Employee Benefits Alert

Employee Benefits Alert Issue 110 June 2007 The Massachusetts Health Care Reform Act: What s an Employer to Do? The Massachusetts Health Care Reform Act became law in April 2006; the July 1, 2007 effective date for some of its requirements is almost here. In addition to requiring almost all Massachusetts residents to obtain health coverage, the act includes requirements for employers and insurers. This Alert discusses the effect that the various mandates on individuals, insurers and employers will have on employer-sponsored health plans, and the steps that employers should consider before July 1. Mandates on Individuals The act has been well publicized because it requires almost every Massachusetts resident who is age 18 or older to obtain health coverage by July 1, 2007. In 2007-2008, any health coverage under an employer-sponsored plan will satisfy this individual mandate. Starting in 2009, however, employersponsored coverage will not satisfy the individual mandate unless the coverage meets certain minimum standards. Impact on Employer- Sponsored Plans The mandate on individuals will affect employers indirectly. The act does not require employers to provide health coverage, but it will inevitably put pressure on them to ensure that health plans they do offer meet the minimum requirements. This is because Massachusetts residents are subject to significant penalties if they violate the individual mandate and employees will want coverage that meets those standards, allowing them to avoid penalties. This is not of immediate concern to employers because the minimum standards are not effective until 2009. Mandates on Insurers Insurers obligations include making coverage of dependent children available through age 26 or the second anniversary of the date that the child ceases to be an employee s federal tax dependent (whichever is sooner). In addition, carriers cannot offer health insurance policies to any employer that pays more towards the cost of coverage for highly compensated employees than for typical employees or fails to offer coverage to all of its full-time employees who reside in Massachusetts. The dependent coverage mandate is already in effect for most Massachusetts insurance policies, while the nondiscrimination requirement is effective for policy periods starting after June 30, 2007. Willis North America 06/07

Impact on Employer-Sponsored Plans As is the case with almost all insurance mandates, insurers (not employers) are responsible for compliance. When insurers comply, employers that buy group health insurance policies from them also comply. If a policy is issued in Massachusetts, the insurance mandates probably will apply to all individuals covered by the policy including those residing outside of Massachusetts. If an insurance policy is issued in a state other than Massachusetts, it may be entirely exempt from these insurance mandates or may need to comply with the mandates only with respect to Massachusetts residents. In all cases, the insurer is the appropriate party to determine whether the insurance mandates apply. Mandates on Employers The new law imposes several requirements on Massachusetts employers: A fair share contribution requirement A free rider surcharge/cafeteria plan requirement Health insurance disclosure filings using Health Insurance Responsibility Disclosure (HIRD) forms These mandates apply to employers that have 11 or more employees performing services within Massachusetts. The law sets out detailed rules for determining how to count employees for this purpose. While the employer requirements apply regardless of whether an employer s health plan is insured or self-insured, federal law may preempt some of these requirements, particularly for selfinsured plans (as mentioned above). Below, we review the question of preemption for each of these mandates. As always, of course, each employer will need to determine its own compliance strategy based on advice of its legal counsel and its risk tolerance. Fair Share Contribution Requirement Because these provisions may affect employers enrollment practices and contributions, however, employers that provide insured health benefits to Massachusetts residents may wish to check with their insurers to determine whether and when the insurer will implement the insurance mandates. If an insurer will be implementing the mandates, the employer also will need to consider whether to apply the Massachusetts-mandated provisions to employees that are covered under other health plan options. For example, an employer with an insurance option in Massachusetts would need to determine whether to change its dependent eligibility provisions under other options that are not subject to the Massachusetts law. In the case of self-insured plans, the Massachusetts insurance mandates will have no effect because federal law states that a self-insured plan cannot be deemed to be an insurer for purposes of applying state insurance laws. Massachusetts employers must either make a fair and reasonable contribution toward the cost of employees coverage or pay an annual assessment of up to $295 per employee into the Commonwealth Care Trust Fund. Final regulations governing the collection and payment of the annual assessment have not yet been released. There are two tests for determining whether an employer has made a fair and reasonable contribution. If an employer passes either test then it is not required to pay the annual assessment. Primary test: If at least 25 percent of the employer s fulltime Massachusetts employees are enrolled in the employer s health plan, then the employer is deemed to be making a fair and reasonable contribution. No minimum level or type of coverage is specified. Secondary test: If an employer offers to pay at least 33 percent of the premium cost of any group health plan offered to all of its Massachusetts full-time employees, the employer will not be required to pay the annual assessment. Detailed rules have been established to determine which employees are considered full-time employees, and what 2 Willis North America 06/07

