Category: Articles

april-articleAs published in The Self-Insurer,
April 2014

I am often reminded of an unacknowledged fact that I shared with a room full of employers during a conference several years ago. Like it or not, employers are now responsible for the health and well-being of their employees. When it comes to impacting the trend of their health care spend and issues associated with absenteeism, employers are encouraged to invest in employee health engagement and health accountability to make an impact. Granted, there is an ongoing controversy surrounding the ROI when it comes to wellness programs, however, I think we can all agree that doing nothing or simply dabbling in wellness will have little to no impact.

The U.S. departments of HHS, Labor and the Treasury recently issued the final regulations on employment-based wellness programs in compliance with the Patient Protection and Affordable Care Act (PPACA), effective for plan years beginning on or after January 1, 2014, and applicable to both grandfathered and non-grandfathered health plans.

Correspondingly, wellness programs are not only permitted, they are encouraged, and employers across the country are becoming creative and utilizing a variety of different wellness approaches in their attempts at addressing health care costs and the health and well-being of their employees. However, the regulations governing wellness programs have many nuances that come into play when tailoring a wellness program and if not done carefully they may actually become landmines.

Pursuant to the final regulations we still have two variations of wellness programs, par ticipatory wellness programs and health- contingent wellness programs, and the basic requirements that existed in the proposed regulations are still applicable in the final regulations. However, there are some distinct

differences and the requirements var y between the two sub-categories of health-contingent wellness programs, activity-based (AB) wellness programs and outcome-based (OB) wellness programs, par ticularly when it comes to availability and the reasonable alternative standard, that I believe are wor thy of clarification.

To simplify matters, wellness program regulations can be broken down into five categories: Frequency; Size; Purpose; Availability; and Disclosure.

Frequency

For both AB and OB wellness programs, eligible individuals must be given the opportunity to qualify for the reward and/or penalty avoidance under the program at least once per year. If an eligible individual declines the opportunity at open enrollment, the Plan is not required to provide another opportunity until next year’s enrollment.

Size

Combined health-contingent rewards cannot be in excess of 30% (or 50% if designed to prevent and/ or reduce tobacco use) of the cost of coverage based on the total amount of employer and employee contributions paid towards the benefit package under which the individual is receiving coverage. This is an enrollment specific analysis.

Purpose

The AB and OB wellness programs must be reasonably designed to promote health and prevent disease. This will be satisfied so long as the program is not: overly burdensome; a subterfuge for discriminating based on a health factor ; or highly suspect in the method chosen to promote health or prevent disease. Requiring an employee to complete a one-hour nutrition class each week for an entire year in order to obtain the reward is not likely to satisfy the required purpose.

Availability

The full reward must be available to all similarly situated individuals. This requires reasonable alternatives be made available upon an individual’s request. This is the juncture in the regulations where the AB and OB wellness programs have significantly different requirements, which are important to understand.

  • Activity-Based: An AB wellness program must allow a reasonable alternative method for obtaining the reward for any individual for whom it is medically inadvisable to attempt to satisfy the standard or unreasonably difficult due to a medical condition. Here, it is reasonable for the Plan to require physician verification. Ultimately the Plan must provide a reasonable alternative based on the facts and circumstances, which will take into account considerations including, but not limited to, cost shifting and time commitment. In the alternative, the Plan may also waive the standard as opposed to providing a reasonable alternative.
  • Outcome-Based: An OB wellness program must allow a reasonable alternative method for obtaining the reward for a much broader group of participants. It must allow ANY individual who does not meet the initial standard to use a reasonable alternative standard regardless of any medical condition. Therefore, the employer and/or the Plan cannot require an individual to provide physician verification of a need for an alternative standard. That is not to say that an individual’s physician cannot assert such claims, it is only to say that the employer and/or the Plan cannot require such. The Plan must ultimately provide a reasonable alternative based on the facts and circumstances, much like the AB requirement, and likewise, the Plan may also waive the standard as opposed to providing a reasonable alternative.

The challenge here is to adhere to the requirements yet still preserve meaningful and cost-effective OB wellness programs, and with either the AB or the OB wellness programs, employers need to keep in mind that they are going to need to determine the classification of the reasonable alternative (is it an AB or an OB) and follow the appropriate rules thereof.

Disclosure

The Plan must disclose in all Plan material the terms of an AB or OB wellness program as well as in any disclosure to an individual that he or she did not satisfy the initial standards (OB), the availability of a reasonable alternative, contact information and a statement that the recommendations of a participant’s physician will be accommodated. If the Plan simply mentions that a program is available, without mention of its terms, this disclosure is not required.

