As 2013 comes to an end, we are pleased to present you with our traditional End of Year Plan Sponsor “To Do” Lists. This year we are presenting our “To Do” Lists in three separate Employee Benefits Updates. Part one of the series covered year-end executive compensation issues, part two will cover health and welfare plan issues and part three will cover qualified plan issues. Each Employee Benefits Update will provide you with a “To Do” List of items on which you may want to take action before the end of 2013 or in early 2014. As always, we appreciate your relationship with Snell & Wilmer and hope that these “To Do” Lists help focus your efforts over the next few months.
This Employee Benefits Update, part two of our End of Year Plan Sponsor “To Do” Lists, focuses on health and welfare plan issues.
Health and Welfare Plans “To Do” List
- Update Summary Plan Description if Needed: Summary Plan Descriptions (“SPDs”) must be updated once every five years if the plan has been amended during the five-year period and once every 10 years for other plans. SPDs may need to be updated.
- Consider Impact on Employee Benefit Plans of Supreme Court Defense of Marriage Act (“DOMA”) Case: As reported in our September 9, 2013 Legal Alert, “Agencies Issue Guidance on Same Sex Marriage Impacting Employee Benefits,” the Internal Revenue Service (the “IRS”), the Department of the Treasury (the “Treasury”) and the Department of Labor (the “DOL”) have released guidance on the treatment of same sex-spouses. In Revenue Ruling 2013-17, the IRS and Treasury ruled that same-sex married couples will be treated as married for all federal tax purposes as long as they were married in a jurisdiction that recognizes same-sex marriages, which is known as a “state of celebration” standard. The guidance also provides that the terms “spouse,” “husband and wife,” “husband” and “wife” include an individual married to a person of the same sex if the individuals are lawfully married under state law, and the term “marriage” includes such a marriage between individuals of the same sex. The impact of this guidance is that employers who offer health coverage to same-sex spouses will have to update and amend their plans to treat same-sex spouses the same as opposite-sex spouses with respect to, among other things, the Consolidated Omnibus Budget Reconciliation Act (“COBRA”), special enrollment rights and the ability to pay health benefits on a pre-tax basis (at least for federal purposes). Employers who do not currently offer health coverage to same-sex spouses should consider whether they now want to do so.
The DOL also updated its guidance relating to the Family & Medical Leave Act (“FMLA”). FMLA leave is now available to care for a same-sex spouse. However, in order to be eligible for FMLA leave to care for a sick spouse, the current guidance requires employees to reside in a state that legally recognizes their marriage, whether same-sex or opposite-sex. This means that married same-sex couples who live in a state that recognizes same-sex marriage will be eligible for FMLA leave, but married same-sex couples who reside in a state that does not recognize same-sex marriage will not be legally entitled to FMLA leave.
- Continue to Track and Comply with Health Care Reform Changes: Employers should continue moving forward with implementation of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “Health Care Reform Act”). Below, we have highlighted a number of the more significant upcoming Health Care Reform Act changes that affect employer group health plans. See our checklist that provides a more detailed summary of the principal requirements under the Health Care Reform Act, beginning with those that first became effective in 2010 and continuing through those that will become effective in 2018. The purpose of this checklist is to provide a summary of the principal requirements under the Health Care Reform Act that apply to employer-sponsored group health plans. The Health Care Reform Act and its related guidance go into much more detail and should always be consulted when considering its application to any particular plan.
- If a Group Health Plan is a Grandfathered Plan, Review Grandfathered Status: Group health plans that were in existence on or before March 23, 2010 and that have not undergone significant changes since then (“grandfathered plans”) have to comply with some, but not all, of the requirements under the Health Care Reform Act. Employers that have made any changes to their health plans or added a wellness component in 2013, or in connection with open enrollment for an upcoming plan year, should consider whether those changes cause the plan to lose grandfathered status. If grandfathered plan status is lost, the plan must comply with additional requirements that apply to non-grandfathered plans as of the date grandfathered status is lost. In addition, effective for plan years beginning on or after January 1, 2014, grandfathered plans may no longer deny coverage to a child who is eligible for coverage under another employer’s plan.
