elimination of all or substantially all benefits to diagnose or treat a particular condition.
  2. Increase in a percentage cost-sharing requirement (e.g., raising an individual’s coinsurance requirement from 20% to 25%).
  3. Increase in a deductible or out-of-pocket maximum by an amount that exceeds medical inflation plus 15 percentage points.
  4. Increase in a copayment by an amount that exceeds medical inflation plus 15 percentage points (or, if greater, $5 plus medical inflation).
  5. Decrease in an employer’s contribution rate towards the cost of coverage by more than 5 percentage points.
  6. Imposition of annual limits on the dollar value of all benefits below specified amounts.

However, still left unanswered is the question whether, and to what extent, a change of insurers affects a plan’s grandfathered status.

Benefit Package Options Segregated for Purposes of Grandfathered Plan Status

The FAQs confirm that the loss of grandfathered status for one benefit package option in a plan does not result in a loss of grandfathered status for other benefit options in the plan. For example, if a plan offers three benefit package options – a PPO, a POS arrangement and an HMO – loss of grandfathered status for the PPO does not affect the status of the POS and HMO options.

Cost-Sharing Benchmarks Established on March 23, 2010 Apply to All Tiers of Coverage

The FAQs state that cost-sharing percentages apply on a tier-by-tier basis. Rates and tiers in effect as of March 23, 2010 (the general date for determining whether a group health plan can be grandfathered) provide testing benchmarks for employer contribution-rate changes. If a plan modifies the tiers of coverage it had on March 23, 2010, the employer contribution for any new tier would be tested by comparison to the contribution rate for the corresponding tier on March 23, 2010. If a plan adds a new tier of coverage without eliminating or modifying preexisting tiers and the new coverage tier includes previously excluded individuals, the testing benchmark is established on the first date coverage is available under the new tier.

Cost-Sharing Changes Separately Tested

Under the FAQs, each change in cost sharing is separately tested for grandfathering purposes. If the copayment level for any service is modified beyond the acceptable range, the entire plan loses grandfathered status.

Plans May Provide Wellness Incentives that Avoid “Lifestyle Penalties”

Plans may continue to provide incentives for wellness by providing premium discounts or additional benefits to reward healthy behaviors, reward high quality providers, and by incorporating evidence-based treatments into benefit plans. However, “lifestyle penalties” (such as cost-sharing surcharges) should be generally avoided.

Compliance Exemptions for Dental and Vision Plans

The FAQs also confirm that, if the benefits available under a plan are structured as “excepted benefits” under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), the plan is not required to comply with the market reform provisions of the Act. Provided that they meet specified conditions, excepted benefits under HIPAA include: dental or vision; accident-only; disability income; liability supplement; general liability; automobile liability; workers’ compensation; automobile medical payment; credit-only; on-site medical clinics; long-term care; nursing home care; specified disease or illness; hospital indemnity or other fixed indemnity insurance; Medicare supplement, Tricare supplement, and similar group supplemental coverage.

Certain Coverage Terminations Exempt from Anti-Rescission Rules

The FAQs provide clarification of the scope of the Act’s anti-rescission rules, confirming that fraud or misrepresentation is not limited in scope to prior medical history. Other plan errors (such as mistakenly covering a part-time employee and providing coverage upon which the employee relies for some time) permit prospective cancellation of coverage, but retroactive rescission must be avoided.

Expanding on this point, the FAQs clarify that some delays in administrative recordkeeping that result in retroactive termination of coverage are not necessarily rescissions. For example, if a human resources department reconciles eligibility lists only once per month and an employee is terminated at the beginning of a month and does not pay a premium for the particular month, retroactive elimination of coverage to the date of termination of employment is not deemed a rescission.

Plans May Rely on Relevant Evidence Base to Establish Scope of Preventive Health Services

The FAQs provide that, to the extent a recommendation or guideline for a recommended preventive health service does not specify the frequency, method, treatment, or setting for the provision of the service, the plan or issuer may rely on the relevant evidence base and established techniques to determine the frequency, method, treatment, or setting for the recommended preventive health service.

Compliance Exemptions for Retiree Health Plans

Group health plans that do not cover at least two current employees are exempt from the Act’s market reforms.

Acknowledging an information gap as to whether the Act’s market reform exemptions extend to disability plans, the FAQs indicate that the agencies will issue a request for information to solicit comments on the possible exemption of disability plans.

Some employers sponsor plans covering only retirees and individuals on long-term disability. The FAQs provide that, until guidance is issued, such plans will be treated as satisfying the exemption from HIPAA and the Act’s group market reforms for plans with fewer than two participants who are current employees. To the extent future guidance on this issue is more restrictive, it will be applied prospectively. Pending further guidance, such plans may adopt any or all of the market reforms without prejudice to future exemptions.

Reporting Relief for 2011 as to Cost of Group Health Plan Coverage

The Act generally requires that the aggregate cost of applicable employer-sponsored coverage must be reported on Form W-2, effective for taxable years beginning after December 31, 2010. In Notice 2010-69, the IRS states that this requirement will not be mandatory for Forms W-2 issued for 2011. According to the IRS, this relief will provide employers with additional time to make necessary changes to their payroll systems and procedures to comply with the reporting requirement. Further guidance on the reporting requirement is expected to be issued before the end of 2010.

For more information on the Act and any of the recent guidance discussed in this article, please contact the authors or any member of the McGuireWoods Employee Benefits Team.