Frost Insurance Client Compliance Tip: Applicable Large Employers Should Review Health Plan Eligibility Provisions

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1 M a rch 19, 2015 Frost Insurance Client Compliance Tip: Applicable Large Employers Should Review Health Plan Eligibility Provisions As applicable large employers begin to come into compliance with the Affordable Care Act s employer mandate by either offering minimum essential coverage that meets minimum value and affordability requirements to substantially all of their full-time employees or risking employer shared responsibility penalties (i.e., pay or play), they should also ensure that their health plan documents accurately reflect how eligibility for benefits is determined, including a description of any measurement periods that the employer may use. This Tip provides guidance to applicable large employers who, in response to the employer mandate, have made or will make changes impacting health plan eligibility. Background: Under the ACA s employer mandate, applicable large employers (ALEs), or those employers who employed, on average, 50 or more full-time employees (including equivalents), in the preceding calendar year, can choose to pay or play. Meaning, they must either make an offer of minimum essential coverage (MEC) to substantially all (i.e., 70 percent in 2015; 95 percent thereafter) of their full-time employees or risk paying employer shared responsibility (ESR) penalties. A full-time employee is anyone who averages at least 30 hours of service per week (or 130 hours per month). However, other employees maintain atypical work schedules making it difficult for the employer to determine, ahead of time, whether they will satisfy the 30 hours of service per week threshold and require an offer of coverage. For instance, a variable hour employee is one whose hours vary to such a degree that it is impossible for the employer to definitively know, in advance, whether the employee will meet the 30 hour threshold requirement. Additionally, a seasonal employee is one whose customary annual employment does not exceed six months and whose work begins at approximately the same time each year. Examples of a seasonal employee may include a holiday seasonal retail store employee, a ski instructor, or a golf course worker. Accordingly, employers will often use certain measurement methods (i.e., monthly measurement method or look-back measurement method) to track the hours of these variable hour or seasonal employees to determine whether they meet the 30 hours per week threshold and qualify as a full-time employee who is eligible for an offer of coverage. Keep in mind though that the date for compliance with the employer mandate depends on the size of the employer. While employers with 100+ FTEs (including equivalents) are required to comply beginning with the first plan year beginning on or after Jan. 1, 2015, there is a one-year delay, until Jan. 1, 2016, available for employers who meet certain qualifications and employ FTEs (including equivalents). There is also a delay for employers (of any size of 50 or more FTEs) that sponsor non-calendar-year plans, if certain conditions are met. Regardless of the compliance date that may apply, ALEs should review their health plan eligibility provisions in any plan documentation that they maintain. The Employee Retirement Income Security Act (ERISA) requires that a health plan be established and maintained pursuant to a written instrument so that employees can determine their rights and obligations under the plan. This written plan document must describe the plan s eligibility requirements and specify the basis on which payments are made to and from the plan. Therefore, ALEs, who are either providing coverage for the first time or changing how they define full-time employees to come into compliance with the employer mandate, must also update their plan documents to ensure that they accurately reflect how they determine eligibility for benefits. 1 A p p l ic a bl e L a r ge Em p l o y e r s Shou l d R e v i e w H e a lt h P l a n El igi bi l i t y P r o v isions

