Common Compliance Questions

Get the answers to commonly asked questions for the below listed by clicking here.

• HIPAA- Smoker Surcharge
• Cafeteria Plans -Health Flexible spending Account
• MSP Mandatory Reporting
• Controlled Groups
• Creditable Coverage under Medicare Part D
• Family and Medical Leave Act
• Health Savings Accounts
• ERISA
• Cafeteria plans
• COBRA

Health Reform Questions

Question 1 – “Free Standing” Health Reimbursement Arrangements

My client wants to establish a “free standing” Health Reimbursement Arrangement (“HRA”) for its employees for medical, dental and vision expenses incurred after December 31, 2011.  Under this plan, participants would be reimbursed up to $5,000 for medical, dental and vision expenses and/or premiums for individual insurance premiums.  Is it possible for an employer to sponsor such a plan considering the changes under health reform?

No, unless the employer amends the HRA to only reimburse dental and vision expenses and/or premiums.  See the discussion below:

The health care reform law prohibits group health plans from establishing “lifetime limits on the dollar value of benefits for any participant or beneficiary” for plan years beginning on or after September 23, 2010, as provided under PHSA §2711(a)(1)(A), For plan years beginning on or after September 23, 2010 and prior to January 1, 2014, the health care reform law allows “restricted annual limits” on essential health benefits, but for plan years beginning on or after January 1, 2014, no annual limits on essential health benefits are permitted.

HRAs are group health plans that provide reimbursements up to a maximum dollar amount for a coverage period and generally, though not always, allow unused amounts to be carried forward to increase the maximum reimbursement in subsequent coverage periods as provided in IRS Notice 2002-45, 2002-28 I.R.B. 93. In essence, then, HRAs are account-based benefits which by their very nature impose upper limits on the dollar value of benefits.

There are three exemptions for HRAs from these annual limit requirements.  These include:

• Retiree-only HRAs, as provided in 75 Fed. Reg. 34537,
• Those HRAs that provide excepted benefits under the HIPAA portability rules, as provided in Treas. Reg. §54.9831-1(c); DOL Reg. §2590.732(c); and 45 CFR §146.145(c).  HRAs that provide only limited-scope dental or vision benefits will not be subject to the annual limit rules.
• HRAs that are integrated with other coverage as part of a (more comprehensive) group health plan will not violate the annual limit rules so long as the other coverage on its own would comply, as provided in Preamble to Interim Final Rules Relating to Preexisting Condition Exclusions, Lifetime and Annual Limits, Rescissions, and Patient Protections Under PPACA, 75 Fed. Reg. 37188, 37190.

For any HRA that does not come under one of the above exemptions, there are offer two ways to obtain a temporary exemption from the annual limit restrictions: by applying for a waiver or by satisfying the requirements of a class exemption. The window of opportunity for filing waiver applications closed on September 22, 2011; and both the waiver and class exemption apply only to HRAs that were in effect prior to September 23, 2010.  This is provided in the CCIIO Supplemental Guidance (CCIIO 2011-1D): Concluding the Annual Limit Waiver Application Process; CCIIO Supplemental Guidance (CCIIO 2011-1E): Exemption for Health Reimbursement Arrangements that are Subject to PHS Act Section 2711.

A copy of each guidance can be obtained by clicking on the link below:

CCIIO Supplemental Guidance (CCIIO 2011-1D): Concluding the Annual Limit Waiver Application Process:

http://cciio.cms.gov/resources/files/06162011_annual_limit_guidance_2011-2012_final.pdf

CCIIO Supplemental Guidance (CCIIO 2011-1E): Exemption for Health Reimbursement Arrangements that are Subject to PHS Act Section 2711:

http://cciio.cms.gov/resources/files/final_hra_guidance_20110819.pdf

For the purpose of the waiver and the class exemption, the term “in effect” is not defined, but it presumably means the HRA had been formally adopted (and perhaps even providing benefits or accumulating account balances) prior to September 23, 2010. The exemption clearly does not apply to an HRA that was created significantly after that date—for example, a company that designs an HRA in 2011 to be effective January 1, 2012.

In order for any “free standing” HRAs adopted prior to September 23, 2010 to rely on the exemption, they must comply with the record retention and annual notice requirements that apply under the waiver program (which are discussed above). This is true even though that waiver program may not be available to the HRA (e.g., because the HRA did not submit an application prior to September 22, 2011).

Question 2 – Form W-2 Reporting

In meeting the new Form W-2 Reporting requirements, what coverages provided by the employer to employees must be reported?

The Form W-2 reporting requirement applies only to “applicable employer-sponsored coverage,” a term that generally includes any employer-provided group health plan coverage under an insured or self-insured health plan that is excludable from the employee’s gross income under Code § 106, or that would be excludable if it were paid for by the employer. It is subject to numerous exceptions, including exceptions for:

• any coverage for long-term care;
• any coverage (whether through insurance or otherwise) described in Code § 9832(c)(1), which includes accident and disability coverage, but no exception applies for coverage for on-site medical clinics;
• certain stand-alone vision or dental coverage (as discussed below); and
• any coverage described in Code § 9832(c)(3) (i.e., coverage only for a specified disease or illness and hospital indemnity or other fixed indemnity insurance) where such coverage is funded by the employee on an after-tax basis for which a deduction under Code § 162(l) is not allowable as provided in PPACA, Pub. L. No. 111-148, § 9002 (2010) (cross-referencing Code § 4980I(d)(1), which was added by PPACA, Pub. L. No. 111-148, § 9001 (2010)).