Potential landmines to consider outside of the wellness regulations themselves include but are not necessarily limited to the ADA, HIPAA, ACA, GINA, COBRA, ERISA, tax implications and other state and federal laws. Everyone is in agreement that compliance with HIPAA doesn’t necessarily mean compliance with the ADA. In fact, the 2006 HIPAA regulations confirmed for us that compliance with HIPAA’s non-discrimination rules and wellness program requirements does not necessarily ensure compliance with the ADA or any other applicable federal or state law. As a side note, the EEOC recently gathered testimony on the issue that may of these regulations are not in alignment, and we are hopeful that they will be issuing guidance shortly to help reconcile some of the inconsistencies.

Setting forth regulations always begs the question “what is the penalty for non-compliance?” Aside from the potential participant lawsuit regarding discriminatory practices, which could result in damages and possibly attorney fees, under HIPAA, the IRS may impose a penalty in the form of an excise tax of $100 per day per person for non-compliance. As we all know, the DOL is actively auditing plans for compliance and could bring a civil action against an employer to enforce these requirements as well. Now is a good time to get your house in order and ensure that the administration of your employer wellness programs is compliant and that your Administrative Services Agreements accurately represents the corresponding duties and responsibilities.

Compliance aside, successful wellness programs that have mastered health engagement and health accountability among their employee population typically have implemented programs in a methodical and strategic manner over a multi-year timeframe and have acknowledged early on that it will take time and a corporate commitment to build a true culture of wellness.

This article is intended for general informational purposes only. It is not intended as professional counsel and should not be used as such. This article is a high-level overview of regulations applicable to certain health plans. Please seek appropriate legal and/or professional counsel to obtain specific advice with respect to the subject matter contained herein.


Category: Articles

The Self-Insurer, March 2014As published in The Self-Insurer,
March 2014

It should be no surprise that self-insured health plans, cafeteria plans, and dependent care assistance programs (DCAPs) are subject to non-discrimination requirements under the Internal Revenue Code. This has been the case for some time. More recently, PPACA established non-discrimination requirements, as set forth in the Public Health Service Act (PHSA) section 2716, for fully insured health plans and this renewed focus on non-discrimination has creating a testing frenzy in the marketplace.

The non-discrimination requirements are premised on the fact that if an employer (may require controlled group analysis) wishes to provide tax-free benefits to its employees, the employer must ensure that in doing so it does not unduly favor those employees that would be deemed highly compensated and/or key personnel, and if a plan fails to comply with these requirements there may be adverse tax consequences for these employees.

With regard to fully insured plans, section 1001 of PPACA added section 2716 to the PHSA which prohibits fully insured non-grandfathered group health plans from discriminating in favor of highly compensated individuals in accordance with the principles set forth in Code section 105(h) that were previously only applicable to self-insured health plan. However, the IRS has postponed enforcement until further guidance can be provided, and at this time, there is little to no indication that the guidance is forthcoming any time soon.

Nonetheless, for self-insured health plans, cafeteria plans and DCAPs it is status quo – testing is required and discrimination is prohibited. Although these plans (as well as HRAs and FSAs) are all subject to non-discrimination testing, the tests are not identical and some of the applicable definitions differ. For instance, section 105(h) prohibits discrimination in favor of Highly-Compensated Individuals (HCIs) and section 125 prohibits discrimination in favor of Highly-Compensated Participants and Individual (HCEs) and Key Employees.

HCIs

For section 105(h) testing purposes, an HCI is an individual who is:

  • one of the employer’s five highest paid officers;
  • a shareholder owning more than 10% in value of the stock of the employer; or
  • among the highest paid 25% of all non-excludable employees.

Section 105(h) allows the exclusion of the following individuals from the highest paid 25%:

  • employees who have not attained the age of 25;
  • employees who have not completed three years of service;
  • part-time or seasonal employees;
  • non-resident aliens; and
  • collectively bargained employees.

HCEs

HCEs For section 125 testing purposes, HCEs on the other hand include the following:

  • employees owning more than 5% of the voting power or value of all classes of stock of the employer during the current or preceding plan year;
  • officers;
  • highly compensated; or
  • a spouse or dependent of an individual set forth above.

Section 125, under certain circumstances, allows the potential exclusion of the following individuals from the eligibility and participation requirement:

  • employees who have not attained the age of 21;
  • employees who have not completed one year of service;
  • non-resident aliens; or
  • collectively bargained employees.

