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Copyright Nondiscrimination Rules for Insured Health Plans and Latest Guidance regarding “Grandfathered” Plans Presented by: Robert Browning, Esq. and Chadron Patton, Esq.

Copyright Nondiscrimination Rules - Overview  Section 105(h) and self-insured plans  What does it prohibit?  What is the consequence of a violation?  Applying 105(h) to fully-insured plans  What plans are subject to the rule?  What aspects of Section 105(h) apply?  What is the consequence of a violation?  What plans/arrangements are most at risk?

Copyright Code Section 105  Code Section 105 – employees are not taxed on the benefits they (or their dependents) receive under employer- sponsored health plans where “premiums” are paid by employer or paid with pre-tax employee contributions via 125 plan  Section 105 is not applicable if premiums are paid with employee after-tax amounts  Section 105(h) – taxes some or all of the benefits paid to “highly compensated individuals” in “discriminatory” self-insured plans

Copyright Section 105(h) – “self-insured”  Existing Section 105(h) nondiscrimination rule applies to all “self-insured” medical reimbursement plans:  Plans are considered self-insured unless reimbursements are provided under a policy of accident or health insurance (or similar arrang.)  Even plans underwritten by an insurance policy are self-insured if they do not shift the risk to an unrelated third party Cost-plus or administrative-services-only policies are considered “self-insured” Stop-loss insurance does not count as “insurance”

Copyright Highly Compensated Individuals  Highly Compensated Individual (HCI):  One of 5 highest paid officers; or  10% or more owner (after attribution); or  One of the highest paid 25% of all EEs. For purposes of highest paid 25%, “all employees” includes the 5 highest paid officers, but excludes the “excludible” employees who do not participate in any self- insured plan of the employer

Copyright (h) – Excludible Employees  Employees with less than 3 yrs of service  Employees under age 25  Employees who normally work less than 35 hours/wk (if others work more), or any employee who works less than 25 hours/wk  Employees who normally work less than 9 months/year (if others work more), or any employee who works less than 7 months/yr  Union employees (if benefits bargained)  Non-resident aliens

Copyright (h) – Discrimination Tests  Self-insured plan must not discriminate in favor of “highly-compensated individuals” with respect to either:  Eligibility to participate; or  Benefits  If plan is discriminatory, HCIs will be taxed on some or all of the benefits they receive under the plan (i.e., no adverse consequence for the plan sponsor)

Copyright (h) – Eligibility Tests  Plan must “benefit”:  70 percent or more of all employees; or  80 percent or more of all employees who are eligible to benefit, if 70 percent or more of all employees are eligible to benefit; or  a “nondiscriminatory classification” of employees (based on rules similar to the 410(b) coverage test for qualified plans)  “Excludible Employees” excluded from tests:  But only if excluded from plan?  But only if no similar employee is included?

Copyright Nondiscriminatory Classification Test  Based on Treas. Reg. Section 1.410(b)-4  Two-part test:  Must be a “reasonable” classification of employees based on objective business criteria  Must cover a “nondiscriminatory” percentage of non-HCIs (as compared to the % of HCIs): “Safe-harbor” ratio percentage; or “Non-safe-harbor” ratio percentage with favorable facts and circumstances  May pass with ratio percentages as low as 39% (safe-harbor) or 29% (non-safe harbor)

Copyright Eligibility Test - Example  Plan covers 10 physicians and 10 staff, but excludes 20 nurses and residents (assume physicians = HCIs and no excludables)  Plan does not benefit 70% of all EEs  Plan does not pass 80%/70% test  Plan’s ratio percentage is 33.3%, so it does not pass “safe-harbor” test  May or may not pass “non-safe-harbor” test, depending on facts and circumstances

Copyright Benefits Test  105(h) Benefits Test – requires that all benefits provided to any participant who is an HCI must also be provided to all participants who are non-HCIs  Also applies to benefits provided to spouses/dependents of participants  Applies to benefits subject to reimbursement (not actual benefits paid)

Copyright Discriminatory Benefits  Better coverage (more covered conditions, procedures, drugs, etc)  Lower copay, deductible, out-of-pocket limits, etc.  Lower cost (employee’s share)  Longer coverage (employer-paid COBRA, etc)  Exception for diagnostic tests (executive physicals, etc.)

Copyright (h) - Special Rules  HCIs are determined, and eligibility is tested, as if the “employer” includes all members of the “controlled group,” as determined under Code Section 414  Employer may designate (and test) two or more plans as a single plan  Retired employees may be tested separately

Copyright Consequences  If a self-insured plan violates the 105(h) eligibility test, a percentage of the benefits paid to HCIs become taxable (based on the ratio of the total benefits paid to HCIs vs. the total benefits paid to all EEs under the plan)  If a self-insured plan violates the 105(h) benefits test, then all discriminatory benefits paid to HCIs are taxable  “Benefits” means actual reimbursements (not the premiums paid for coverage)

Copyright Health Care Reform  Extends the “concept” of the 105(h) non-discrimination rule to insured group health plans, but with two important differences:  Nondiscrimination requirements do not apply to all insured plans;  Consequences of violation fall on the plan sponsor, not the HCI(s)

