Despite the recent successful ERISA preemption challenge to Maryland’s health coverage proposal, State-led efforts toward universal health coverage are proliferating and have been bolstered by recent comments by the Bush administration and members of Congress. Massachusetts is the latest state to issue comprehensive health care reform. This advisory provides an overview of the Massachusetts health care reform law and its impact on employers with employees working in Massachusetts. Included with the advisory is a helpful chart to assist in navigating the cafeteria plan requirement imposed by the Massachusetts law. Note: The law also includes mandates on insurers that may indirectly impact employers who fully insure benefits provided to their employees in Massachusetts; however, this article is limited to those provisions of the law that directly impact employers.
Massachusetts Health Care Reform Law
“An Act Providing Access to Affordable, Quality, Accountable Health Care,” was enacted in April 2006 as an “emergency law, necessary for the immediate preservation of public health.” As a measure intended to achieve near universal health coverage in Massachusetts, this law, and its extensive implementing regulations (collectively referred to herein as the “Act”), impose numerous new requirements on individuals, employers, and insurers.
The Act directly affects all employers with 11 or more full-time equivalent (“FTE”) employees working at any Massachusetts location(s). Relevant guidelines in this regard include the following:
- All employees working at a Massachusetts location must be counted, including full-time, part-time, temporary, seasonal and collectively-bargained employees. It does not matter whether or not the individual is a Massachusetts resident. Individuals employed for less than one month, however, need not be counted. For convenience, we use the term “Massachusetts employee” to refer to an employee that must be counted.
- The number of FTEs is determined by taking the sum of total payroll hours for all Massachusetts employees during the applicable determination period and dividing by 2,000. Payroll hours must include all hours for which the employer paid wages including, but not limited to, regular, vacation, sick, FMLA, short-term disability, long-term disability, overtime and holiday hours. Any Massachusetts employee with more than 2,000 payroll hours is counted for this purpose as having 2,000 payroll hours.
- Initially, the applicable determination period is the 12-month period ending March 31, 2007. For employers with 11 or more FTEs for that applicable determination period, the requirements under the Act apply effective July 1, 2007 through December 31, 2007.
- For calendar years beginning on and after January 1, 2008, a new calculation must be performed. The determination period for each subsequent calendar year is the 12-month period ending the prior September 30th. Thus, the determination period for the calendar year beginning January 1, 2008 ends September 30, 2007. If an employer has had 11 or more FTEs for the applicable determination period ending September 30th, the requirements under the Act apply to the employer for the immediately following calendar year.
The term “151F Employer” is used in the regulations – and also in some communications from the regulators – to refer to an employer with 11 or more FTEs and therefore subject to the requirements of the Act. An exemption applies, however, to any employer that provides 100 percent of the monthly premium for health coverage of all of its Massachusetts employees (and eligible dependents to the extent selected by the employee).
Requirements for Affected Employers
The Act requires that each 151F Employer:
- Both maintain a cafeteria plan that meets the Act requirements as to Massachusetts employees and file the cafeteria plan document with the state;
- Make a “fair and reasonable” contribution to Massachusetts employees’ health insurance;
- Report to regulators whether it offers a cafeteria plan that complies with the Act; and
- Collect and maintain written information from Massachusetts employees who decline coverage.
Each requirement is discussed in further detail below. A short description regarding Form MA 1099- HC, a new Massachusetts individual tax form required under the Act to demonstrate coverage, is also provided.
Cafeteria Plan Requirement
The cafeteria plan maintained by a 151F Employer must, at a minimum, be a premium only plan (i.e., pre-tax salary deduction for payment of required premiums/contributions) for one or more medical care coverage options in compliance with applicable requirements under Section 125 of the Internal Revenue Code (the “Code”). Flexible spending accounts will not satisfy this requirement and are not required to be offered as a coverage option. More information on the cafeteria plan requirement can be found at www. MAhealthconnector.org in the section for employers.
When determining whether a cafeteria plan meets the Act requirements, the Act permits only the following classes of Massachusetts employees to be excluded from eligibility to participate in the cafeteria plan:
- Employees under age 18;
- Temporary employees;
- Part-time employees working, on average, fewer than 64 hours per month (roughly 16 hours per week);
- For existing employees, this means dividing by six the employee’s gross payroll hours during the 180 day period immediately preceding the first day of any cafeteria plan enrollment period;
- For new employees (i.e., employees who start after July 1, 2007 and after the effective date of the cafeteria plan), this means the employer reasonably expects the employee to work 63 hours or less during the first 180 days following commencement of employment.