- Comply with Prohibition on Pre-Existing Condition Exclusions for All Participants: Effective for plan years beginning on or after January 1, 2014, health plans may no longer impose a pre-existing condition exclusion on participants age 19 or over. Previously, plans were prohibited from imposing any pre-existing condition exclusion on children. This requirement applies to both grandfathered and non-grandfathered plans.
- Comply with No Annual Limit for Essential Health Benefits: The current annual limit on essential health benefits for plan years beginning on or after September 23, 2012, but before January 1, 2014, is $2,000,000. However, for plan years beginning on or after January 1, 2014, plans will no longer be able to impose any annual dollar limits on essential health benefits. See “Agencies Publish Guidance on Pre-Existing Condition Exclusions, Lifetime and Annual Limits, Rescissions and Other Patient Protections” in our July 13, 2010 Health Care Alert for more information. This requirement applies to both grandfathered and non-grandfathered plans.
- Comply with Prohibition on Waiting Periods in Excess of 90 Days. As reported in our September 18, 2013 Health Care Alert, “Additional Health Care Reform Rules Take Effect in 2014 Including Prohibition on Waiting Periods in Excess of 90 Days,” effective for plan years beginning on or after January 1, 2014, group health plans and health insurance issuers offering group health insurance coverage may not apply any waiting period that exceeds 90 days. For this purpose, a “waiting period” is defined as a period that must pass before an individual is eligible to be covered for benefits under the terms of the plan. This requirement applies to both grandfathered and non-grandfathered plans.
- Limit Cost-Sharing (Out-Of-Pocket Maximums) in Non-Grandfathered Health Plans: For plan years beginning on or after January 1, 2014, non-grandfathered health plans will not be able to charge participants cost sharing amounts (i.e., out-of-pocket maximums) of more than $6,350 for individual coverage and $12,700 for family coverage for any single plan year. Cost-sharing amounts consist of deductibles, co-payments, co-insurance and similar charges for qualified medical expenses which are essential health benefits. The cost-sharing limits will be adjusted by the DOL periodically. For employers that use more than one provider to administer benefits subject to the cost-sharing limitation requirement, there is transitional relief for plan years beginning in 2014. The relief provides that the cost-sharing limitation is satisfied if (a) the plan complies with the limits with respect to its major medical coverage portion of the group health plan (excluding, for example, prescription drug coverage and pediatric dental coverage) and (b) to the extent the plan has an out-of-pocket maximum for any non-major medical coverage, such out-of-pocket maximum complies with the annual cost-sharing limits.
- Cover Preventive Services without Cost Sharing in Non-Grandfathered Health Plans: Non-grandfathered group health plans were first required to provide coverage for preventive services without cost sharing for plan years beginning on or after September 23, 2010. Non-grandfathered group health plans were required to cover additional women’s preventive services without cost sharing for plan years beginning on or after August 1, 2012 (i.e., January 1, 2013 for calendar year plans). On January 20, 2012, the Department of Health and Human Services (“HHS”) announced that nonprofit employers who, based on religious beliefs, do not currently provide contraceptive coverage, would be provided an additional year, until August 1, 2013, to comply. Plan sponsors and insurers that are subject to the preventive services mandate should periodically review their plans to ensure that they are covering all of the services described in the recommendations and guidelines. Information about the recommendations and guidelines is available at the Healthcare.gov website, which is updated on an ongoing basis.