Copyright Plans Subject to New Nondiscrimination Rule  Rules similar to those under Section 105(h) now apply to fully insured group health plans, but do not apply to:  Excepted benefits – e.g., dental, vision, long- term care, accident or disability income, specific disease/illness coverage, Medicare supplemental coverage -- if offered separately from group health plan coverage  Retiree-only plans  “Grandfathered” plans

Copyright Applying 105(h) to Insured Plans  Under health care reform, for plan years beginning on or after Sept. 23, 2010, insured plans that are not grandfathered must satisfy the 105(h) discrimination tests (both the eligibility test and the benefits test)  HCI is defined the same way  Employer means the entire controlled group

Copyright Consequences – Insured Plans  Insured plans that are subject to 105(h), but fail either the eligibility or the benefits test, are subject to:  Section 4980D excise tax = $100 per day per non-HCI discriminated against Limited exception for “small” employers (50 or less employees)  Civil action by participant to enjoin the discriminatory practice

Copyright Examples of Discrimination  Management-only health coverage  Better benefits (reduced premium or increased benefits) for management  Post-termination continuation coverage (including COBRA) for management or other HCIs only  Coverage provided to HCI as result of resolution of employment litigation

Copyright Avoiding Discrimination  Offer broad coverage, equal benefits, and equal cost  Switch to self-insured plan, and have HCIs pay for coverage with after-tax $  May need to gross-up for tax effects  Keep insured plans “grandfathered” as long as possible  Offer retiree coverage under separate plan  Limit discriminatory coverage to “excepted” benefits

Copyright “Grandfathering” Guidance  Overview  Health care reform provisions applicable to all plans  Additional provisions applicable to non-grandfathered plans  Loss of grandfathered status  Recent guidance

Copyright Overview  Insurers and plan sponsors must modify their plans/contracts to comply with significant new market reforms  The Affordable Care Act (“ACA”) "grandfathers" certain plans that were in existence on the date of enactment from some of the reform requirements  Effective the first plan year beginning on or after September 23, 2010

Copyright Overview  To maintain status as a grandfathered health plan, a group health plan or health insurance coverage must include a statement, in any plan materials provided to a participant or beneficiary describing the benefits provided under the plan or health insurance coverage, that the plan or coverage believes it is a grandfathered health plan.  Also, the plan or health insurance coverage must maintain records documenting the terms that were in effect on March 23, 2010, and any other documents necessary to verify, explain, or clarify its status as a grandfathered health plan.

Copyright Overview  For health insurance coverage maintained pursuant to a collective bargaining agreement ("CBA") that was ratified prior to March 23, 2010, the coverage is deemed to be grandfathered until the date on which the last of the CBAs in effect on March 23, 2010, terminates.  This special rule only applies to insured plans maintained pursuant to a CBA, not to self-funded collectively bargained plans.

Copyright Applicable Provisions- All Plans  Elimination of lifetime limits for “essential” benefits  Restrictions on annual limits for “essential” benefits  $750,000 for policy years beginning on or after September 23, 2010 but before September 23, 2011  $1.25 million for following policy years beginning before September 23, 2012  $2 million for following policy years beginning before January 1, 2014

Copyright Examples of “Essential” Benefits  Ambulatory patient services  Emergency services  Hospitalization  Maternity and newborn care  Mental health and substance abuse disorder benefits, including behavioral health treatments  Prescription drugs  Rehabilitative and habilitative services and devices  Laboratory services  Preventive and wellness services and chronic- disease management  Pediatric services, including oral and vision care

Copyright Potential “Essential” Benefits  Bariatric surgery and related treatments  Infertility treatments  Chiropractic care  Speech therapy  Physical therapy  Vision benefits  Applied behavioral therapy  Hearing aids  Acupuncture  Organ transplants  Hospice and palliative care  TMJ (temporomandibular joint disease)  Wigs

Copyright Applicable Provisions- All Plans  Preexisting condition exclusion prohibition for those under 19  Coverage of dependents to age 26 (for plan years prior to 2014, grandfathered plans do not have to provide coverage if the child is eligible for other employer coverage)  No rescission of coverage except in the event of fraud or intentional misrepresentation of material fact

Copyright Additional Provisions for “Non- grandfathered” Plans  Patient Protections. Non-grandfathered plans:  must permit each participant to designate any participating primary care provider who is available to accept such individual;  must permit a participant to designate a pediatrician as the primary care provider for a child; and  may not require a referral or preauthorization for obstetrical or gynecological care provided by a specialist in those areas.

Copyright Additional Provisions for “Non- grandfathered” Plans  Emergency Services. Must provide coverage for out-of-network emergency services at in-network levels.  Preventive health services. Must provide first-dollar coverage of certain preventive services with no deductible.  Coverage to age 26. Must provide coverage to age 26 regardless of whether child has other employer coverage.

Copyright Additional Provisions for “Non- grandfathered” Plans  Appeals process. Must have an effective independent review process for appeals of coverage determinations and claims.  Non-discrimination requirements for fully-insured plans. Fully-insured group health plans must satisfy Section 105(h) non-discrimination requirements.

