In October 2015, the Department of Labor (DOL) provided an informational FAQ relating to the Mental Health Parity and Addiction Equity Act (MHPAEA) and ACA market reform provisions.
Non-grandfathered group health plans and individual or group market health insurance must cover a variety of preventive services without any cost-sharing requirements. Required preventive services include “breastfeeding comprehensive support and counseling from trained providers, and access to breastfeeding supplies,” obesity screening and weight management services for certain individuals, colonoscopies for certain age groups, and contraception coverage for women.
ACA Auto-Enrollment Requirement Repealed
The ACA initially required employers with more than 200 full-time employees and that offer employees one or more health benefit plans to automatically enroll (and re-enroll existing) full-time employees into one of the health plans (subject to any waiting period authorized by law), in accordance with DOL regulations.
Following delays in the DOL regulation, the “Bipartisan Budget Act of 2015,” which was signed by President Obama on November 2, 2015, repealed the auto-enrollment requirement.
Employers are still free to use default or negative elections for employee enrollment, but employers with more than 200 employees are not longer required to do so.
EEOC Proposes Rule Relating to GINA and Wellness Programs
On October 30, 2015, the Equal Employment Opportunity Commission (EEOC) issued a proposed rule to amend the regulations implementing Title II of the Genetic Information Nondiscrimination Act (GINA) as they relate to employer wellness programs that are part of group health plans. The proposed rule would allow employers to offer financial incentives and inducements to spouses who offer information about current or past health status as part of a wellness program.
Final Rule on Grandfathered Health Plans
On November 13, 2015, federal agencies issued a final rule that essentially combined a variety of interim final rules and non-regulatory guidance on a variety of ACA initiatives such as grandfathered health plans, preexisting condition exclusions, internal and external appeals, rescissions of coverage, lifetime and annual limits, emergency care access and dependent coverage. The final rule was very similar to the previous guidance it consolidated. The final rule goes into effect on January 1, 2017. At that time all of the prior interim rules will be superseded.
The final rule also noted that various transitional rules are now void, such as the allowance of grandfathered health plans to exclude children under age 26 who were eligible for other group health plan coverage, and rules that provided a special enrollment period for children under age 26 who had been excluded from coverage.
PACE Act Clarifications from CMS
The Providing Affordable Coverage for Employees (PACE) Act amended the ACA and redefined small employers as those with 50 or fewer employees; it also gives states the option to expand the definition to include employers with up to 100 employees (or, practically speaking, those with 51 to 100 employees, also called “mid-size employers”). Prior to the ACA, all states defined small employers as those with 1 to 50 or 2 to 50 employees; however, many have passed legislation redefining the group size up to 100 employees beginning in 2016. States are now in the process of determining what they define as “small employer.”
The Centers for Medicare & Medicaid Services (CMS), in response to the PACE Act, issued an FAQ on the impact of the PACE Act on small group expansion. CMS clarified that states that choose to expand the definition up to 100 employees beginning January 1, 2016, were required to notify CMS of the decision by October 1, 2015. States with other effective dates should notify CMS of the decisions as soon as is practical. A state’s definition is legally binding on health insurance issuers.
Question of the Month
May an employer fill out 1094-B, 1095-B, 1094-C, and 1095-C forms by hand or must they be typewritten?
Although handwritten forms will be accepted, the IRS prefers that filers type or machine print data entries.
On November 13, 2015, federal agencies issued a final rule that essentially combined a variety of interim final rules and non-regulatory guidance on a variety of Patient Protection and Affordable Care Act (ACA) initiatives such as grandfathered health plans, preexisting condition exclusions, internal and external appeals, rescissions of coverage, lifetime and annual limits, emergency care access and dependent coverage. The final rule was very similar to the previous guidance it consolidated. The final rule goes into effect on January 1, 2017. At that time all of the prior interim rules will be superseded.
The final rule also noted that various transitional rules are now void, such as the allowance of grandfathered health plans to exclude children under age 26 who were eligible for other group health plan coverage, and rules that provided a special enrollment period for children under age 26 who had been excluded from coverage.