For purposes of determining whether a specific arrangement is a group health plan, employers may rely upon a good faith application of a reasonable interpretation of the statutory provisions and applicable guidance, including the definition under the IRS COBRA regulations as provided in Treas. Reg. § 54.4980B-2, Q/A-1(a). Thus, any coverage subject to the COBRA regulations’ definition of group health plan would, in the absence of an exception or transition rule, be subject to the W-2 reporting requirement, as provided in IRS Notice 2011-28, 2011-16 I.R.B. 656, Q/A-13.

Dental and Vision Coverage

Applicable employer-sponsored coverage subject to the reporting requirement does not include stand-alone, insured dental, or vision coverage, as provided in  Code § 4980I(d)(1)(B). Based on a plain reading of the statutory language, it appears that the cost of insured dental or vision coverage which is offered “under a separate policy, certificate, or contract of insurance” is excluded from the aggregate cost of employer-sponsored coverage to be reported on the employee’s Form W-2, as provided in Code § 4980I(d)(1)(B)(ii) By contrast, under the literal language of the statute, the cost of self-insured dental or vision coverage (whether a limited-scope stand-alone benefit or bundled with medical) appears to be included on the employee’s Form W-2. Interim guidance issued in IRS Notice 2011-28 conforms the treatment of self-insured and fully insured dental/vision plans by providing transition relief.

Transition Relief for Stand-Alone Dental or Vision Coverage (Whether Insured or Self-Insured).

IRS Notice 2011-28 provides transition relief by not requiring employers to include the cost of coverage under a dental or vision plan (provided on an insured or self-insured basis) if such plan is not integrated into a group health plan providing additional health care coverage subject to the reporting requirement, as provided under IRS Notice 2011-28, 2011-16 I.R.B. 656, Q/A-20.

Health Savings Account (HSA) and Archer MSA Contributions

HSA and Archer MSA contributions are included in the definition of applicable employer-sponsored coverage, but they are explicitly excluded from the W-2 reporting obligation, as provided in Code § 4980I(d)(2)(C) A special rule applies to health FSAs .

Special Rules for Health FSA Contributions

Health FSA contributions are included in the definition of applicable employer-sponsored coverage, but special rules apply with respect to the W-2 reporting obligation, as provided in Code § 4980I(d)(2)(B). The amount of any salary reduction election to a health FSA is excluded from the aggregate reportable cost and is not reported on Form W-2, as provided in IRS Notice 2011-28, 2011-16 I.R.B. 656, Q/A-16. Where the health FSA is offered through a cafeteria plan under which optional employer flex credits (expressed as a fixed amount, or as formula such as matching salary reduction) can be applied to the health FSA, special rules must be applied to determine whether any amount must be included in the aggregate reportable cost as follows:

• If the amount of the employee’s salary reduction (for all qualified benefits) equals or exceeds the amount of the health FSA for a plan year, then the amount of the employee’s health FSA is not included in the aggregate reportable cost.
• If the amount of the employee’s health FSA for a plan year exceeds the employee’s salary reduction for that plan year, then the amount of the employee’s health FSA minus the employee’s salary reduction election for the health FSA must be included in the aggregate reportable cost.

Coverage Under a Health Reimbursement Arrangements (HRA)

Under transition relief provided in IRS Notice 2011-28, 2011-16 I.R.B. 656, Q/A-18, an employer is not required to include the cost of coverage under an HRA in determining the aggregate reportable cost. Thus, if the only applicable employer-sponsored coverage provided to an employee is an HRA, no reporting is required on the Form W-2.

Transition Relief for Certain Employers and Coverage

For instances in which transition relief is provided under IRS Notice 2011-28, the IRS has indicated that future guidance may prospectively limit the availability of some or all of this transition relief—but it will not apply earlier than January 1 of the calendar year beginning at least six months after it is issued and will not limit the availability of the transition relief for the 2012 Forms W-2. Transition relief is available for the following:

• employers filing fewer than 250 Forms W-2,
• certain Forms W-2 furnished to terminated employees before the end of the year,
• relief with respect to multiemployer plans,
• HRAs,
• certain dental and vision plans, and
• self-insured plans of employers not subject to COBRA continuation coverage or similar requirements.

A copy of IRS Notice 2011-28 can be obtained by clicking on the link below:

http://www.irs.gov/pub/irs-drop/n-11-28.pdf

 

Question 3 – Wellness Programs

One of my clients sponsors a wellness program.  If an employee participates in the program, his or her group medical coverage premium will be reduced from 10% to 15%.  If for any year, an employee does not qualify for the discount under the wellness program and his or her premium increases 10% to 15%, will such an increase affect the grandfathered status of the employer’s group medical plan?

Yes. The various federal agencies caution that penalties related to wellness programs (such as cost-sharing surcharges) should be examined carefully as they could jeopardize the plan’s grandfather status-for example, by decreasing the employer’s contribution percentage by more than 5 percentage points below the contribution rate on March 23, 2010.

Question 4 – Form W-2 Reporting

Are all employers required to report “applicable employer -sponsored coverage” on an employee’s Form W-2 for 2012?

No. All employers that provide “applicable employer-sponsored coverage” during a calendar year are subject to the reporting requirement-including federal, state, and local government entities (a few exceptions apply, such as federally recognized Indian tribal governments).

For 2012 Forms W-2 and until the issuance of further guidance, the IRS indicated in Notice 2011-28, Q/A-3 that an employer is not subject to the reporting requirement for any calendar year if the employer was required to file fewer than 250 Forms W-2 for the preceding calendar year. Therefore, if an employer files fewer than 250 Forms W-2 in 2011, the employer would not be subject to the reporting requirement for the 2012 calendar year.

