The U.S. Department of Health and Human Services (HHS) has issued additional guidance on how a plan sponsor can demonstrate that it is not using reimbursements received under the Early Retiree Reinsurance Program (ERRP) as general revenue by maintaining the level of its contributions to the plan.

The ERRP was established under the Patient Protection and Affordable Care Act (the 2010 health care reform legislation) to encourage plan sponsors to maintain health coverage for employees who retire before they become eligible for Medicare. It provides partial reimbursement for the benefits paid to early retirees under a plan. To view prior alerts on the ERRP, click here.

When HHS implemented the ERRP, it made statements that fueled concerns about how narrowly it would interpret the “maintenance of contribution” requirement. It soon became clear that HHS would be reconsidering those statements, and the new guidance offers a flexible approach to compliance.

The new rule provides guidance on a number of subjects:

  • Baseline year. Plan sponsors are required to maintain their level of contributions for health benefits relative to a baseline year. The new guidance allows a plan sponsor to choose from a range of baseline years that include: (i) the plan year that most recently ended before the plan sponsor submitted its ERRP application, (ii) that plan year combined with up to four of the immediately preceding plan years (the average of the contributions for those years will be taken), or (iii) a plan year ending after June 1, 2010, for which the budget was finalized (or the applicable collective bargaining agreement, if any, was ratified) before June 1, 2010.
  • Measurement of contributions. In circumstances where a plan sponsor cannot determine with certainty the extent to which its contributions under a plan fund health benefits, the plan sponsor may use any reasonable methodology to estimate the contribution.
  • Comparison methodologies. The guidance also allows plan sponsors considerable flexibility in determining how to compare current contributions, net of any ERRP reimbursements, to contributions in the baseline year. The comparison may be based on total dollars or per capita dollars. It may alternatively be based on the ratio of dollars spent by the plan sponsor to the dollars spent by both the plan sponsor and participants, or the per capita average of that ratio. Purely self-funded plans may refer to the amount set aside for the payment of health benefits, for example, in a VEBA, even if it is not all spent in a year.
  • Years when requirement must be met. The rules require plan sponsors to meet the maintenance of contribution requirement in plan years for which it receives a reimbursement, in which it receives a reimbursement, and during which it applies a reimbursement for a permitted purpose (to offset increases in the plan sponsor's contributions toward health benefits or to reduce costs incurred by participants under the plan). The new guidance does not set a limit on how far in the future a reimbursement may be applied.

If a plan sponsor does not comply with the approaches identified in the regulations, it may demonstrate compliance with the maintenance of contribution requirement in other ways. Given the flexibility of the new rules, we expect that most plan sponsors will find that the new rules support positions that they have taken to comply with the maintenance of contribution requirements under the ERRP. Still, plan sponsors should confirm that they are compliant and be prepared to justify their approach on audit.