2 The following questions and answers outline important considerations for employers who are amending health plan documentation to reflect how the plan determines eligibility for benefits in light of the employer mandate: Q.1: What kind of health plan documentation should be amended to capture any changes I make to health plan eligibility provisions in order to come into compliance with the employer mandate? A.1: Depending on whether you sponsor a fully insured or self-insured plan, health plan documentation can consist of several documents. For fully insured plans, the documentation usually consists of the group insurance contract and certificates of coverage. For self-insured plans, the documentation usually includes the written plan document and the Summary Plan Description (SPD). Additionally, in both cases, some employers may have adopted a wrap document that describes eligibility. Employers should examine all of these relevant documents to determine whether the terms of eligibility for health plan benefits require amendment. Q.2. If I have or will make changes to health plan eligibility to come into compliance with the employer mandate, what information should I now include in my health plan documentation? A.2: In general, you have two rules of thumb to remember: 1. Be accurate: The eligibility provisions should accurately reflect how the employer actually determines full-time status for purposes of the employer mandate. 2. Be detailed: The eligibility provisions should provide enough detail that the plan can enforce these terms and be able to point to specific plan provisions in administering claims and appeals. With regard to the first rule, you must ensure that any changes you make to your health plan documentation reflect how you actually determine eligibility for all employees. For instance, if you intend to use the look-back measurement method to determine whether certain employees average at least 30 hours per week in a given measurement period, then simply defining eligibility at 30 hours per week does not accurately or fully describe the eligibility requirements for all employees. With regard to the second rule, you also must ensure that any changes you make to your health plan documentation include sufficient details so that the plan is enforceable. The Internal Revenue Service (IRS) rules for determining when an employee is a full-time employee are quite complex and filled with an array of rules and exceptions to the rules. For instance, for those relying on the look-back measurement method, you should, at a minimum, include provisions addressing the length and application of any initial and standard measurement period and their associated stability period and administrative period. However, the IRS rules do not stop there. There are rules addressing what the employer can consider as an hour of service, what factors the employer can consider when determining whether or not someone is a variable hour employee whose hours should be measured, how employers should treat leaves of absence, how changes in employment status during a new variable hour employee s initial measurement period will impact the timing of an offer of health plan coverage, etc. Because all of these details impact eligibility, your health plan documentation should include any of those rules that are relevant to how you actually determine eligibility for all of your employees. Alternatively, the plan documents can reference a separate measurement policy that is adopted by the employer and incorporated by reference into the plan documentation. However, the bottom line, again, is that the eligibility provisions or measurement policy should accurately reflect how the employer determines eligibility for purposes of the employer mandate and include enough detail so that the terms of the plan can be enforced. 2 A p p l ic a bl e L a r ge Em p l o y e r s Shou l d R e v i e w H e a lt h P l a n El igi bi l i t y P r o v isions

3 Given what it is at stake here exposure to ESR penalties we always recommend that employers who have made changes regarding eligibility for benefits in light of the employer mandate work with someone who specializes in preparing health plan documentation, such as an ERISA attorney or other service provider, to ensure that all health plan documentation and policies sufficiently describe how the employer determines eligibility for all employees. Q.3. Will my cafeteria plan or any other plan I sponsor be impacted by the changes I make to health plan eligibility provisions? A.3: Yes, if you sponsor a cafeteria plan (i.e., health plan premiums are paid on a pre-tax basis through a Section 125 cafeteria plan), then you should work with your cafeteria plan administrator in updating any cafeteria plan eligibility provisions. You will want to ensure that all employees who are eligible for the health plan are also eligible for the cafeteria plan so that any premium payments occur on a pre-tax basis. With regard to other plans that you may sponsor (e.g., dental plan, vision plan, disability, health FSA), you are not required, under the employer mandate, to offer those plans to substantially all of your full-time employees. However, you may decide that it would be less administratively burdensome for you to use uniform eligibility requirements for all health benefits. In that case, you should update the plan documentation for those plans as well. Additionally, if you have used an ERISA wrap document to wrap several health plans together (e.g., major medical plan and dental plan), which is sometimes referred to as a mega-wrap document, then you have other considerations. You may or may not want to use uniform eligibility requirements for all of the health plans that have been wrapped together under that mega-wrap document. Again, we recommend that you work with someone who specializes in health plan documentation to ensure that the documentation associated with any health plan you sponsor accurately reflects how you determine eligibility for all employees. Q.4: Do I have a requirement to notify employees or anyone else of any changes I make to my health plan documentation? A.4: Absolutely! If you plan or have already made changes to health plan documentation to reflect the manner in which you determine eligibility for benefits in line with the employer mandate, then under ERISA, you have an obligation, as the plan administrator to also communicate those changes to all plan participants. ERISA requires that plan administrators provide a Summary of Material Modification (SMM) to plan participants any time there is a material modification to the plan itself or any time there is a change to the information that is required to be provided in the SPD. Because the SPD must include a description of the plan eligibility provisions, then any changes to those eligibility provisions should be communicated through an SMM. Alternatively, instead of distributing an SMM, the plan administrator can distribute an updated SPD. With regard to the timing of distributing this SMM or updated SPD, the general rule is that the plan administrator must distribute this information to all plan participants (including COBRA beneficiaries) within 210 days after the end of the plan year in which the material modification was adopted. However, that deadline can shift depending on the exact circumstances involved, so we encourage you to work with someone who specializes in health plan documentation to determine any deadlines that may apply to your specific situation. Practically speaking, though, an SMM or updated SPD should be provided as soon as possible, since plan sponsors, administrators, and participants should all be on the same page with respect to the benefits available under the plan. A timely SMM will ensure that there is no participant confusion, and therefore will reduce the chance of a participant lawsuit in connection with promised benefits. 3 A p p l ic a bl e L a r ge Em p l o y e r s Shou l d R e v i e w H e a lt h P l a n El igi bi l i t y P r o v isions