Grandfathered Health Plans
The final rule reaffirmed that grandfathered status applies separately with respect to each benefit package. For example a group health plan with a preferred provider organization (PPO) plan, a point of service (POS) arrangement, and a health maintenance organization (HMO) option would each carry grandfathered status (or not) separately. Requirements for grandfathered status notification remain the same — plans must include a statement that the plan or health insurance coverage believes it is a grandfathered health plan in any summary of benefits provided under the plan. The model disclosure notice remains the same.
Grandfathered plans have been governed by anti-abuse rules, to prevent plans from maintaining grandfathered status when employees transferred into the plan are from a transferee plan that would have caused the transferor plan to lose grandfathered status if its terms were adopted. There is an exception for bona fide reasons for employee transfers, such as a plan being eliminated by the carrier.
The final rule noted that a plan that eliminated substantially all benefits needed to diagnose a condition would cause a plan to lose its grandfathered status, but purposefully declined to provide a bright line rule to interpret the requirement. Excessive increases to a single or limited number of copayments would cause a plan to lose grandfathered status, even if the remaining copayments remained the same.
Plans that add additional tiers (such as individual plus one, individual plus two) will not lose grandfathered status if the contribution rate for the new tiers is not below the previous non-self-only tier by more than five percent. Employers with grandfathered health plans that offer wellness programs should take great caution if the wellness program imposes penalties for failing to meet standards, this could put the plan’s grandfathered status at risk. Finally, grandfathered health plans may move brand-name versions of drugs that become generic to a higher cost-sharing tier.
The final rule clarifies that a carrier can bar coverage for a specific condition if it does so regardless of when the condition arose. Caution should be exercised to take other requirements into account, such as essential health benefit requirements.
Lifetime and Annual Coverage Limits
Carriers and group health plans are prohibited from imposing lifetime and annual limits on coverage. Because health reimbursement arrangements (HRAs) cannot meet this requirement and are a group health plan, HRAs must be integrated with a group health plan in order to meet the requirements of the ACA. HRAs are still prohibited from being used to purchase individual plan premiums.
There are two sets of requirements for HRA and other account-based plan integration. An HRA that does not need to meet minimum value requirements is considered integrated if:
The plan sponsor offers a group health plan (other than the HRA or other account-based plan) to the employee that does not consist solely of excepted benefits;
The employee receiving the HRA or other account-based plan is actually enrolled in a group health plan (other than the HRA or other account-based plan) that does not consist solely of excepted benefits, regardless of whether the plan is offered by the same plan sponsor (referred to as non-HRA group coverage);
The HRA or other account-based plan is available only to employees who are enrolled in non-HRA group coverage, regardless of whether the non-HRA group coverage is offered by the plan sponsor of the HRA or other account-based plan (for example, the HRA may be offered only to employees who do not enroll in an employer’s group health plan but are enrolled in other non-HRA group coverage, such as a group health plan maintained by the employer of the employee’s spouse);
The benefits under the HRA or other account-based plan are limited to reimbursement of one or more of the following — co-payments, co-insurance, deductibles, and premiums under the non-HRA group coverage, as well as medical care that does not constitute essential health benefits; and
Under the terms of the HRA or other account-based plan, an employee or former employee) is permitted to permanently opt out of and waive future reimbursements from the HRA or other account-based plan at least annually and, upon termination of employment, either the remaining amounts in the HRA or other account-based plan are forfeited or the employee is permitted to permanently opt out of and waive future reimbursements from the HRA or other account-based plan.
An HRA or other account-based plan will meet integration requirements and minimum value if:
The plan sponsor offers a group health plan (other than the HRA or other account-based plan) to the employee that provides minimum value pursuant to IRS Code (and its implementing regulations and applicable guidance);
The employee receiving the HRA or other account-based plan is actually enrolled in a group health plan that provides minimum value pursuant to IRS Code (and applicable guidance), regardless of whether the plan is offered by the plan sponsor of the HRA or other account-based plan (referred to as non-HRA MV group coverage);
The HRA or other account-based plan is available only to employees who are actually enrolled in non-HRA MV group coverage, regardless of whether the non-HRA MV group coverage is offered by the plan sponsor of the HRA or other account-based plan (for example, the HRA may be offered only to employees who do not enroll in an employer’s group health plan but are enrolled in other non-HRA MV group coverage, such as a group health plan maintained by an employer of the employee’s spouse); and
Under the terms of the HRA or other account-based plan, an employee (or former employee) is permitted to permanently opt out of and waive future reimbursements from the HRA or other account-based plan at least annually, and, upon termination of employment, either the remaining amounts in the HRA or other account-based plan are forfeited or the employee is permitted to permanently opt out of and waive future reimbursements from the HRA or other account-based plan.