- Review Account-Based Health Plans Such as Health Reimbursement Arrangements (“HRAs”) and Health Flexible Spending Accounts (“health FSAs”) for Compliance with the Health Care Reform Act: On September 13, 2013, the IRS and DOL issued nearly identical guidance, IRS Notice 2013-54 and DOL Technical Release 2013-03, explaining how certain Health Care Reform Act rules apply to HRAs and other account-based plans. The guidance also elaborates on prior Frequently Asked Questions (“FAQs”) addressing integration of HRAs with a group health plan to avoid violating the prohibition on annual dollar limits. The guidance is generally effective for plan years beginning on or after January 1, 2014, and in some cases will require plan amendments before then. The guidance may be relied upon for prior periods. As a result of this guidance employers should:
Understand that Pre-Tax Account-Based Plans, such as HRAs, Cannot be Integrated with Individual Coverage. Many employers have been asking whether they may set up an HRA for their employees to use to buy individual health insurance policies through a state-based or federal health insurance exchange (each, an “Exchange”). The issue with such arrangements is whether an HRA can be integrated with an individual health insurance policy. If it cannot, then the HRA will not comply with the Health Care Reform Act’s prohibition on annual dollar limits. A previous FAQ indicated that an HRA could not be integrated with an individual insurance policy. IRS Notice 2013-54 reiterates that position and expands it to “employer payment plans,” which are arrangements under which an employer reimburses, or directly pays, an employee’s insurance premium, and excludes the payments from the employee’s gross income. Because such funding arrangements cannot be integrated with individual health insurance, they violate the Health Care Reform Act’s prohibition on annual dollar limits and the requirement to provide first-dollar preventive care. IRS Notice 2013-54 is disappointing for employers who had hoped to use a pre-tax defined contribution approach to provide health insurance coverage to their employees.
Amend Section 125 Plans To Prohibit Providing Qualified Health Plans Offered Through An Exchange. Effective for taxable years beginning after December 31, 2013, Section 125(f)(3) of the Internal Revenue Code, as amended (the “Code”) provides that the term “qualified benefit” does not include a qualified health plan (as defined in Section 1301 of the Health Care Reform Act) offered through an Exchange. This prohibits employers from providing a qualified health plan offered through an Exchange as a benefit under the employer’s Section 125 plan. Calendar year plans will need to comply with this requirement effective January 1, 2014. The guidance provides relief for Section 125 plans that, as of September 13, 2013, operated on a plan year other than the calendar year. For such plans, the restriction under Section 125(f)(3) of the Code will not apply until the first day of the plan year of the Section 125 plan that begins after December 31, 2013.
Make Sure HRAs are Integrated with Other Non-HRA Coverage. IRS Notice 2013-54 indicates that HRAs may use one of two methods to integrate with other group health plan coverage in order to satisfy the annual dollar-limit prohibition and requirement to provide first dollar preventive care. Both of these methods require that the HRA be limited only to employees who are enrolled in the integrated non-HRA group health coverage. The first method, called the “minimum value not required method” requires that the HRA reimburse only co-payments, co-insurance, deductibles and premiums under the non-HRA group coverage, or reimburse medical care other than essential health benefits. The second method, called the “minimum value required” method, does not have any use restrictions, as does the first method, but requires that the non-HRA coverage be “minimum value.” The surprising news is that neither method requires that the HRA and non-HRA coverage have the same sponsor. This means an employer may “integrate” its HRA with another employer’s non-HRA coverage. Both methods also require that employees be allowed to permanently opt-out of HRA coverage and, upon termination of employment either forfeit their HRA balance or permanently opt-out of coverage. HRA plans must be amended before the 2014 plan year to comply with one of these methods, both of which have very detailed requirements. Employers who do not want to follow either approach will have to terminate their HRA and set terms for payout of remaining balances. Please note, employers may still offer retiree-only HRAs and “excepted benefit” HRAs without integrating such HRAs with other coverage because those two types of HRAs are exempt from the Health Care Reform Act.
Confirm Health FSAs Are “Excepted Benefits.” The guidance highlights that a health FSA that is not an “excepted benefit” is subject to various Health Care Reform Act changes, including the requirement to provide preventive services. This highlights the importance of making sure that health FSAs qualify as excepted benefits, and if they are not, making required changes through plan amendments. Health FSAs that are not “excepted benefits,” must be converted before the beginning of the 2014 plan year in order to avoid Health Care Reform Act penalties.
