Massachusetts Provides Guidance on Section 125 Plan and Minimum Creditable Coverage Requirements

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1 Massachusetts Provides Guidance on Section 125 Plan and Minimum Creditable Coverage Requirements A new Massachusetts health care law requires employers with employees working in Massachusetts to establish a Section 125 plan to enable all Massachusetts employees, including those not currently eligible for the employer plan, to pay for coverage through their group health plan or through the Commonwealth Health Insurance Connector on a pre-tax basis. Emergency regulations providing guidance to employers with respect to this requirement have now been adopted. In addition, draft regulations on the law s minimum creditable coverage requirement have been issued. Background Massachusetts enacted a health law last year requiring residents to have a minimum amount of insurance coverage by July 1, 2007 (minimum creditable coverage). Residents of the state who are not offered health coverage by an employer with at least 50 employees may purchase coverage through the Commonwealth Health Insurance Connector (the Connector). One provision of the law requires employers of 11 or more employees working in Massachusetts (regardless of where the employer is headquartered) to sponsor a cafeteria plan meeting the requirements of Internal Revenue Code Section 125 to enable employees to pay for their coverage (either through their employer or through the Connector) on a pre-tax basis. An employer that does not implement such a plan will be subject to a free rider surcharge. (See our February 15, 2007 For Your Information.) The Commonwealth Health Insurance Connector Authority has now approved emergency regulations on the Section 125 plan requirement. The agency has also issued draft guidance on the minimum creditable coverage standards for required insurance. Importantly, insurance meeting these standards is not required until January 1, 2009 as long as individuals have coverage under any health plan beginning July 1, Guidance on 125 Plan Requirement 11 or More Employee Determination For purposes of determining whether an employer has 11 or more employees, the guidance provides that

2 The number of employees is calculated by taking the sum of total payroll hours for all employees working in Massachusetts during the determination period and dividing by Payroll hours include vacation, sick time, short- and long-term disability and leave protected by the Family and Medical Leave Act. No more than 2000 hours per employee need be included in determining total payroll hours. The first determination period is April 1, 2006 through March 31, 2007 and each subsequent determination period runs from July 1 through June 30. Employees include full-time, part-time, temporary, and seasonal employees (even if covered by a collective bargaining agreement) and self-employed individuals. Independent contractors are not included. For leased employees in connection with a co-employment arrangement, the client company is the employer, but the employer may contractually allocate the responsibility for implementing and maintaining the Section 125 plan to the leasing company. The guidance provides that an employer providing and paying the full cost for health coverage for all of its employees does not have to provide a Section 125 plan for each month that it provides this coverage. Adoption of a Section 125 Plan The regulations reiterate that the cafeteria plan must satisfy IRC Section 125 requirements and applicable rulings and regulations, including the requirement of a written plan document that contains the following information a specific description of each benefit available and the period for which it is provided. Importantly, these descriptions may be found in other documents, which may be incorporated by reference. the plan s eligibility rules the procedures governing participant elections, including election periods, irrevocability and effective dates how employer contributions are made (e.g., by salary reduction agreement or non-elective contributions) the maximum amount of elective contributions (i.e., by stating maximum dollar amount, maximum percentage or other determination method) the cafeteria plan s plan year. The guidance states that the plan document may be a separate, stand-alone document or may be combined with other employer plans. An employer may establish a separate Section 125 plan for employees not eligible for employer medical coverage. Also, a document may cover employees of two or more affiliated or related employers. The plan document must clearly state the effective date of the cafeteria plan this date may not be later than the date the employer becomes subject to the Section 125 plan requirement. [ 2 ]