Rescissions of coverage, or cancelling coverage retroactively or with a retroactive effect, have been prohibited since 2010, unless there is fraud or misrepresentation of material fact. The final rule did not provide a definition of “material fact.”
The rescission rules do not apply when an employee fails to or delays informing its employer that he or she has divorced a covered spouse, or a COBRA-qualified beneficiary fails to pay for COBRA coverage.
Rescissions are subject to internal and external appeal. Coverage must remain effective until an internal appeal is completed, and enrollees must be given 30 days notice prior to rescission to allow them time to appeal.
Group health plans and carriers must cover all children up to age 26, regardless of financial dependency or shared residence, student status of the child, employment status, or marital status. They must also be covered even though they do not live in a plan’s service area. Plans are not required, however, to cover out-of-network services for adult children, and the rule does not extend to grandchildren or other relatives.
The final rule finalized additional requirements for internal appeals for individual plans. The final rule clarified that non-grandfathered fully insured group health plans and individual insurers must comply with the state’s external review processes if the state process offers the same consumer protections offered by the National Association of Insurance Commissioner’s Uniform Health Carrier External Review Model Act. Self-insured plans and insurers in states without this requirement must use a process that meets the Department of Health and Human Services (HHS) standards, which were narrowed in regard to adverse benefit determinations. Originally all final adverse benefit determinations were permitted to be reviewed. The final rule determined that only final review of adverse benefit decisions involving medical judgment and rescission may be reviewed. Examples of medical judgment claims were provided. Coding decisions may involve medical judgment and are appealable.
The final rule also provided the federal review process rules which were previously found in guidance. Group health plans have five days to complete a review of an appeal to determine if it is eligible for an external review, and then assign the appeal to an accredited independent review organization. That organization, or IRO, notifies the claimant, who has 10 days to provide additional information. Decisions must be issued, in writing, within 45 days, unless the situation involves serious jeopardy to life or health, in which case decisions must be made within 72 hours. Group health plans must contract with three accredited IROs and assign them claims through unbiased means.
The regulations discourage filing fees for claimants, but in states that are required to charge a filing fee, it must not exceed $25, and must be waived if it would cause hardship.
Designation of a Primary Care Provider
Plans that require or provide for designation of a primary care provider must allow the participant (or beneficiary or enrollee) to designate any available in-network primary care provider. Women do not need authorization for care from an obstetrician or gynecologist, who must be treated as primary care providers for purposes of ordering and authorizing services.
Similarly, plans that require the designation of a participating primary care provider for a child must permit the designation of a physician who specializes in pediatrics if they are in-network.
Access to Emergency Care
Plans and carriers may not impose administrative hurdles or requirements to limit access to emergency care, or charge additional copayments or coinsurance for out-of-network emergency care. Out-of-network emergency providers may balance bill, and plans or carriers are not required to pay a balance bill. Plans and carriers must pay a reasonable amount for out-of-network emergency care, which is:
The median amount it pays for in-network-providers;
The amount it usually pays out-of-network providers; or
The Medicare rate.
Federal agencies indicated they might prohibit balance billing in the future.
Under the Patient Protection and Affordable Care Act (ACA), individuals are required to have health insurance, while applicable large employers (ALEs) are required to offer health benefits to their full-time employees. In order for the Internal Revenue Service (IRS) to verify that (1) individuals have the required minimum essential coverage, (2) individuals who request premium tax credits are entitled to them, and (3) ALEs are meeting their shared responsibility (play or pay) obligations, employers with 50 or more full-time or full-time equivalent employees and insurers will be required to report on the health coverage they offer. Final instructions for both the 1094-B and 1095-B and the 1094-C and 1095-C were released in September 2015, as were the final forms for 1094-B, 1095-B, 1094-C, and 1095-C.