- Employees who are considered wait staff, service employees or service bartenders and who earn, on average, less than $400 in monthly payroll wages (this excludes tip income);
- Student employees who are employed as interns or as cooperative education student workers;
- Employees for whom the employer is required to contribute to a multi employer health plan (i.e., union health fund); and
- Seasonal employees who are international workers with either a U.S. J-1 student visa, or a U.S. H2B visa and who are also enrolled in travel health insurance. 3
Eligible Massachusetts employees must be offered participation in the cafeteria plan during any applicable election period provided for in the cafeteria plan document, without regard to whether the employee was previously eligible or had previously waived participation in the plan during any prior election period. Any eligibility waiting period for the cafeteria plan cannot exceed two months, except that if the employer makes contributions toward the medical coverage available under the cafeteria plan, the eligibility waiting period for the cafeteria plan may correspond with (but cannot exceed) the eligibility waiting period for enrollment in the applicable medical coverage (even if the medical plan’s waiting period is more than 2 months). Employers qualifying as 151F employers on July 1, 2007 can provide a special initial eligibility period for eligible Massachusetts employees who are employed on July 1, 2007 that may extend to no later than September 1, 2007.
In addition, consistent with Section 125 of the Code, the Act requires that the cafeteria plan document include the following descriptions:
- Each of the benefits available under the plan, including the periods during which the benefits are provided. Incorporation by reference is permitted;
- Eligibility rules for participation in the plan;
- Election procedures, including the period during which elections may be made, the extent to which elections are irrevocable, and the periods with respect to which the elections are effective;
- Manner in which employer contributions (if any) may be made to the plan, such as by salary reduction agreement or by non-elective employer contributions to the plan;
- Maximum dollar amount or percentage of compensation that a participant may contribute (or the method for determining maximum amount or percentage); and
- The plan year of the cafeteria plan.
151F Employers must file their cafeteria plan documents with the Commonwealth Health Insurance Connector Authority (the “Connector”) by October 1, 2007. At the time of this writing, however, there exists no official guidance on this filing requirement, and the Connector’s Administrative Bulletin (dated June 29, 2007) indicates that it will not accept plan documents prior to September 1, 2007.
Any 151F Employer that fails to maintain an Act-compliant cafeteria plan is subject to a surcharge in the event its “state-funded employees” incur $50,000 or more in state-funded health care costs (in the aggregate) during the fiscal year ending September 30 (a “Surcharge Fiscal Year”). The initial Surcharge Fiscal Year for employers who qualify as 151F Employers on July 1, 2007, is a short-year beginning July 1, 2007 and ending September 30, 2007. Relevant guidelines include the following:
- A “state funded employee” is (i) a Massachusetts employee who receives (or whose tax dependent receives) four or more state-funded health care visits in a Surcharge Fiscal Year, or (ii) any Massachusetts employee (or any tax dependent of such employee) of a 151F Employer whose employees (or tax dependents) make five or more state-funded admissions or visits during a Surcharge Fiscal Year. However, employees (and their tax dependents) cannot be “state funded employees” if they are (A) excluded under an Act-compliant cafeteria plan’s eligibility rules, (B) covered by a bona fide collective bargaining agreement that governs their employment conditions, or (C) participants in Massachusetts’ Insurance Partnership Program (i.e. low-income health care subsidy program).
- The surcharge amount is to be determined by the Massachusetts Division of Health Care Finance and Policy (DHCFP) in two steps: (i) Initial amount is determined based on the number of FTE employees and the state-funded health care costs incurred, shown in the chart below and (ii) then reducing the initial amount by the 151F Employer’s percentage of Massachusetts employees who are enrolled in group medical coverage sponsored and paid for, in whole or in part, by the 151F Employer. This reduction cannot, however, be greater than 75 percent.