Confirm Employee Assistance Programs (“EAPs”) Are “Excepted Benefits.” The guidance provides some relief indicating that regulations will be amended to allow EAPs to be considered “excepted benefits”, and thus not be subject to many of the Health Care Reform Act’s mandates, but only if the EAP does not provide significant benefits in the nature of medical care or treatment. Plan amendments may be required to take advantage of this relief
- Amend Health Flexible Spending Accounts to Reflect the $2,500 Cap on Salary Reduction Contributions: As reported in our August 1, 2012 Health Care Reform Legal Alert, “$2,500 Cap on Salary Reduction Contributions to Health Flexible Spending Accounts,” prior to the Health Care Reform Act, the Code did not limit the amount that could be contributed to a health FSA. The $2,500 cap currently applies to plan years beginning on or after January 1, 2013. Plans documents that currently reflect a health FSA limit in excess of $2,500 will have to be amended to reflect the $2,500 limit. Cafeteria plans must normally be amended in advance of the effective date of a change. However, IRS Notice 2012-40 provides that plans may adopt retroactive amendments to reflect the $2,500 cap at any time before December 31, 2014, provided that the plan operates in accordance with the $2,500 limit in the meantime. For 2014, there was no cost-of-living increase, so the cap remains at $2,500 for plan years beginning on or after January 1, 2014.
- Consider Allowing Carryover of $500 for Health FSAs: On October 31, 2013, in IRS Notice 2013-71 the IRS announced a change to the “use-it-or-lose-it rule.” Employers may elect to adopt a rule allowing employees to carryover up to $500 of health FSA funds to use in the following plan year. However, if an employer elects to implement this option, it may not also have a 2 ½ month grace period. To allow carryovers from 2013 to 2014, a plan amendment must be adopted by December 31, 2013.
Amend Non-Calendar-Year Cafeteria Plans to Allow Mid-Year Election Changes. In 2014, employees will be able to purchase coverage through an Exchange, and the Health Care Reform Act’s individual shared responsibility (individual mandate) penalty will become applicable for individuals without qualifying coverage. At that time, some employees may wish to drop employer-provided health coverage and enroll in coverage through an Exchange, or to enroll in qualifying employer-provided coverage to avoid the individual shared responsibility penalty. However, the permitted election change regulations do not currently provide for midyear cafeteria plan election changes on account of either of these events. To accommodate employees participating in non-calendar-year cafeteria plans (who would otherwise be locked into their elections as of January 1, 2014), the IRS has provided transitional relief under which non-calendar-year plans may permit certain accident and health plan election changes during the cafeteria plan year beginning in 2013. The transitional relief allows non-calendar-year cafeteria plans to be amended to provide for one or both of the following midyear election changes during the cafeteria plan year beginning in 2013:
- Employees may prospectively revoke or change their salary reduction elections for accident and health plan coverage election once during the plan year, without regard to whether there has been a change in status event under the permitted election change regulations.
- Employees who failed to make salary reduction elections for accident and health plan coverage prior to the deadline under IRS rules for making elections for the plan year beginning in 2013 may make a prospective salary reduction election for such coverage during the plan year, without regard to whether there has been a change in status event under the permitted election change regulations.
In Notice 2013-71, the IRS clarified that an amendment adopted pursuant to this transition rule may be more restrictive than the amendments described above, but not less restrictive. For example, an employer may restrict an employee to revoking or changing his election once during a limited period (for example, the first month of 2014 only rather than the entire plan year). Normally, cafeteria plans must be amended prospectively, but the transition relief gives employers until December 31, 2014 to amend their plans to reflect the transition rules, so long as the amendment is effective retroactively to the first day of the 2013 cafeteria plan year.
- Large Employers Should Start to Consider How They Will Comply with the “Play or Pay” Mandate: As reported in our July 3, 2013 Health Care Alert, “Treasury Announces Large Employer Play or Pay Penalties Will Be Delayed For One Year,” the employer shared responsibility penalties will not take effect until 2015. In 2015, large employers will be subject to a penalty if either: (1) the employer fails to offer to its full-time employees the opportunity to enroll in minimum essential coverage and any full-time employee receives a premium tax credit or cost-sharing reduction; or (2) the employer offers its full-time employees the opportunity to enroll in minimum essential coverage and one or more full-time employees receive a premium tax credit or cost-sharing reduction because the employer’s coverage either is not affordable or does not provide minimum value. A full-time employee is an employee who, with respect to any month, is employed on average at least 30 hours per week. The IRS has issued guidance that describes safe harbor methods that employers may use to determine which employees are considered full-time employees. These methods involve different look back measurement periods of between three and 12 months (within the employer’s discretion) and may be helpful for employers whose employees work variable or seasonal hours. Even though the employer mandate does not go into effect until 2015, because full-time employees may be defined based on 2014 service, if a large employer chooses to rely on the IRS safe harbors, it should take steps now to determine how it will identify full-time employees and what strategies it wants to implement to comply with the mandate. In addition, employers should use this one-year delay to make sure they are properly classifying employees, because failing to do so can result in significant penalties. For more information, please see our March 20, 2013 Legal Alert “Health Care Reform’s Large Employer Pay or Play Penalties: A Checklist for Employers” (Please note that this Alert has not been updated for the one-year delay in the penalties) and our June 12, 2013 Legal Alert “Another Reason Not to Misclassify Employees.”