Reporting will first be due in 2016, based on coverage in 2015. All reporting will be for the calendar year, even for non-calendar year plans. On December 28, 2015, the IRS issued Notice 2016-4, delaying the reporting deadlines.
The reporting requirements are in Sections 6055 and 6056 of the ACA. The 1094-C, 1095-C, 1094-B, and 1095-B were originally due to the IRS by February 28 if filing on paper (February 29, in 2016, because February 28 falls on the weekend), or March 31 if filing electronically. The 1095-C form was due to employees by January 31 of the year following the year to which the Form 1095-C relates (February 1, in 2016, because January 31 falls on a weekend). The 1095-B was due to the individual identified as the “responsible individual” on the form by January 31 (February 1, in 2016, because January 31 falls on a weekend).
The transition relief provided by Notice 2016-4 extended the due date for furnishing Form 1095-B and 1095-C to individuals to March 31, 2016. The due date for filing all forms (1094-C, 1095-C, 1094-B, and 1095-B) to the IRS is moved from February 29, 2016, to May 31, 2016, if filing by paper. If filing electronically, the date is moved to June 30, 2016.
Employers that have difficulty meeting the extended reporting deadlines are encouraged to file late, as the IRS will take late filing into consideration when determining whether to reduce penalties for reasonable causes. The IRS will also take into account if an employer made reasonable efforts to prepare for reporting, such as gathering or transmitting necessary information to a reporting service.
Impact on Individuals
The IRS has determined that individual taxpayers may be affected by the extension, as employees are not eligible for the premium tax credit for any month, which an employee is eligible for an employer plan that provides minimum value, affordable coverage. However, the IRS has determined most individuals offered employer-provided coverage will not be affected by the extension.
Employees who enrolled in Marketplace coverage, but did not receive a determination from the Marketplace regarding whether their employer-sponsored coverage was affordable, could be affected by the extension if they do not receive their 1095-C form prior to filing their individual income tax returns. As a result, for 2015 only, individuals who rely on other information received from employers about their offers of coverage for purposes of determining eligibility for the premium tax credit when filing their income tax returns need not amend their returns once they receive their Forms 1095-C or any corrected Forms 1095-C. Individuals do not need to send this information to the IRS when filing their returns, but should keep it with their tax records.
Some individuals might also be affected by the extension because they will use the forms in determining whether they had minimum essential coverage. Individuals may not have received this information before they file their income tax returns, so for 2015 only, individuals who rely on other information received from their coverage providers about their coverage, for purposes of filing their returns, need not amend their returns once they receive the Form 1095-B or Form 1095-C or any corrections. Individuals need not send this information to the IRS when filing their returns, but should keep it with their tax records.
The extensions of due dates provided in the Notice apply only to section 6055 and section 6056 information returns and statements for calendar year 2015 filed and furnished in 2016 and do not require the submission of any request or other documentation to the IRS.
In September 2015, the IRS provided information on the Form instructions on applying for extensions. Generally, an automatic 30-day extension will be given to entities filing Form 8809, and no signature or explanation is needed. Form 8809 must be filed by the due date of returns in order to be granted the 30-day extension. Waivers may be requested with Form 8508, and are due at least 45 days before the due date of the information returns. This extension relates to the deadline to provide the IRS with the forms, not providing individuals with the forms.
However, because of the transition relief, for 2015, no extension requests will be granted. Employers must utilize the transition relief guidelines provided in Notice 2016-4.
Beginning January 1, 2014, individuals and employees of small businesses have access to affordable coverage through a new competitive private health insurance market – the Health Insurance Marketplace. The Marketplace offers “one-stop shopping” to find and compare private health insurance options. This year, open enrollment for health insurance coverage through the Marketplace begins November 15, 2014. ACA requires employers to provide all new hires with a written notice about ACA’s Exchanges, as well as current employees if the employer failed to send out notices prior to the original October 1, 2013 deadline.