4 With regard to the methods of delivery, an SMM or updated SPD must be furnished in a way that is reasonably calculated to ensure actual receipt to all intended participants and beneficiaries. The delivery methods approved by the U.S. Department of Labor (DOL) include mail (i.e., first-, second- or third-class mail) or hand delivery. However, hand delivery may be more difficult to prove should the DOL request documentation or a participant challenge delivery in court. The SMM or updated SPD can also be distributed electronically, provided that the DOL s electronic disclosure rules are satisfied. For more information on those electronic disclosure rules, you can reference our Frost Client Compliance Tip at the following link: Plan sponsors that fail to properly provide an SMM or updated SPD could be subject to a penalty of up to $110 per day. In addition, willful failures could result in criminal penalties, including fines of up to $100,000 for an individual ($500,000 for companies) and imprisonment for up to 10 years. Q.5: If I update health plan eligibility provisions to reflect that I am using the look-back measurement method to determine whether certain employees qualify as full-time employees and eligible for benefits, will this impact my COBRA obligations? A.5: Yes. Because full-time status and health plan coverage are generally fixed during a stability period while the employee remains employed, COBRA administration will be impacted when a full-time employee experiences a reduction in hours during a stability period. While the reduction in hours will not immediately affect the employee s coverage during the duration of the applicable stability period, eventually this employee will experience a loss of coverage due to the reduction in hours once that stability period ends. At some point, a COBRA qualifying event occurred here because the employee experienced a reduction in hours and an eventual loss of coverage. But, when did that qualifying event occur? From the date that the employee experienced the reduction in hours (i.e., the end of the applicable measurement period) or from the date that the loss of coverage actually occurs (i.e., the last day of the stability period for which the employee s full-time status was locked in)? The answer to this question is important because it will drive the timing of employer COBRA notice requirements and when the COBRA maximum coverage period begins. We recommend that employers review their COBRA documentation and COBRA procedures to reflect the use of the look-back measurement method and to address when qualifying events occur and when the COBRA maximum coverage period begins. This Tip was compiled relying upon the following sources: id=t0hcrfrm%3a &feature=ttoc&lastcpreqid= A p p l ic a bl e L a r ge Em p l o y e r s Shou l d R e v i e w H e a lt h P l a n El igi bi l i t y P r o v isions

5 For questions relating to ALEs updating plan eligibility provisions in light of the employer mandate, please contact your dedicated Frost Insurance advisor, or call us at (866) If you re not currently working with a Frost advisor on your business insurance needs, give us a call. We d love to earn your business. Please note this communication is intended for informational purposes only and does not constitute legal or tax advice, nor is it guaranteed to be current, reliable or accurate. Please consult legal counsel or a tax professional as appropriate. 5 A p p l ic a bl e L a r ge Em p l o y e r s Shou l d R e v i e w H e a lt h P l a n El igi bi l i t y P r o v isions