Question 5 – Summary of Benefits and Coverage

The health care reform law  expands ERISA’s disclosure requirements by requiring that a four-page “summary of benefits and coverage” (“SBC”) be provided to applicants and enrollees before enrollment or re-enrollment. The SBC must accurately describe the “benefits and coverage under the applicable plan or coverage.”  The SBC applies in addition to ERISA’s SPD and SMM requirements.  Although effective for plan years beginning on or after September 23, 2010,  this requirement contains a special distribution deadline of 24 months after the enactment of PPACA (March 23, 2010).  Last week, new proposed regulations were released and provided important new guidance and clarification. The following reviews are two important questions.

Must the SBC be provided 60 days before the beginning of each renewal?

No. Individuals enrolled in a health plan must be notified of any significant changes to the terms of coverage reflected in the SBC at least 60 days prior to the effective date of the change. This timing applies only to changes that become effective during the plan or policy year but not to changes at renewal (the start of the new plan or policy year).

 

So if this rule does not apply, when must the SBC be provided?

In general, the proposed regulations direct that the SBC be provided when a plan or individual is comparing health coverage options. If the information in the SBC changes between the time of application, when the coverage is offered, and when a policy is issued (often the case only for individual market coverage), the proposal would require that an updated SBC be provided. If the information is unchanged, the SBC does not need to be provided again, except upon request.

An insurer also must provide a new SBC if and when the policy, certificate, or contract or policy is renewed or reissued. In the case of renewal or reissuance, if the insurer requires written application materials for renewal (in either paper or electronic form), it must provide the SBC no later than the date the materials are distributed. If renewal or reissuance is automatic, the SBC must be provided no later than 30 days prior to the first day of the new policy year.

Question 6 – Tax Free health Coverage

Under the Health Care Reform laws, which individuals qualify for tax free health coverage?

The Health Care Reform laws expanded the group of individuals who can receive accident or health benefits on a tax-free basis to include children “of the taxpayer” who have not attained age 27 as of the end of the taxable year, as provided in Code Section 105(b). This change means that, in addition to the employee and his or her spouse, the following individuals may now receive employer-provided health coverage on a tax-free basis:

• any child of the employee, until the end of the year the child turns age 26;
• an employee’s qualifying child; and
• an employee’s qualifying relative.

For purposes of this exclusion, a “child” means “a son, daughter, stepson, or stepdaughter of the taxpayer, or an eligible foster child of the taxpayer, “as provided under Code §152(f)(1) The terms “qualifying child” and “qualifying relative” are defined using the modified Code §105(b) definition.

Please remember that the tax-treatment provisions apply to all employer-provided accident or health coverage, including plans that provide only HIPAA-excepted benefits, such as limited-scope dental or vision benefits and most health FSAs.

Special Note: Under these new rules, coverage for a child of a civil union spouse or domestic partner will only be tax free if he or she meets the requirements for being a qualifying relative. In many situations, the child of a civil union spouse or domestic partner may not be the “child” or the “qualifying child” of the employee.

Further Note:  For distributions from  a Health Savings Account (HSA) to be tax free for account holder, the medical expense must be incurred by an individual who meets the requirements for being either a “qualifying child” or a “qualifying relative,” as defined using the modified Code §105(b) definition. Code §223 was not amended by the Health Care Reform laws to add a provision allowing expenses for children under age 27 who are not Code §105(b) dependents, so unlike health FSAs, HRAs, and HDHPs, HSAs cannot pay the expenses of such children tax-free.

INSTRUCTIONS HOW TO COMPLETE PART I OF FORM 8889 FOR 2011

Introduction
Every year, I receive a number of questions regarding how to complete Part I of Form 8889. The reason for this is that the instructions provided by the Internal Revenue Service for completing Form 8889 are very complex and unclear. To assist, the following shows how to complete Form 8889 in 27 different situations for 2011.
The discussion below is for example purposes only. Individuals should be advised to seek professional tax assistance in the completion of Form 8889 or any other tax return.

Download the pdf HERE.

Free Webinar: Illinois Civil Union Law

This webinar will review how the new Illinois Civil Union Law impacts employers. My presentation will be approximately 45 minutes in length with a question and answer period to follow.

In a series of questions and answers, the webinar will cover the following topics:

• Who may enter a Civil Union and how,
• What new rights a Civil Union Spouse has under the law,
• How a Civil Union Spouse and family must be treated under an employer’s health and welfare plans and qualified retirement plans,
• The state and federal tax implications of the new law,
• Steps an employer must take to comply with the new law,
• Whether “Church Plans” have to comply,
• Developments on the federal level that may affect the new law and
• Any unanswered questions.

Learn what you need to do to prepare for the new law.

The webinar is presented by Larry Grudzien, Attorney at Law.

AN EMPLOYER’S GUIDE TO HEALTH SAVINGS ACCOUNTS (HSAs) Updated May 2011

The following provides you, as an employer, with information about Health Savings Accounts (“HSAs”) under Internal Revenue Code (“Code”) Section 223. You should read this explanation to evaluate whether HSAs may be used either as an alternative to, or in addition to, health flexible spending accounts (“Health FSAs”) under Code Section 125 or Health Reimbursement Arrangements (“HRAs”) under Code Section 105(h).

To fully understand the requirements of these new accounts, the following discusses their terms and compares their advantages and disadvantages over Health FSAs and HRAs in a question and answer format. In addition, a chart comparing both Health FSAs and HRAs with HSAs is included at the end of this explanation.

It is important to remember that this explanation is not intended to serve as a substitute for the advice of your lawyer, accountant, or other personal tax or financial advisor.