- 151F Employers will be notified by DHCFP at the end of each Surcharge Fiscal Year if a surcharge is owed. The notice will include various information regarding state funded costs, including the name(s) of state-funded employee, provider name and charges, and dates of service. Employers may challenge DHCFP’s surcharge determination, but only if it informs DHCFP in writing, within 14 days of the surcharge notice, that it contests DHCFP’s determination, and provides documentation that (i) an individual identified was not its employee (or dependent of the employee), (ii) it is not a 151F Employer, or (iii) that it maintains an Act-compliant cafeteria plan.
- DHCFP can assess interest of up to 18 percent per annum on the unpaid surcharge amount, and late fees or penalties of up to 5 percent per month. Also, an 151F Employer that fails to provide information required by the regulations may be subject to civil penalty of up to $5,000 per each week in which such violation occurs or continues.
- The surcharge regulations also include a provision that strictly prohibits 151F Employers from discriminating against any Massachusetts employee on the basis of the employee’s (i) receipt of free care, (ii) reporting or disclosure of the employer’s identity and other information about the employer, (iii) completion of a HIRD Form (discussed below), or (iv) any facts or circumstances relating to surcharges assessed against the employer in relation to the employee.
Fair Share Contribution Requirement
The Act requires that each 151F Employer annually determine and report – to the Massachusetts Division of Unemployment Assistance (DUA) – whether it has made a “fair and reasonable contribution” toward the cost of their Massachusetts employees’ employment-based group health coverage. More information on the Fair Share Contribution Requirement can be found at the state’s Web site. For any 151F Employer that fails the test, the Act requires an assessment of a “Fair Share Contribution” from the employer. The test methodology and related details are as follows:
- The testing period is each October 1 through September 30. The initial testing period is from October 1, 2006 through September 30, 2007.
- Generally, employers can pass the “fair and reasonable contribution” test one of two ways. First, the test is passed if at least 25 percent of the 151F Employer’s full-time Massachusetts employees participate in a group health plan. The percentage is calculated based on the aggregate payroll hours of Massachusetts employees working at least 35 hours per week (other than certain seasonal or temporary employees). Second, if a 151F Employer fails the 25 percent test, it may still satisfy the Fair Share Contribution Requirement by offering to pay at least 33 percent of the premium cost of its group health plan to full-time Massachusetts employees that were employed at least 90 days during the testing period. If the 151F Employer fails both tests, it must pay the Fair Share Contribution.
- For purposes of the fair and reasonable contribution test, “group health plan” must be either (i) sponsored and paid for (in whole or in any part) by the 151F Employer or (ii) sponsored by an employee organization (or a self-employed person) for the purposes of providing health care to employees, former employees, self-employed individuals, certain current or former business associates, or their families.
- For a 151F Employer that fails both fair and reasonable contribution tests, the amount of required Fair Share Contribution, which is capped at $295 per Massachusetts employee, is to be determined (and collected) by the DUA based on various data for the applicable fiscal year, including the total number of users of the uncompensated care pool, the percentage of employers that are non-contributing employers, and overall “private sector” liability for uncompensated care. While regulations relating to the payment of the Fair Share Contribution have not been finalized, it is expected that 151F Employers have the option to pay the full annual amount by November 15, or to choose a semi-annual or quarterly payment schedule with due dates established by the DUA.
- At the time of this writing, the DUA is in the process of finalizing additional regulations relating to online reporting, collection, penalty, appeal, and other rights and obligations relating to the Fair Share Contribution Requirement. It is expected that the DUA will require an annual online reporting by 151F Employers with regard to Fair Share Contribution Requirement.
Health Insurance Responsibility Disclosure (HIRD) Form Requirements
There are two types of HIRD Forms: Employer HIRD Forms and Employee HIRD Forms. Every 151F Employer is required to file an Employer HIRD Form on an annual basis to report on compliance with the Act’s cafeteria plan requirements. The required format or other details regarding the Employer HIRD Form have not been finalized at the time of this writing, but it is expected that the filing is to be done online, and that a filing with the DUA for purposes of the Fair Share Contribution requirement will also serve to satisfy the Employer HIRD Form filing requirement with the DHCFP. Based on current regulations, the information required to be filed under penalty of perjury will include, without limitation, the following:
- Whether the 151F Employer maintains an Act-compliant cafeteria plan;
- Whether the 151F Employer contributes to the premium cost of a group health plan for its Massachusetts employees. If answered in the affirmative, the following information must also be reported:
- Employer contribution percentage for each Massachusetts employee category, if the percentage varies by category;
- The total monthly premium cost for the lowest priced health insurance offered to Massachusetts employees for an individual plan and a family plan;
- The total monthly premium cost for the highest priced health insurance offered to Massachusetts employees for an individual plan and a family plan.