- Update Four-Page Summary of Benefits and Coverage (“SBC”) to Include New Required Statements: As reported in our August 19, 2013 Health Care Alert, “Government Agencies Release Additional Guidance on Minimum Essential Coverage, Minimum Value, and Summary of Benefits and Coverage” the DOL issued a new SBC template applicable for coverage beginning on or after January 1, 2014 and before January 1, 2015. The new SBC template adds two important statements. The employer must additionally include in the SBC (1) a statement as to whether the health plan provides minimum essential coverage, and (2) a statement as to whether the health plan meets the minimum value requirements.
- Provide 60-Day Advance Notice of Changes Impacting SBC: As reported in our July 19, 2012 Health Care Reform Legal Alert, “Summary of Benefits and Coverage for Group Health Plans,” the Health Care Reform Act requires group health plans to give participants 60-days advance notice before making any material modification in plan benefits or coverage that is not reflected in the most recently provided SBC. This applies to both benefit enhancements and reductions.
- Provide Health Benefit Exchange Notice and Update COBRA Election Notice: Employers were required to provide the Health Benefit Exchange Notice (the “Exchange Notice”) to current employees on or before October 1, 2013, and, beginning October 1, 2013, to each new employee at the time of hiring. For 2014, the DOL will consider a notice to be provided at the time of hiring if the notice is provided within 14 days of an employee’s start date. To satisfy the content requirements, the DOL has issued two model Exchange Notices. Employers may use one of these models, as applicable, or a modified version, provided the notice meets the content requirements described in DOL Technical Release 2013-02. The model Exchange Notice for employers who offer a health plan is available on the DOL’s website. The model Exchange Notice for employers who do not offer a health plan is available on the DOL’s website. Both model notices are available in Spanish. The DOL has also updated its COBRA model election notice to help make qualified beneficiaries aware of other coverage options available in the Marketplace. The model election notice is available in modifiable, electronic form on the DOL’s website. A clean copy is available, as is a redline from the prior model notice to help employers and plan administrators identify the changes. More information about the Exchange Notice and the updated COBRA model election notice can be found in our June 25, 2013 Legal Alert, “Department of Labor Sets October 1 Deadline for Employers to Send Health Benefit Exchange Notices; COBRA Election Notices Must Also be Updated.”
- Report and Pay Reinsurance Fees. The Health Care Reform Act directs that a transitional reinsurance program must be established in each state to help stabilize premiums for coverage in the individual market from 2014 through 2016. As part of this reinsurance program, insurers and self-insured group health plans are required to make contributions to support reinsurance payments to individual market issuers that cover high-cost individuals (“Reinsurance Fees”). For insured policies, health insurance issuers are responsible for reporting and paying the Reinsurance Fees. For self-insured plans, plan sponsors are responsible for reporting and paying the Reinsurance Fees, although a third-party administrator or administrative-services only contractor may be used to transfer reinsurance payments on behalf of a self-insured plan, at the plan’s discretion. The reinsurance contribution is calculated by multiplying the average number of covered lives of “reinsurance contribution enrollees” (i.e., all individuals covered by a plan for which reinsurance contributions must be made) during the benefit year for all of the contributing entity’s plans and coverage that must pay reinsurance contributions, by the national contribution rate for the applicable benefit year. HHS has proposed a nationally uniform contribution rate of $63 per person per year in benefit year 2014. Insurers and plan sponsors can choose from several methods for counting covered lives, similar to the methods outlined in the PCORI fee regulations. Contributing entities must submit enrollment data to HHS by November 15 each year (generally calculated based on January through September data, even for non-calendar year plans). HHS will notify each contributing entity of the reinsurance contribution amounts to be paid based on that annual enrollment count within 30 days of submission of the enrollment count or by December 15, whichever is later. Payment is due within 30 days of notification by HHS. In the preamble to regulations published on October 30, 2013, HHS indicated that it plans to propose future rulemaking to change how the $63 per covered life reinsurance fee will be collected and to exempt certain self-insured, self-administered plans from the requirement to make reinsurance contributions for the 2015 and 2016 benefit years.