Click Here to Download the whole Document…

INSTRUCTIONS HOW TO COMPLETE PART I OF FORM 8889 FOR 2010

Every year, I receive a number of questions regarding how to complete Part I of Form 8889. The reason for this is that the instructions to Form 8889 are very complex and unclear. To assist, the following shows how to complete Form 8889 in 27 different situations for 2010. I have added four (4) situations this year. They are provided at the end as situations XXIV, XXV, XXVI and XXVII.
The discussion below is for example purposes only. Individuals should be advised to seek professional tax assistance in the completion of Form 8889 or any other tax return.

Click here to download the PDF file.

Worksheet for Code § 105(h) Nondiscrimination Tests Now Available

Introduction

For Plan Years beginning after September 23, 2010, nongrandfathered insured health plans must pass the nondiscrimination tests under Code Section 105(h) or the employer may be penalized. These tests include a Benefits Test and an Eligibility Test.

In order to conduct these tests, the employer must collect information regarding the insured health plans offered to employees, individuals employed. employees covered, the details of various plan features, employees excluded from coverage and the businesses included in its controlled group.

Code Section 105(h) Nondiscrimination Testing Worksheet

To assist in collecting all of the above information and conducting the Benefits Test and the Eligibility Test, I have created a nine page worksheet that creates a guide in what information is needed and how to conduct the tests. It also provides step by step directions with a series of questions and answers.

The completion of this Worksheet is important because it provides evidence of the completion of the tests in case of an IRS audit. It also provides an early warning of any problems in passing the tests.

This worksheet will be updated at no cost when the IRS provides any new guidance. In addition, if you order the worksheet, I will answer any questions.

How do I order?
Call me at 708-717-9638 and pay by credit card.
OR
Just send me a check for $149 to:
Larry Grudzien
Attorney at Law
708 So. Kenilworth Ave.
Oak Park, IL 60304

Did you miss the Webinar? Click her to view it now!

Free Webinar “New Nondiscrimination Rules for Insured Health Plans under Health Care Reform”

I conducted a free Webinar on December 14 to introduce the nondiscrimination rules that apply to nongrandfathered insured plans under Code Section 105(h). This webinar is be approximately 1 hour in length.

From this Webinar, you will learn:

• When a health plan will lose grandfathered status and the new nondiscrimination rules apply,
• What policies will cause an employer’s health plan to violate the rules,
• What nondiscrimination tests will apply,
• Which employees are in the “prohibited group,”
• What employees can be excluded from the tests,
• Which plans must be tested, and
• What are the consequences for failing the tests for employers.

After this webinar, you will able to advise your employer and/or clients in how to prepare for these changes.

You can purchase the Worksheet for Code § 105(h) Nondiscrimination Tests by clicking here.

DEPARTMENTS OF TREASURY, LABOR AND HEALTH AND HUMAN SERVICES RELEASE INTERIM FINAL REGULATIONS ON INTERNAL CLAIMS AND APPEALS AND EXTERNAL REVIEW PROCESSES

On July 23, 2010, the Departments of the Treasury, Labor (“DOL”) and Health and Human Services (“HHS”) released interim final regulations for group health plans and health insurance coverage relating to internal claims and appeals and external review processes under the Patient Protection and Affordable Care Act (“Affordable Care Act”).  These regulations are under Section 9815(a)(1) of the Internal Revenue Code (“Code”), Section 715(a)(1) of the Employee Retirement Income Security Act (“ERISA”) and Section XXVII of the Public Health Service Act (26 CFR 54.9815-2719T, 29 CFR 2590.715-27109 and 45 CFR 147.136).  The following will summarize the provisions of these regulations.

Introduction

Group health plans and health insurance companies must to establish internal claims appeal and external review procedures. They must at a minimum:

• Establish an internal claims appeal process; provide notice to enrollees “in a culturally and linguistically appropriate manner” of the availability of internal and external appeals procedures and the availability of the office of health insurance consumer assistance or ombudsman to assist the enrollee with the claims procedures (which office or ombudsman must be established by the states);

• Allow the enrollee to review the enrollee’s file and present evidence and testimony as a part of the appeals process; and

• Allow the enrollee to continue to receive health coverage pending the outcome of the appeals process.

To establish an external review process, group health plans and insurance companies must comply with any applicable state external review process or implement an effective external review process that meets minimum standards to be established by the Secretary.

These requirements are in addition to any ERISA claims procedures, although the existence of ERISA claims procedures may be used to establish the existence of an internal claims appeal process.

This provision is effective for plan years beginning on and after September 23, 2010 and does not apply to grandfathered health plans.

Internal Claims and Appeals Process

All plans and insurance companies are required to comply with the 2000 claims and appeals regulations under Section 503 of ERISA, including insurance companies not otherwise subject to ERISA.  The new regulations impose six additional requirements that group insured and self-insured plans (including groups not covered by ERISA) must comply with, in addition to the existing DOL ERISA regulations:

• It extends the internal appeals process to cover rescissions as well as adverse benefit determinations.  An adverse benefit determination eligible for internal claims and appeals processes under these regulations includes a denial of, reduction of, termination of, or failure to provide or make a payment for a benefit, including the following:

• • A determination of an individual’s eligibility to participate in a plan or health insurance coverage;

• • A determination that a benefit is not a covered benefit;

• • The imposition of a preexisting condition exclusion, source-of-injury exclusion, network exclusion, or other limitation on otherwise covered benefits; or

• • A determination that a benefit is experimental, investigational, or not medically necessary or appropriate.

• It requires plans or insurance companies to notify members of determinations in urgent care claims within 24 hours rather than the 72 hours provided for in the DOL regulations.

• Plans or insurance companies must provide claimants, without charge, any new or additional information relied upon or generated by the plan as soon as possible and far enough in advance of a determination to allow an opportunity to respond.  If plans or insurance companies make an adverse determination on a new or additional rationale, they also must provide this to the claimant in time to allow a response.