- The open enrollment period of the group health plan (if any) sponsored by the 151F Employer.
151F Employers must also designate a person responsible for verifying and certifying the accuracy of the Employer HIRD Form.
In addition, 151F Employers are required to obtain a completed and signed Employee HIRD Form from every Massachusetts employee who declines to enroll in the employer-sponsored health plan or declines to use the Act-compliant cafeteria plan to purchase health insurance. There is no requirement to file Employee HIRD Forms, but they must be maintained for at least three years and provided to the DHCFP upon audit or upon request. If a Massachusetts employee does not comply with the 151F Employer’s request to complete and sign the Employee HIRD Form, then the 151F Employer must document its “diligent efforts” and maintain such documentation for three years. An authorized Employee HIRD Form is available at www.MAhealhtconnector.org, but employers are permitted to collect the required information and obtain the Massachusetts employee’s acknowledgement in any form or manner that it deems necessary or appropriate, including through electronic or other media.
The information and acknowledgements required in an Employee HIRD Form include the following:
- Employee and employer name;
- Whether the employee was informed about the employer's cafeteria plan;
- Whether the employee declined to use the employer's cafeteria plan to pay for health insurance;
- Whether the employee was offered employer subsidized health insurance;
- Whether the employee declined to enroll in employer subsidized health insurance; If the employee declined employer subsidized health insurance, the dollar amount of employee’s portion of the monthly premium cost of the least expensive individual health plan offered by the employer to the employee;
- Whether the employee has alternative insurance coverage;
- The date the employee completes and signs the HIRD Form;
- Employee’s acknowledgement that he or she:
- has declined to enroll in employer sponsored insurance and/or has declined to use the employer's cafeteria plan to pay for health insurance;
- understands that by declining employer’s offer of subsidized health insurance, he or she may be liable for his or her health care costs;
- is aware of the individual mandate under M.G.L. c. 111M and the penalties for failure to comply with the individual mandate;
- is required to maintain a copy of the signed Employee HIRD Form and that the Employee HIRD Form contains information that must be reported in the employee's Massachusetts tax return; and
- Employee’s signature acknowledging the truthfulness of his or her answers.
The regulations also require that 151F Employers provide each Massachusetts employee with a copy of his or her Employee HIRD Form.
With regard to Massachusetts employees for whom a HIRD Form is required, 151F Employers must obtain signed Employee HIRD Forms by the earlier of (i) 30 days after the close of the applicable open enrollment period or (ii) September 30 of the reporting year. For new Massachusetts employees, Employee HIRD Forms must be obtained within 30 days of the end of the applicable enrollment period. For Massachusetts employees who terminate participation in a 151F Employer-sponsored health insurance plan, Employee HIRD Forms must be signed within 30 days of termination of participation. Employee HIRD Forms should be obtained retroactively for Massachusetts employees that were eligible for but declined coverage for 2007.
Any 151F Employer that knowingly falsifies or fails to file any information required by the DHCFP is subject to a fine of up to $5,000.
“Health 1099” Requirement
The Act requires all Massachusetts residents to obtain “creditable coverage,” and to file with their state tax returns a new form – Form MA 1099-HC – to show that they have creditable coverage. While Massachusetts insurers are responsible for providing this form to insured individuals, 151F Employers are responsible for determining creditable coverage status and the creation and distribution of Form MA 1099-HC for Massachusetts employees who have coverage under a self-funded plan (or insured coverage written outside of Massachusetts). For each year, Form MA 1099-HC is required to be provided by January 31 of the following year. Employers must provide a 1099-HC beginning with the 2007 year; therefore, the first 1099-HCs will be due no later than January 31, 2008. Failure to provide the form or to report to the tax commissioner may incur penalties of $50 per individual, not to exceed $50,000 per year per violator. As of the time of this writing, no regulations or further guidance have been issued with respect to Form MA 1099-HC.