- Continue to Report and Pay Patient-Centered Outcomes Research Institute (“PCORI”) Fees: Health insurance issuers and sponsors of self-funded health plans should continue to report and pay PCORI Fees. For health insurance issuers and plan sponsors of self-funded plans with calendar-year policy or plan years, the first IRS Form 720 and payment was due July 31, 2013. The PCORI Fees for a plan or policy year is equal to the average number of lives covered under the plan or policy multiplied by an applicable dollar amount. For the first year, the applicable dollar amount was $1. This amount will increase to $2 in the second year and future increases are based on increases in the projected per capita amount of National Health Expenditures released by the HHS. More information about PCORI Fees can be found in our August 9, 2012 Health Care Reform Legal Alert, “Health Care Reform’s New Research Fees: What Employers Need to Know.”
- Continue to Comply with IRS Form W-2 Reporting of the Cost of Employer-Sponsored Group Health Plan Coverage: Beginning with the Form W-2 issued in January 2013 (i.e., the Form W-2 issued for the 2012 calendar year), employers were required to report to employees the cost of their employer-sponsored group health plan coverage. This reporting is for informational purposes only and is intended to communicate the cost of health care coverage to employees. It does not change how such benefits are taxed. This requirement continues to apply for future years. More information about the reporting requirement can be found in our July 26, 2012 Health Care Reform Legal Alert, “W-2 Reporting of Employer-Sponsored Group Health Coverage.”
- Update Health Insurance Portability and Accountability Act (“HIPAA”) Privacy and Security Policies and Business Associate Agreements: On January 25, 2013, the Department of Health and Human Services issued the HIPAA Omnibus Rule which updated covered entities’ responsibilities. Employers that sponsor their own self-funded health plans are covered entities. Among other things, the final rule clarifies a covered entity’s obligation with respect to a breach of unsecured protected health information, known as the “breach notification rule.” The breach notification rule sets forth the covered entity’s responsibility to identify what caused the breach and immediately remedy those causes. Employers should have updated their HIPAA Privacy and Security Policies and Procedures to comply with the final rule’s September 23, 2013 deadline. In addition, the final rule clarifies that business associates are also responsible for protecting protected health information. Business associates are usually vendors of the covered entity that handle protected health information. If not already included in the business associate agreement, employers should add language providing that any subcontractor that business associate utilizes will enter into a written contract with the business associate and abide by the same rules as the business associate. Accordingly, employers should update their business associate agreements to comply with the final rule.
- Review Existing Wellness Programs: As reported in our July 17, 2013 Health Care Alert, “Final Wellness Rules May Require Review of Existing Wellness Programs,” final wellness regulations were issued that apply to employer-sponsored group health plans for plan years beginning on or after January 1, 2014. Importantly, the final regulations provide that health-contingent welfare plans that do not address tobacco use may offer rewards of up to 30% of the cost of employee-only coverage. If the welfare plan is designed to prevent tobacco use, a reward of up to 50% may be offered. In addition, the final regulations provide that wellness programs must offer a reasonable alternative (or waive the standard) for those participants for whom it is unreasonable for them to meet the standard because of a medical condition (activity based wellness programs) or for those participants who do not meet the initial standard on screening (outcome base wellness programs). For more information on the final wellness regulations, please see the above referenced Health Care Alert.
- Distribute Summary Annual Report: Distribute a summary annual report, which is a summary of the information reported on the Form 5500. The summary annual report is generally due nine months after the plan year ends. If the Form 5500 was filed under an extension, the summary annual report must be distributed within two months following the date on which the Form 5500 was due.