• Plans and insurance companies must ensure that internal reviewers do not have a conflict of interest.  In particular, the rule prohibits hiring, compensation, terminations, or promotion of claims adjudicators or medical experts based on the likelihood that they will deny benefits.

• Plans and insurance companies must provide culturally and linguistically appropriate notices as well as detailed information on diagnosis, treatment, and denial codes, and the meaning of the codes, so that claimants can understand which claim was denied and why.  The notice must explain the standard applied in the denial and inform the claimant of the availability of internal and external appeals and how to contact the consumer assistance or ombudsman office for assistance.  The DOL and HHS will issue model notices.  Model notices that can be used to satisfy all the notice requirements under these interim final regulations will be made available in the future at http://www.dol.gov/ebsa and http://www.hhs.gov/ociio/.

• If plans or insurance companies fail to strictly adhere to the requirements of the process, the claimant may proceed to an external appeal or judicial review, even if the error was minor and the plan or insurer substantially complied with the requirements.

Application to Individual Health Plans

Individual health plans must comply with the same rules, plus three separate requirements.

• The internal appeals process also covers initial eligibility determinations, including preexisting conditions denials.

• Only one level of internal appeal is permitted, as compared to group plans where the DOL rules permit two levels of internal appeals.

• Individual health insurers must maintain records of claims and appeals for six years.  They must make these records available for examination upon request and without charge to regulators.

External Review

Plans and insurance companies must comply with either a state external review process or the federal external review process.  If a state has in place an external review process offering at least as much protection as the NAIC Model Act, an insurance company must comply with the state law.  Plans and insurance companies not subject to state law (self-insured employee benefit plans), or located in states without external review laws as protective as the NAIC Model Act, must comply with a federal external review process yet to be established.

For health insurance coverage, if a state external review process includes, at a minimum, the consumer protections in the NAIC Uniform Model Act in place on July 23, 2010, then the issuer must comply with the applicable state external review process and not with the federal external review process.  In such a case, to the extent that benefits under a group health plan are provided through health insurance coverage, the issuer is required to satisfy the obligation to provide an external review process, so the plan itself is not required to comply with either the state external review process or the federal external review process.

These regulations do not preclude a state external review process from applying to and being binding on a self-insured group health plan under some circumstances.

While the preemption provisions of ERISA ordinarily would prevent a state external review process from applying directly to an ERISA plan, ERISA preemption does not prevent a state external review process from applying to some self-insured plans, such as nonfederal governmental plans and church plans not covered by ERISA preemption, and multiple employer welfare arrangements, which can be subject to both ERISA and state insurance laws.  A state external review process could apply to such plans if the process includes, at a minimum, the consumer protections in the NAIC Uniform Model Act.

Any plan not subject to a state external review process must comply with the federal external review process.

These regulations set forth the standards that would apply to claimants, plans, and issuers under this federal external review process, and the substantive standards that would be applied under this process, which are similar to a state external review process.  They also provide that the federal external review process, like the state external review process, will provide for expedited external review and additional consumer protections with respect to external review for claims involving experimental or investigational treatment.

These requirements do not apply to grandfathered health plans.  How non-grandfathered self-insured group health plans may comply or be brought into compliance with the requirements of the new federal external review process will be addressed in future “sub-regulatory guidance.”

For a state external review to apply instead of the federal process, the state external review process must include the following elements from the NAIC Uniform Model Act:

• Provide for the external review of adverse benefit determinations that are based on medical necessity, appropriateness, health care setting, level of care, or effectiveness of a covered benefit.

• Require issuers to provide effective written notice to claimants of their rights.

• Make exhaustion of internal review unnecessary if: the issuer has waived the exhaustion requirement, the claimant has exhausted the internal claims and appeals process under applicable law, or the claimant has applied for expedited external review.

• Provide that the issuer must pay the cost of an independent review organization (“IRO”) for conducting the external review.

• Not impose a restriction on the minimum dollar amount of a claim for it to be eligible for external review (for example, a $500 minimum claims threshold).

• Allow at least four months after the receipt of a notice of an adverse benefit determination or final internal adverse benefit determination for a request for an external review to be filed.

• Provide that an IRO will be assigned on a random basis or another method of assignment that assures the independence and impartiality of the assignment process.

• Provide for maintenance of a list of approved independent review organizations qualified to conduct the review based on the nature of the health care service that is the subject of the review.

• Provide that any approved IRO has no conflicts of interest that will influence its independence.

• Allow the claimant to submit to the IRO in writing additional information that the IRO must consider when conducting the external review and require that the claimant is notified of such right to do so.

• Provide that the decision is binding on the plan or issuer, as well as the claimant, except to the extent that other remedies are available under state or federal law.

• Provide that, for standard external review, within no more than 45 days after the receipt of the request for external review by the IRO, the IRO must provide written notice to the issuer and the claimant of its decision to uphold or reverse the adverse benefit determination.

• Provide for an expedited external review in certain circumstances and, in such cases, the state process must provide notice of the decision as expeditiously as possible, but not later than 72 hours after the receipt of the request.

• Require that issuers include a description of the external review process in the summary plan description, policy, certificate, membership booklet, outline of coverage, or other evidence of coverage it provides to claimants.

• Follow procedures for external review of adverse benefit determinations involving experimental or investigational treatment, substantially similar to what is set forth in the NAIC Uniform Model Act.

Existing state external review requirements that do not contain these essential elements will govern plans and insurers for a transitional period until the first plan year beginning after July 1, 2011, after which the federal process will govern unless the state updates its statute to comply.  As required by the statute, the various Departments will establish an external review process similar to the state process to govern self-insured plans and insured plans not governed by state law.