3 BUCK COMMENT. The employer is responsible for administering its plan in accordance with all of the rules under Section 125, including limits on mid-year election changes. An employer may want to consider a separate administrative design for a plan that only covers employees ineligible for its health plan. Filing Requirement The Section 125 plan document must be filed with the Connector before the employer becomes subject to the law i.e., generally by June 30, The employer must also designate an individual authorized to verify and certify the accuracy of the documentation. BUCK COMMENT. It may be difficult for an employer to have a new plan or conforming amendment to an existing plan approved by the Board or other committee before June 30. Other Section 125 Plan Guidance The guidance provides that The Section 125 plan need only be a premium conversion plan. A flexible spending account is not required. No employer contributions are required. The plan may include an eligibility waiting period that corresponds to (but does not exceed) the medical plan waiting period if the medical plan waiting period does not exceed two months from date of hire. Under a special rule, for employees employed on July 1, 2007, the cafeteria plan eligibility waiting period may be extended to no later than September 1, Employees must be able to elect to participate during an election period regardless of whether they were previously eligible or waived participation. Employers are not required to make the Section 125 plan available to the following employees under age 18 temporary employees part-time employees who average fewer than 64 hours per month wait staff, service employees or service bartenders who earn less than $400 in monthly payroll wages (including tips) student employees (i.e., interns or cooperative education student workers) seasonal, international workers with visas and enrolled in travel health insurance. [ 3 ]

4 BUCK COMMENT. An employer will need to either establish a new Section 125 plan for employees not eligible for the employer health plan, or expand eligibility in the existing plan to include all nonexcludable employees. This may require changes to the employer s payroll system and other administrative processes. Massachusetts has not yet issued implementation specifications for employers to forward Section 125 contributions to the Connector. Minimum Creditable Coverage Guidance Deadline for Minimum Creditable Coverage The Connector Board realized that it would be almost impossible for individuals to obtain coverage meeting the standards by July 1, Therefore, under the draft guidance, the deadline for purchasing coverage that meets the criteria outlined below is January 1, In the interim, the guidance specifies that coverage under any health plan will be deemed to comply with the mandate. Basic Coverage Requirements The draft guidance provides criteria for the lowest threshold health benefit plan that an individual must purchase to have minimum creditable coverage. According to the guidance, a plan providing minimum creditable coverage must provide a broad range of medical benefits may impose reasonable exclusions and limitations and may differentiate between in-network and out-ofnetwork providers may impose varied levels of co-payments and deductibles, as long as they are disclosed. An in-network deductible may not exceed $2,000 for an individual or $4,000 for a family. Any separate deductible for prescription drug coverage may not exceed $250 for an individual or $500 for a family. may generally not impose out-of-pocket maximums for in-network services that exceed $5,000 for an individual or $10,000 for a family must include co-payments over $100 and co-insurance and deductibles for purposes of calculating out-ofpocket maximums. Amounts paid for prescription drugs do not need to be included. may not impose an annual benefit or per illness maximum may not impose a fee schedule of indemnity benefits must cover at least three preventive care visits for an individual or at least six preventive care visits for a family before imposing a deductible [ 4 ]

5 must cover prescription drugs as either a covered medical benefit with a deductible that does not exceed $250 for an individual or $500 for a family or under an alternative design approved by the Connector Board. The guidance specifies that certain plans will be deemed to constitute minimum creditable coverage, including a high-deductible health plan (HDHP) that complies with federal rules and provides eligibility for a Health Savings Account (HSA). BUCK COMMENT. Employers should review their current plan designs to determine what, if any, modifications are needed to meet the minimum creditable coverage requirements and then consider what modifications they may want to make by January 1, Although employers are not required to provide coverage that meets the criteria, most will want to do so to avoid subjecting their employees to the penalty tax. Employers should also consider submitting comments on the minimum creditable coverage requirements to the Connector Board. The guidance also specifies certain plans that will not constitute minimum creditable coverage (e.g., accident only plans, limited scope vision or dental benefits). Conclusion Now that the Connector Board has issued guidance, employers with Massachusetts employees that want to avoid the free rider surcharge must ensure that they will be able to implement a compliant Section 125 plan by July 1, There are many issues to consider i.e., whether to implement more than one Section 125 plan, how to administer payroll deductions for plans other than the employer plan, payment of premiums to other plans, etc. Buck s consultants would be pleased to help you consider and address these issues. This FYI is intended to provide general information. It does not offer legal advice or purport to treat all the issues surrounding any one topic. [ 5 ]