Does your company offer retiree medical coverage? This article highlights some of the common legal compliance issues we’ve noted recently when reviewing post-retirement medical coverage, and provides recommendations for dealing with these issues. This article is not intended to be a comprehensive checklist of every legal rule applicable to retiree medical plans.
The Spin-Off: Separate Plans for Retirees and Employees
Traditionally, employers offering retiree medical coverage provided this coverage through their active employee plan. The desirability of covering retirees and active employees under the same medical plan changed after enactment of the Affordable Care Act (ACA or ObamaCare). This is due to the fact that the ACA imposes various mandates, such as a ban on lifetime and annual dollar limits that are often incompatible with the retiree health care arrangements offered by many employers. Fortunately, these restrictions, including the ban on annual and lifetime dollar limits, do not apply to plans covering fewer than two participants who are current employees, such as a “stand-alone” retiree medical plan.
If your company’s medical plan covers both active employees and retirees, but imposes annual or lifetime dollar limits on retiree coverage, we suggest that you “spin-off” the retiree medical coverage into a separate plan. To do so, you should create separate plan documents for active employees and retirees. This would include separate formal plan documents, separate summary plan descriptions (if applicable to your company), and depending on the number of plan participants involved, separate Form 5500s (if applicable to your company). In addition, if you fund your medical benefits through a trust, there should be separate sub-accounts for contributions made on behalf of retirees and active employees to avoid the possibility of intermingling funds between the plans.
Even if the coverage offered to retirees currently complies with the ACA mandates, you should keep this issue in mind if you modify benefits provided to retirees in the future. If your modifications would cause the coverage offered to retirees to fail to comply with the ACA mandates, then the retiree plan should be spun-off into a separate plan at that time, as described above.
Document Review: Does Your Insurance Policy Cover Retiree Medical Benefits or Are You Inadvertently Self-Insuring Retiree Medical Coverage?
Is your retiree medical coverage insured? If self-insured, do you have stop-loss insurance coverage limiting your liability for retiree medical claims? If you answer “yes” to either of these questions, then this section may be of particular relevance to you.
Many insurance policies limit coverage to employees. Stop-loss policies provide insurance protection for benefits provided by the underlying self-insured plan, which is often drafted to limit coverage to employees. By definition, retirees are not considered employees.
This is commonly overlooked by employers, who often provide retiree medical coverage to their retired employees, but forget to amend their insurance policies or their self-insured plan document to actually state that retirees are covered. This issue may result in liability if a retiree incurs significant medical claims. When an individual incurs large claims, an insurer is more likely to investigate to determine whether he or she is actually eligible for coverage under the policy/plan. If coverage under the policy/plan is limited to active employees, then the insurer may deny the claims (even if premiums have been paid for such coverage) and your company may be “on the hook” for the retiree’s medical bills.
To avoid a situation in which you are inadvertently self-insuring retiree medical coverage, you should review any relevant insurance policies and the terms of your self-funded plan to confirm that the policy/plan covers retirees. You may also be required to obtain the consent of the insurance carrier to any such changes.
In Focus: Stand-Alone Health Reimbursement Arrangements After the ACA
Health reimbursement arrangements (HRAs) are utilized by employers to provide employees and/or retirees with a spending account to reimburse them for qualified medical expenses. HRAs are considered group health plans subject to the ACA mandates, including the ACA’s prohibition against imposing lifetime and annual dollar limits on essential health benefits.
The prohibition against annual and lifetime limits effectively eliminates an employer’s ability to offer a stand-alone HRA to active employees. However, as described above, a group health plan that covers solely retirees is not subject to the prohibition on annual and lifetime dollar limits.
Accordingly, employers may continue to offer stand-alone HRAs to retirees. To do so, we recommend having separate HRA plan documents and separate trust sub-accounts with respect to the HRA for current employees and the HRA for retirees, to help preserve the exception from the ACA mandates for the retiree-only HRA.
A Twist: Rehired Employees and Independent Contractors
As described above, certain ACA mandates, including the prohibition on annual and lifetime dollar limits, do not apply to retiree-only health plans. However, what happens when a retiree is rehired or when a retiree classified as an independent contractor is actually an employee?
If rehires are allowed to continue participation in the retiree health plan (including being allowed to receive reimbursement from a retiree HRA), the retiree plan may become subject to the requirements of the ACA (including the prohibition on annual and lifetime dollar limits).
We suggest carefully monitoring re-hires to ensure that coverage is not inadvertently provided to an active employee under the retiree plan. We’d also suggest reviewing the terms of the retiree plan and amending the plan as necessary to indicate that rehired employees are excluded from plan participation while an employee.
Another area of concern is independent contractor or consulting arrangements with retirees. These arrangements should be scrutinized to determine whether the individual is actually acting in an employee capacity, in which case covering such individual under the retiree medical plan may subject the plan to the ACA mandates.
The Checkup: Compliance Roadmap
(1) Does your company offer medical coverage to active employees and retirees under the same plan?
- If Yes, does the coverage you offer to retirees impose any restrictions that would violate the ACA mandates (such as annual or lifetime dollar limits or limits on preventive care)?
- If Yes, your company’s retiree medical coverage does not comply with the ACA. The retiree medical coverage should be “spun off” into a separate plan, as described above.
- If No, go to Question 2.
- If No, go to Question 2.
(2) Is the coverage offered to retirees insured or, if self-insured, does your company have a stop-loss policy capping the company’s liability for medical claims?
- If Yes, does the insurance certificate or self-insured plan document indicate that retirees are eligible for the policy/plan?
- If Yes, go to Question 3.
- If No, revise the insurance policy or plan document (if permitted by the insurer) to indicate that retiree medical benefits are covered expenses. In any event, future policies should indicate that retiree medical benefits are covered expenses.
- If No, go to Question 3.
(3) Does your company offer HRAs to retirees?
- Yes, are retirees covered under the same HRA plan as active employees?
- If Yes, the coverage offered to retirees does not comply with the ACA. You should “spin-off” the retiree HRAs into a separate plan.
- If No, go to Question 4.
- If No, go to Question 4.
(4) Does your stand-alone retiree medical plan exclude rehired employees?
- If Yes, no action is required.
- If No, we’d suggest amending your plan to specifically exclude rehired employees. This will reduce the likelihood of your retiree plan inadvertently becoming subject to the ACA mandates.