Employers may use the applicable DOL’s model Exchange notices to satisfy this requirement using the interactive form available online:
The FLSA section 18B requirement to provide a notice to employees of coverage options applies to employers to which the FLSA applies. In general, the FLSA applies to employers that employ one or more employees who are engaged in, or produce goods for, interstate commerce. For most firms, a test of not less than $500,000 in annual dollar volume of business applies.(4) The FLSA also specifically covers the following entities: hospitals; institutions primarily engaged in the care of the sick, the aged, mentally ill, or disabled who reside on the premises; schools for children who are mentally or physically disabled or gifted; preschools, elementary and secondary schools, and institutions of higher education; and federal, state and local government agencies.
The Department’s Wage and Hour Division provides guidance relating to the applicability of the FLSA in general including an internet compliance assistance tool to determine applicability of the FLSA.
Providing Notice to Employees
Employers must provide a notice of coverage options to each employee, regardless of plan enrollment status (if applicable) or of part-time or full-time status. Employers are not required to provide a separate notice to dependents or other individuals who are or may become eligible for coverage under the plan but who are not employees.
Form and Content of the Notice
Pursuant to the statute, the notice to inform employees of coverage options must include information regarding the existence of a new Marketplace as well as contact information and description of the services provided by a Marketplace. The notice must also inform the employee that the employee may be eligible for a premium tax credit under section 36B of the Code if the employee purchases a qualified health plan through the Marketplace; and a statement informing the employee that if the employee purchases a qualified health plan through the Marketplace, the employee may lose the employer contribution (if any) to any health benefits plan offered by the employer and that all or a portion of such contribution may be excusable from income for Federal income tax purposes.
To satisfy the content requirements for FLSA section 18B, model language is available on the Department’s website www.dol.gov/ebsa/healthreform. There is one model for employers who do not offer a health plan and another model for employers who offer a health plan or some or all employees. Employers may use one of these models, as applicable, or a modified version, provided the notice meets the content requirements described above.
In general, the Exchange notice must:
Inform employees about the existence of the Exchange and describe the services provided by the Exchange and the manner in which the employee may contact the Marketplace to request assistance;
Explain how employees may be eligible for a premium tax credit or a costsharing reduction if the employer’s plan does not meet certain requirements
Inform employees that if they purchase coverage through the Exchange, they may lose any employer contribution toward the cost of employer-provided coverage, and that all or a portion of this employer contribution may be excludable for federal income tax purposes; and
Include contact information for the Exchange and an explanation of appeal rights.
Who Must Receive a Notice?
Employers must provide the Exchange notice to each employee, regardless of plan enrollment status or of part-time or full-time status. Employers are not required to provide a separate notice to dependents or other individuals who are or may become eligible for coverage under the plan but who are not employees.
As was the case last year, insurers with medical loss ratios (MLRs) that were below the prescribed levels on their blocks of business must issue rebates to policyholders. Insurers must pay rebates owed on calendar year 2013 experience by August 1, 2014. The rules for calculating and distributing these rebates are largely the same this year as they were last year.
The guidance provided by the regulatory agencies on how employers should distribute rebates has been fairly general, so employers have some discretion as to how to calculate and distribute the employees’ share. These general principles apply:
Assuming both the employer and employees contribute to the cost of coverage, the rebate should be divided between the employer and the employees, based on the employer’s and employees’ relative share. Employers may divide the rebate in any reasonable manner — for example, the rebate could be divided evenly among the employees who receive it, or it may be divided based on the employee’s contribution for the level of coverage elected.Employers are not required to precisely determine each employee’s share of the rebate, and so do not need to perform special calculations for employees who only participated for part of the year, moved between tiers, etc.The employer may pay the rebate only to employees who participated in the plan in 2013 and are still participating, only to current participants (even though the rebate relates to 2013), or to those who participated in 2013, regardless whether they are currently participating.Insurers must send a notice to all employees who participated in the plan in 2013 stating that a rebate has been issued to the employer, so employers who choose to limit rebate payments to those who are currently participating should be prepared to explain why the rebate is only being paid to current participants. This might include the fact that since the rebate would be taxable income, the amount involved does not justify the administrative cost to locate former participants and issue a check.