Key Employee

For section 125 testing purposes, a Key Employee is any employee who, during the plan year, was:

  • an officer of the employer with an annual compensation in excess of a specified dollar threshold;
  • more than a 5% owner of the employer; or
  • more than a 1% owner of the employer with an annual compensation in excess of a specified dollar threshold.

For years, many employers have merely paused to assess whether their plan(s) satisfies the non-discrimination requirements. However, the non-discrimination requirements are complex and require a more thorough analysis to make this determination.

The general components of the self-insured health plans, cafeteria plans and DCAP testing requirements can be narrowed down to eligibility, benefits, availability and utilization.

Self-Insured Health Plans

Eligibility and benefits are considered in the analysis of a self-insured health plan. The plan must satisfy one of the following

three tests in order to satisfy the eligibility component:

  1. 70% or more of all non-excludable employees benefit under the plan;
  2. 80% or more of all eligible employees, if 70% or more of all non-excludable employees are eligible to participate under the plan; or
  3. the plan benefits a classification of employees which the IRS finds to be non-discriminatory.

Likewise, the plan must satisfy the benefits test by providing similar benefits to the HCIs and non-HCIs. The maximum benefit level cannot be based on compensation, age, or years of service, and the type of benefits must be identical for all participants without differing waiting periods.

Cafeteria Plans

Eligibility, benefits, availability and utilization are considered in the analysis of a cafeteria plan. The plan must satisfy all three of the following eligibility requirements:

  1. it must benefit a non-discriminatory classification of employees;
  2. the employment requirement must be the same for all employees with no more than three years of employment needed for all employees to be eligible to participate; and
  3. eligibility cannot be later than the first day of the plan year after the employment requirement is met.

With regard to availability and utilization in a cafeteria plan, the requirements will be satisfied if: ‘reasonable’ classifications do not discriminate in favor of HCIs; ‘similarly situated’ employees are treated the same; non-taxable benefits are not disproportionately elected by HCIs; HCIs are not favored in the actual operation of the plan; and qualified benefits provided to key employees do not exceed 25% of the total of all such benefits provided for all employees under the plan.

Dependent Care Assistance Programs (DCAPs)

Eligibility, benefits and utilization are considered in the analysis of a DCAP plan.

Again, ensuring that the benefits offered benefit employees who qualify under a classification that does not discriminate in favor of HCEs. The ‘reasonableness’ test for the cafeteria plan is utilized, however, here an HCE is defined as an employee who owns more than 5% during the current or preceding year or the employees compensation during the preceding year exceeded $115,000 for 2012, 2013, and 2014.

Benefits cannot favor HCEs and no more than 25% of the amount paid for DCAP benefits during the year can be provided to individuals (including spouses and dependents) that have more than 5% ownership.

With regard to utilization, the average DCAP benefits provided to non-HCEs must be at least 55% of the average benefits provided to HCEs. Many times, non-HCEs don’t understand the value in electing DCAP benefits and plans often end up with more HCEs utilizing the benefits which may cause the plan to fail. Some employees may be excluded from the test as set forth above, however, it is important to run the test so the employer knows for sure whether the plan passes the test.

A common question is always “when should I test?” If a plan has never tested before they should test now! Ideally, a plan should test mid-year and at the end of the plan year. However, plans that have not been testing should perform a test now for the 2013 plan. If the test(s) fails then they will likely have some modifications to make now for 2014. If the test(s) passes and there were not many changes made for 2014, they may be safe waiting until the end of the current plan year. If changes were made then a mid-year test would be prudent and recommended. Some circumstances that could significantly impact results, employers have little control over. Something as simple as a disproportionate number of HCIs electing coverage or more importantly, and more likely, a disproportionate number of non-HCIs not electing coverage may cause a plan to fail and unlike 401(k) testing, employers are not afforded the opportunity to do cleanup from a failed test after the end of the plan year.

If you have not already done so, this would be a good opportunity to educate your clients, provide a service offering, and/or encourage your clients to seek legal/compliance assistance. I would encourage you to also review your Administrative Service Agreements and see how it addresses the testing requirements. For plans that have not had testing on their radar, now would be a good time to start, and depending upon the results, they may need to review their plan documents and consider potential plan modifications.

The reality is, we don’t have a lot of guidance on section 105(h) testing and for most folks, the regulations themselves might as well be written in Latin. However, with the focus now on the fully insured plans as a result of PPACA, there is no doubt that there is going to be a renewed spotlight on the self-insured plans.

This article is intended for general informational purposes only. It is not intended as professional counsel and should not be used as such. This article is a high-level overview of the non-discrimination requirements applicable to certain health plans. Please seek appropriate legal and/or professional counsel to obtain specific advice with respect to the subject matter contained herein.