Copyright Acceptable Changes to “Grandfathered” Plans  Premium increases (except for those that result in an impermissible decrease in employer contribution)  Appointment of a new third party administrator  Compliance with federal or state legal requirements  Voluntary compliance with the ACA

Copyright Loss of “Grandfathered” Status  Elimination of all or substantially all benefits to diagnose or treat a particular condition  Increase in a percentage cost-sharing requirement (e.g., raising an individual’s coinsurance requirement from 20% to 25%)  Increase in a deductible or out-of-pocket maximum by an amount that exceeds medical inflation plus 15 percentage points

Copyright Loss of “Grandfathered” Status  Increase in a co-payment by an amount that exceeds medical inflation plus 15 percentage points (or, if greater, $5 plus medical inflation)  Decrease in an employer's contribution rate towards the cost of coverage by more than 5 percentage points (e.g., previously covered 55% of cost and now cover 49%)  Imposition of annual limits on the dollar value of all benefits below specified amounts

Copyright Recent Guidance  The federal agencies’ general approach to implementation of health care reform will be compliance oriented, and will focus on assisting plans, issuers, and others acting in good faith, to comply with the law, rather than on imposing penalties.

Copyright Recent Guidance  Fully insured group health plans will not be treated as having lost grandfathered status due to a change in employer contribution rates (assuming the issuer is not aware of the change) if the issuer and plan sponsor complete the following actions:  Upon renewal, the issuer requires the plan sponsor to clearly indicate both its contribution rate for the new plan year and its rate as of March 23,  The issuer’s policies, certificates, or contracts of insurance clearly disclose that plan sponsors must notify the issuer if they change contribution rates during the plan year.  Multiemployer plans may follow similar steps and the same relief will apply unless or until the multiemployer plan knows that the contribution rate has changed.

Copyright Recent Guidance  Plan can make various changes without losing its grandfathered status, other than changes previously discussed under “Loss of ‘Grandfathered’ Status,” i.e., not every change will cause a loss of grandfathered status.

Copyright Recent Guidance  Plans with Multiple Benefit Options. Grandfather status is determined on a benefit package-by-benefit package basis. Therefore, if a plan has three options among which participants may choose, such as a point-of-service option, a preferred provider option, and a health maintenance option, the loss of grandfathered status under one benefit package would not affect the grandfather status of the other two.

Copyright Recent Guidance  Changes in Tiers of Coverage. If a plan eliminates or modifies any of the tiers of coverage it had on March 23, 2010 (e.g., changes from self-only and family to a multi-tiered structure of self-only, self- plus-one, self-plus-two, etc.), the employer contribution rate for any new tier would be tested by comparing it to the contribution rate for the corresponding tier in effect on March 23,  For example, if the employer contribution rate for the family tier on March 23, 2010 was 50%, the employer contribution rate for any new tier of coverage other than self-only could not be less than 45%.

Copyright Recent Guidance  A plan can add new coverage tiers for classes of individuals not previously covered under the plan without losing grandfather status, as long as it does not eliminate or modify a tier of coverage in existence on March 23, 2010.

Copyright Recent Guidance  Changes in Cost-Sharing. Each change in cost-sharing is tested separately and an increase in employee cost-sharing in even one category of services (e.g., such as a change in an office visit co-payment) will result in a loss of grandfather status if the increase exceeds the applicable standard.

Copyright Recent Guidance  Cost-Sharing. If a policy holder had an option under an individual health insurance policy to pay a reduced premium in exchange for higher cost sharing available on March 23, 2010, he/she can exercise the option after that date without affecting the plan's grandfather status.  Thus, the cost-sharing level that would apply under this option would be grandfathered as part of the policy in place on March 23, 2010, even if the level did not apply for the particular individual at that time.

Copyright Recent Guidance  Wellness Programs. Plans may continue to provide incentives for wellness programs but penalties under a wellness program, such as cost-sharing surcharges, “may implicate” the standards discussed earlier and should be examined carefully. In addition, Plans should take steps to ensure they do not run afoul of HIPAA nondiscrimination rules regarding penalties based on health status.

Copyright Recent Guidance  Disclosure Requirement for Grandfathered Plans. Plans can comply with the grandfathered disclosure requirement if they include the model disclosure language whenever a summary of the benefits under the plan is provided to participants and beneficiaries.

Copyright Recent Guidance  The interim final regulations, by their terms, provide that if an employer enters into a “new policy, certificate, or contract of insurance” after March 23, 2010, then the new policy, certificate, or contract is not a grandfathered health plan.  Regulators have said in two sets of FAQs that they will be addressing circumstances under which plans may change insurers without endangering their grandfathered plan status.

Copyright Contact Information Robert Browning Chadron Patton

This Employer Webinar Series program is presented by Spencer Fane Britt & Browne LLP in conjunction with United Benefit Advisors Kansas City   Omaha  Overland Park St. Louis  Jefferson City Thank you for your participation in the Employer Webinar Series. You may receive HRCI credit of 1.5 hours for your participation. To receive your HRCI credit information, obtain a recording, or to register for future presentations, contact your local UBA Member Firm.