These regulations are effective on September 21, 2010 (effective 60 days after publication in the Federal Register).  However, the rules generally apply to group health plans and group health insurance issuers for plan years beginning on or after September 23, 2010.

DEPARTMENTS OF TREASURY, LABOR AND HEALTH AND HUMAN SERVICES RELEASED INTERIM FINAL REGULATIONS ON GRANDFATHER STATUS

On June 14, 2010, the Departments of the Treasury, Labor and Health and Human Services released interim final regulations for group health plans and health insurance coverage relating to status as a grandfathered health plan under the Patient Protection and Affordable Care Act (“Affordable Care Act”).  These regulations are under Section 9815(a)(1) of the Internal Revenue Code (“Code”), Section 715(a)(1) of the Employee Retirement Income Security Act (“ERISA”) and Section XXVII of the Public Health Service Act (26 CFR 54.9815-1251, 29 CFR 2590.715-1251, 45 CFR 147.140).  These regulations outline:

• what group health plans and individual health plans are grandfathered;
• what changes under health reform apply to grandfathered plans;
• what changes under health reform do not apply to grandfathered plans;
• what changes a plan sponsor or an insurance company can make to a health plan and still maintain grandfathered status;
• what changes a plan sponsor or an insurance company can make that will cause a health plan to lose its grandfathered status;
• what disclosure and record retention requirements must a plan sponsor or an insurance company meet to retain its grandfather status for health plans;
• what relief a plan sponsor or insurance company can have if they either made changes to its health plans effective after March 23, 2010 but made them before March 23, 2010 or made changes after March 23, 2010 but before the publication of these regulations; and
• how the grandfather status rules apply to collectively bargained plans.

Q-1: What is a grandfathered health plan?

A-1: A grandfathered group health plan is a group or individual plan in which an individual was enrolled on March 23, 2010. A grandfathered plan can be a single employer plan, a multi-employer plan, or a multiple employer plan. It can also be an insured or a self-insured arrangement.

Q-2: Are all group medical plans that covered employees as of March 23, 2010 grandfathered?

A-2: Grandfathering applies to all group health plans that are welfare benefit plans under ERISA section 3(1) and all health insurance coverage to the extent that the plan or coverage provides medical care to employees and their dependents through insurance, reimbursement, or otherwise, even if coverage is offered through a medical service policy or an HMO offered by a health insurance issuer. The rules under the regulations apply separately to each benefit package made available under a group health plan or health insurance coverage.

Q-3: What tax reform changes apply to grandfather plans?

A-3: Grandfathered Plans need to comply with the following. All provisions are effective on the first renewal date after September 23, 2010, except where noted.

• Coverage of Dependents to Age 26: Fully-insured and self-funded health plans that offer dependent coverage must permit children to stay on family policies until age 26 if the dependent is not eligible for employer coverage. (Prior to 2014, this will only apply to those dependents who cannot secure employer-sponsored coverage). Coverage provided to these dependents will not result in imputed income to the employee.
• Elimination of Lifetime Benefit Limits: For fully-insured and self-funded health plans, lifetime limits on the dollar value of benefits under all health insurance plans must be eliminated. Certain limits may be allowed on specific benefits as long as they are not considered Essential Health Benefits (yet to be defined).
• Restriction on Annual Benefit Limits: For fully-insured and self-funded health plans, the Authority for the Secretary of Health and Human Services (“HHS”) is to define tight restrictions on annual limits placed on insurance plans. (Use of annual limits will be banned entirely in 2014 when the State Insurance Exchanges are operational.)
• No Rescissions of Coverage: Fully-insured and self-funded group health plans are prohibited from rescinding coverage once coverage has already been in place for that person, except in the event of fraud.
• Cost Ratio Requirements: Beginning January 1, 2011, health insurers must provide an annual rebate to each enrollee if the minimum loss ratio (“MLR”) is not met. The MLR is 85% in the large group market (100+ employees) and 80% in the small group market (less than 100 employees). This provision will have no effect on self-funded plans.
• Elimination of Pre-Existing Condition Exclusions for Children: Pre-existing condition exclusions on self-funded or fully-insured health plans cannot apply to children. This provision will extend to adults as of 2014.
• Waiting Period Restriction (for plan years on or after January 1, 2014): Fully-insured and self-funded group health plans may not impose a waiting period in excess of 90 days for coverage.
• Distribution of Uniform Notice of Coverage: Plan administrators, plan sponsors and insurers must provide a summary of benefits and coverage explanation that describes benefits and coverage to participants prior to enrollment. The Uniform Notice of Coverage will be in addition to  a Summary Plan Description which is already required by ERISA. This requirement will extend to those plans exempted from ERISA.

The Secretary of HHS will provide specific standards for the summary. The summary must state if the plan provides Minimum Essential Coverage (yet to be defined) and if it pays less than 60% of the total cost of benefits provided under the plan. In addition, modifications to the group health plan must be summarized and sent to participants no later than 60 days prior to the change. There will be a penalty for willful non-compliance.

Grandfathered plans are exempt from mandatory compliance with many of the other new requirements imposed on new plans under the legislation.

Q-4: What tax reform changes do not apply to grandfathered plans?

A-4: Grandfathered Plans do no need to comply with:

All provisions are effective on the first renewal date after September 23, 2010, except where noted.