The employer may pay the rebate in cash, use it for a premium holiday, or use it for benefit enhancements. The rebate must be applied or distributed within 90 days after it is received.A cash rebate is taxable income to the employee if it was paid with pre-tax dollars.A premium holiday should be completed within 90 days after the rebate is received (or the rebate needs to be deposited into a trust).Benefit enhancements include reduced copays or deductibles (which may not be practical due to the timing requirements) or wellness-type benefits that the employer would not have offered without the rebate, such as free flu shots, a health fair, a lunch and learn on nutrition or stress reduction, or a nurse line.
The employer should consider the practical aspects of providing a rebate in a particular form.Generally speaking, the larger the amount that would be due to an individual, the more effort the employer should make to directly benefit the person (either through a cash rebate or premium holiday). While benefit enhancements are permissible, a large rebate should be used to provide a direct benefit enhancement, such as a reduced co-pay, and not for a general benefit, such as flu shots.The agencies have not provided any details as to what amount is so small that it does not need to be returned to the employee. (Insurers are not required to issue a rebate check to individuals if the amount is less than $5.00.) A cash rebate is taxable income if the premium was paid with pre-tax dollars, so issuing a check that is very small after taxes should not be necessary. If an employer knows it costs it $2.00 to issue a check, issuing a rebate check for $1.00 should not be necessary However, an employer cannot simply keep the rebate if it determines that cash refunds are not practical — it will need to use the employee share of the rebate to provide a benefit enhancement or premium reduction.
Many plans now state how a rebate should be used. If the plan describes a method, that method must be followed.
The following Q and A provides additional details.
Q1. If an employer pays most of the premium, and its contribution far exceeds the rebate, can it just keep the rebate?
A1. With one exception, no. If participants paid part of the premium, the participants (as a whole) should get a pro rata share of the rebate. So, if the employer pays 80% of the premium, the employer must return 20% of the rebate to the participants.
The exception applies if employees paid a fixed dollar amount and the employer paid the balance of the costs. In that case, if the employer’s contribution equaled or exceeded the rebate, the employer could keep the entire rebate.
Q2. How does as an employer determine the percentage it can keep?
A2. The percentage of the premium paid by the employer and the percentage paid by employees should be calculated on a representative date, such as the first day of the plan year. If the relative shares changed during the calendar year because of a renewal, the percentages likely should be averaged. If contribution percentages changed during a year because of a change in demographics (e.g., virtually all new hires elected family coverage, for which the employer pays a smaller share), recalculating does not seem to be needed.
Q3. How does an employer determine the employer percentage if the employer contributes different percentages for different groups? For example, if the employer pays 80% of the cost of employee only coverage and 50% of the cost of dependent coverage.
A3. It is acceptable to look at the participant group as a whole, so an employer could use a blended contribution percentage. If the employer prefers to use different percentages for different classes, based on each classes’ actual contribution percentage, that is fine, but not required. An exception would be if the employer pays 100% of the cost of single coverage, and nothing toward dependent coverage. In that case, those with single coverage would have no “overpayment” to be returned, and the rebate probably should be limited to those with dependent coverage.
Q4. How should an employer distribute the participants’ shares of the rebate?
A4. The agencies have not provided detailed instructions on how to distribute rebates. The primary options are to pay the rebate in cash, use it to reduce future premiums in the current year (a “premium holiday”) or apply it to enhance benefits (e.g., moderating a planned increase in co-pays or the deductible or providing onsite, free flu shots to participants). The Department of Labor (DOL) recognizes that because of the administrative costs of cutting checks and the tax consequences that may follow a cash refund, it may make more sense to provide a premium holiday or to provide a benefit that otherwise would not have been offered. If the per head rebate is more than 90 days’ worth of premium, however, serious consideration should be given to a cash refund.
The DOL has interpreted ERISA to require that participant monies in private employer plans be put into a trust within 90 days after they are received. Very few insured plans operate through a trust, so it would be a burden to create a trust due to delays in dispensing the rebates. To avoid the 90 day rule, private plans should take steps to use or pay out the rebate within 90 days after it is received.
Q5. The rebate is based on last year’s results. Does an employer need to pay part of the rebate to last year’s participants?
A5. The DOL has not specifically addressed whether plans sponsored by private employers should or should not pay rebates to former participants. In similar situations the DOL has said that as long as the participant share is used to benefit the participant group as a whole employers do not need to specifically apportion the payment to specific individuals based on each individual’s contribution to the fund. (This is partly because it is so difficult to determine how much, exactly, any person did contribute, as participants come and go. Moreover, these MLR rebates are based on the block, not individual employer experience, so total precision seems impossible to achieve.)
Q6. Should a rebate be paid to COBRA participants?
A6. The agencies have not issued anything that specifically addresses this question. However, in many situations COBRA participants are considered plan participants, so the most conservative approach would be to include individuals currently on COBRA or in the COBRA election period in the rebate. If former active participants are given a rebate, a person who was a COBRA participant during that time also should receive a rebate. It should be acceptable to use the standard method of allocating the rebate amount (even though the individual may have paid the full cost of coverage).
Q7. The employer has two plans/policies. One received a rebate and one did not. How does it handle the rebate?
A7. Normally, the rebate is tied to the policy that received it, so only those covered by that policy would get a portion of the rebate. This is true even if those in the non-recipient policy say they would have elected the receiving policy if they’d known the rebate would impact the cost.
Q8. Are there issues under the Section 125 Plan if the employer gives a premium holiday?
A8. As long as the plan recognizes a change in cost as a qualifying event, the premium holiday would not be a problem under the Section 125 plan. Because the amount the employee expected to pay on a pre-tax basis is now smaller, their taxable wages will increase.
Q9. If the employer decides to give rebates in cash, are those amounts W-2 or 1099 income?
A9. If the premium was originally paid on a pre-tax basis, the refund is taxable wages, which would be handled like any wages (i.e., subject to income tax, FICA and FUTA) and reported on the person’s W-2. If the premium was paid with after tax dollars, there are no tax consequences (unless the employee claimed the premium as a deduction on their tax return).
See the IRS FAQ on taxation of rebates for more information: Medical Loss Ratio (MLR) FAQs
Q10. Is the employer required to provide an explanation of its rebate distribution method to participants?
A10. An explanation is not required, but it likely will reduce questions and misunderstandings over the long run, particularly since if a rebate is paid the insurer is required to send a notice to those who participated in the plan in 2013 stating that a rebate is being paid. The insurer notice that will be sent when the rebate is paid to the employer is available at:http://www.cms.gov/CCIIO/Resources/Files/Downloads/mlr-notice-2-group-markets-rebate-to-policyholder.pdf
An employer’s explanation does not need to be involved; something like this may be enough:
XYZ Company has determined that it is in the best interest of our participants to use the Medical Loss Ratio Rebate to provide a “premium holiday” for the month of September 2014. This means that your share of premium for September will be [zero] [reduced to $___]].
XYZ Company has determined that it is in the best interest of our participants to return your share of the rebate to you in cash. The rebate will be added to your ______, 2014 pay as taxable income.
Additionally, when making fiduciary decisions under ERISA (which is what a decision about applying participant monies is for a private employer’s plan), the process is just as important as the result. Therefore, it would be a good idea to do a short memo to file explaining the basic method used and why it is used.
Q11. What can the employer do with its share of the rebate?
A11. Unless the insurance policy is part of a trust, the employer can use its share of the rebate however it sees fit. If the policy is in a trust, the entire rebate — both the employer’s and employees’ share — must be used to benefit plan participants (through reduced contributions or enhanced benefits).
Q12. Are grandfathered plans eligible for rebates?
Q13. Are self-funded plans eligible for rebates?
Q14. How are rebates determined?
A14. Medical loss ratios (MLRs) are based on the cost of claims and health care quality improvements as a percentage of total premium (federal taxes and assessments are excluded from the premium). All of the insurer’s policies in a market, in each state, are combined when calculating its MLR. A policy issued in the large group market is eligible for a rebate if its MLR is less than 85%. A policy in the small group or individual market is eligible for a rebate if its MLR is less than 80%.
Q15. If the employer has employees in several states, how is the rebate determined?
A15. The rebate is based on the state the policy was issued in It should be shared with all participants, regardless where the participant lives.
This information is general and is provided for educational purposes only. It reflects UBA’s understanding of the available guidance as of the date shown and is subject to change. It is not intended to provide legal advice.
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