• Information to the Secretary of HHS: Group Health Plans, both fully-insured and self-funded, must provide information regarding claims payment, enrollment data, number of claims denied, rating practices, non-network cost-sharing, enrollee and participant rights, among other data.
• Employer Annual Reporting Requirements regarding Quality of Care: An annual report must be supplied to participants at Open Enrollment that describes health care provider reimbursement rates that improve quality of care, including wellness activities. The Secretary of HHS is to collect this data and make it available on the Internet. Reporting requirements and regulations from HHS will be available by March 23, 2012.
• First Dollar Coverage for Preventive Services: All fully-insured and self-funded health plans will be required to provide first dollar benefits for Preventive Care Services, such as immunizations, screenings and routine care for adults and children.
• Mandated Patient Protections: PCPs, OB-GYNs, and Emergency Care: In fully-insured or self-funded health plans that require the designation of a Primary Care Physician (“PCP”) members must be allowed to select any participating provider as their PCP.
• OB-GYNs and pediatricians: Women must be granted direct access to OB-GYN care without a referral and emergency services offered in a health plan must provide coverage at the in-network level, regardless of facility used and without need for prior-authorization.
• Code Section 105(h) Non-Discrimination Requirements for Fully-Insured Plans: Previously only applying to self-funded plans, group fully-insured health plans will be required to satisfy Section 105(h) non-discrimination requirements stating that employers must not establish any eligibility rules for health care coverage, or levels of coverage that has the effect of discriminating in favor of higher-wage employees.
• Mandated Claims Appeals Process: In addition to the existing ERISA internal claims appeals process for disputed claims, a new external claims procedure must be implemented in fully-insured and self-funded group health plans that will assure the review of disputed claims by a third party.
• Guaranteed Availability and Renewability of Coverage (for plan years on or after January 1, 2014): This provision requires insurance companies to make available health coverage for employers to purchase for their employees. The Act does not address or guarantee that this coverage will be affordable, however. The provision prevents health insurers from canceling an employer’s group plan in the event the plan has poor claims experience in a given year.
• No Discrimination Based on Health Status (for plan years on or after January 1, 2014): Both fully-insured and self-funded group health plans may not establish rules for eligibility to enroll based on health status factors. This same requirement was put forth by HIPAA in 1996.
• Mandated Cost-Sharing Limits (for plan years on or after January 1, 2014): Fully-insured and self-funded group health plans must limit cost-sharing amounts (deductibles, coinsurance and co-pays) to the limits applicable to high deductible health plans under Code Section 223. (For example, in 2010, the out of pocket limits on a high-deductible plan are $5,950 for single and $11,900 for family). Also, deductibles cannot exceed $2,000 per single and $4,000 per family.
• Mandated Coverage for Clinical Trials (for plan years on or after January 1, 2014): Both fully-insured and self-funded health plans must provide coverage for routine costs associated with clinical trials. An individual is eligible for coverage for clinical trials if his or her participating physician deems it appropriate with respect to the protocols of treatment of cancer or other life threatening diseases or conditions.

Q-5: What changes can a plan sponsor or an insurance company make to a health plan and keep its grandfathered status?

A-5: Plan sponsors and insurance companies can make voluntary changes to increase benefits, to conform to required legal changes, add new employees and dependents as participants, change third party administrators, renew an insurance policy and to adopt voluntarily other consumer protections in health care reform.

Q-6: What changes can a plan sponsor or an insurance company make to its health plan to cause it to lose grandfathered status?

A-6: A health plan will no longer be considered a grandfathered health plan if a plan sponsor or the insurance company:

• Eliminates all or substantially all benefits to diagnose or treat a particular condition. The elimination of benefits for any necessary element to diagnose or treat a condition is considered the elimination of all or substantially all benefits to diagnose or treat a particular condition;
• Increases a percentage cost-sharing requirement (such as coinsurance) above the level at which it was on March 23, 2010;
• Increases fixed-amount cost-sharing requirements other than copayments, such as a $500 deductible or a $2,500 out-of-pocket limit, by a total percentage measured from March 23, 2010 that is more than the sum of medical inflation and 15 percentage points;
• Increases copayments by an amount that exceeds the greater of: a total percentage measured from March 23, 2010 that is more than the sum of medical inflation plus 15 percentage points, or $5 increased by medical inflation, measured from March 23, 2010;
• For a group health plan or group health insurance coverage, an employer or employee organization decreases its contribution rate by more than five percentage points below the contribution rate on March 23, 2010;
• With respect to annual limits
  1. a group health plan, or group or individual health insurance coverage, that, on March 23, 2010, did not impose an overall annual or lifetime limit on the dollar value of all benefits imposes an overall annual limit on the dollar value of benefits;
  2. a group health plan, or group or individual health insurance coverage, that, on March 23, 2010, imposed an overall lifetime limit on the dollar value of all benefits but no overall annual limit on the dollar value of all benefits adopts an overall annual limit at a dollar value that is lower than the dollar value of the lifetime limit on March 23, 2010; or
  3. a group health plan, or group or individual health insurance coverage, that, on March 23, 2010, imposed an overall annual limit on the dollar value of all benefits decreases the dollar value of the annual limit (regardless of whether the plan or health insurance coverage also imposes an overall lifetime limit on the dollar value of all benefits); or
• Enters into a new policy, certificate or contract of insurance with an insurance company.

For purposes of these regulations, “medical inflation” is defined by reference to the overall medical care component of the Consumer Price Index (“CPI”) for all Urban Consumers, unadjusted, published by the Department of Labor.

Q-7: What notice and record retainer of records requirement must a plan sponsor or an insurance company meet to retain its grandfathered status of its health plans?

A-7: To maintain status as a grandfathered health plan, a plan sponsor or a insurance company must include a statement, in any plan materials provided to participants or beneficiaries (Summary Plan Description) describing the benefits provided under the plan or health insurance coverage, that the plan or health insurance coverage believes it is a grandfathered health plan and providing contact information for questions and complaints. The following model language can be used to satisfy this disclosure requirement:

This [group health plan or health insurance issuer] believes this [plan or coverage] is a “grandfathered health plan” under the Patient Protection and Affordable Care Act (the Affordable Care Act). As permitted by the Affordable Care Act, a grandfathered health plan can preserve certain basic health coverage that was already in effect when that law was enacted. Being a grandfathered health plan means that your [plan or policy] may not include certain consumer protections of the Affordable Care Act that apply to other plans, for example, the requirement for the provision of preventive health services without any cost sharing. However, grandfathered health plans must comply with certain other consumer protections in the Affordable Care Act, for example, the elimination of lifetime limits on benefits.

Questions regarding which protections apply and which protections do not apply to a grandfathered health plan and what might cause a plan to change from grandfathered health plan status can be directed to the plan administrator at [insert contact information]. [For ERISA plans, insert: You may also contact the Employee Benefits Security Administration, U.S. Department of Labor at 1-866-444-3272 or www.dol.gov/ebsa/healthreform. This website has a table summarizing which protections do and do not apply to grandfathered health plans.] [For individual market policies and nonfederal governmental plans, insert: You may also contact the U.S. Department of Health and Human Services at www.healthreform.gov.]

In addition, to maintain status as a grandfathered health plan, a plan sponsor  or insurance company must  maintain records documenting the terms of the plan or health insurance coverage 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. Such documents could include intervening and current plan documents, health insurance policies, certificates or contracts of insurance, summary plan descriptions, documentation of premiums or the cost of coverage, and documentation of required employee contribution rates. In addition, the plan or issuer must make such records available for examination. The plan sponsor or insurance company must also make such records available for examination.  Accordingly, a participant, beneficiary, State or Federal agency official would be able to inspect such documents to verify the status of the plan or health insurance coverage as a grandfathered health plan.

Q-8: What relief is provided under the regulations for a plan sponsor or an insurance company which makes a change to its health plan before March 23, 2010, but which is not effective until after March 23, 2010?

A-8: Transitional rules are provided for plan sponsors and insurance companies that made changes after the enactment of health reform pursuant to a legally binding contract entered into prior to March 23, 2010; made changes to the terms of health insurance coverage pursuant to a filing before March 23, 2010 with a State insurance department; or made changes pursuant to written amendments to a plan that were adopted prior to March 23, 2010. If a plan or insurance company makes changes in any of these situations, the changes are effectively considered part of the plan terms on March 23, 2010 even though they are not then effective. Therefore, such changes are not taken into account in considering whether the plan or health insurance coverage remains a grandfathered health plan.

For purposes of enforcement, the Departments of the Treasury, Labor and Health and Human Services will take into account good-faith efforts to comply with a reasonable interpretation of the statutory requirements and may disregard changes to plan and policy terms that only modestly exceed those changes described in the regulations and that occur before publication of the regulations.

Q-9: Is there any relief provided under the regulations to a plan sponsor or insurance company if it makes changes to the plan or contract after March 23, 2010 but before the publication of the regulations?

A-9:  Plan sponsors and insurance companies are provided with a grace period within which to revoke or modify any changes adopted prior to the date of the publication of the regulations, where the changes might otherwise cause the plan or health insurance coverage to cease to be a grandfathered health plan. Under this rule, grandfather status is preserved if the changes are revoked, and the plan or health insurance coverage is modified, effective as of the first day of the first plan or policy year beginning on or after September 23, 2010 to bring the terms within the limits for retaining grandfather status in these regulations. For this purpose and for purposes of the reasonable good faith standard, changes will be considered to have been adopted prior to when these regulations are published if the changes are effective before that date; the changes are effective on or after that date pursuant to a legally binding contract entered into before that date; the changes are effective on or after that date pursuant to a filing before that date with a State insurance department; or the changes are effective on or after that date pursuant to written amendments to a plan that were adopted before that date.

Q-10: How do the grandfather rules apply to collectively bargained plans?

A-10: Health insurance coverage maintained pursuant to one or more collective bargaining agreements that were ratified before March 23, 2010, are not subject to the insurance market reforms and coverage mandates of the Affordable Care Act and do not apply until the date on which the last collective bargaining agreement relating to coverage terminates. Before the last of the applicable collective bargaining agreements terminates, any health insurance coverage provided pursuant to the collective bargaining agreements is a grandfathered health plan, even if there is a change in insurance companies during the period of the agreement. The law refers solely to “health insurance coverage” and does not refer to a group health plan; therefore, these interim final regulations only apply this provision to insured plans maintained pursuant to a collective bargaining agreement and not to self-insured plans. After the date on which the last of the collective bargaining agreements terminates, the determination of whether health insurance coverage maintained pursuant to a collective bargaining agreement is grandfathered health plan coverage is made under the regulations.

Under the regulations, this determination is made by comparing the terms of the coverage on the date of determination with the terms of the coverage that were in effect on March 23, 2010. A change in insurance companies during the period of the agreement, by itself, will not cause the plan to cease to be a grandfathered health plan at the termination of the agreement; however, for any changes in insurance companies after the termination of the collective bargaining agreement, the issue of a new policy, certificate or contract of insurance will not be grandfathered. In addition any coverage amendments made pursuant to a collective bargaining agreement that amends the coverage to conform to health care reform will not cause the plan to lose its grandfathered status.

Collectively bargained plans (both insured and self-insured) that are grandfathered health plans are subject to the same requirements as other grandfathered health plans, and are not provided with a delayed effective date for changes under healthcare reform with which other grandfathered health plans must comply. Thus, the provisions that apply to grandfathered health plans apply to collectively bargained plans before and after termination of the last of the applicable collective bargaining agreement.

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