percentage of employees have coverage or have been offered contributions toward the cost of coverage. It is easy to see a parallel between this requirement and the Maryland Fair Share Health Care Fund Act, which required certain companies to either spend at least eight percent of payroll on employee healthcare or contribute to the Maryland Medicaid Fund. Given the similarity between the Maryland and Massachusetts laws, there is a good chance that the Massachusetts law is preempted by ERISA. A federal Circuit Court of Appeals recently held that ERISA preempts the Maryland law because the Maryland law essentially requires an employer to provide health benefits to employees. (The appeals court affirmed a lower court s decision in this case. Information about the lower court s decision on the Maryland law can be found in the Willis Employee Benefits Alert, Issue 74.) Courts have routinely held that ERISA preempts state laws requiring employers to provide health benefits to employees. While the Maryland case provides an indication that a federal court will eventually find that this Massachusetts requirement is preempted, few employers are interested in becoming a test case. One reason is that the requirements and the payments are relatively small. Consequently, it is anticipated that most employers will comply with the fair share mandate without a fight, either by providing coverage or paying the annual assessment. Free Rider Surcharge/Cafeteria Plan Requirement Effective July 1, 2007, Massachusetts employers that neither offer contributions toward the cost of their employees health insurance nor arrange for their employees to purchase health coverage may be assessed a special surcharge. The surcharge may apply if the state-funded health costs incurred by the employer s employees and their dependents total at least $50,000. An employer can avoid this surcharge by adopting and maintaining a cafeteria plan (also known as a Section 125 plan or a pre-tax premium plan) that meets certain requirements. An employer that allows its employees to pay their health insurance premiums on a pre-tax basis through a cafeteria plan is considered to have arranged for coverage, even if the employer does not offer a health insurance plan or contribute to the cost of coverage. The minimum cafeteria plan requirements state that the plan must allow pre-tax payment of premiums and must offer access to one or more health coverage options. Again, the employer need not offer the health plan options the options can be individual policies that employees purchase on the open market or through Massachusetts Commonwealth Connector program. Certain classes of employees can be excluded from eligibility for the cafeteria plan. These include: Employees who are less than 18 years old Temporary employees Part-time employees working, on average, less than 64 hours per month Employees who are considered wait staff, service employees or service bartenders, and who earn, on average, less than $400 per month Student employees who are employed as interns or cooperative education student workers Seasonal employees who are international workers with certain types of visas Employees whose employer is required to contribute to a multiemployer health benefit plan To avoid the free-rider surcharge, a Massachusetts employer will need to file a copy of its cafeteria plan with the state and designate an individual who will be authorized to verify and certify the accuracy of the submitted documentation. The employer can utilize more than one cafeteria plan to provide employees with access to health coverage options, including establishing a plan only for those employees not eligible for the employer s subsidized healthcare options. If an employer makes no contributions to an employee s coverage, the cafeteria plan s eligibility waiting period cannot exceed 2 months. If the employer does contribute to the cost of coverage, though, the cafeteria plan s eligibility waiting period may correspond, but not exceed, the waiting period for the underlying medical plan. An employer must formally adopt its cafeteria plan document before the effective date of the cafeteria plan. For employers that intend to avoid the free-rider surcharge by adopting a cafeteria plan, this must be done before July 1, 2007. Adopting a cafeteria plan may seem like an easy way to avoid the free-rider surcharge. Employers should note, however, that difficult and complicated issues result from allowing employees to pay for individual health insurance with pre-tax amounts elected under a cafeteria plan. An employer could be deemed to sponsor an individual policy in such circumstances, and that would result in a variety of compliance obligations, including ERISA, COBRA and HIPAA. In effect, a requirement to adopt a 3 Willis North America 06/07

cafeteria plan may be very close to a requirement to adopt the health benefits offered through the cafeteria plan as an employer-sponsored plan. If a court agrees that this requirement is a de facto mandate that an employer offer health benefits to its employees, the case finding preemption of the Maryland law will loom large. It is far from certain, however, that a court would reach that conclusion. Accordingly, employers probably will proceed with adopting cafeteria plans rather than risking a dispute about paying the free-rider surcharge. Filing Requirements An employer will not be penalized or held responsible if an employee refuses employer-sponsored or employer-arranged health coverage. To help determine whether an employer is subject to the annual assessment or free-rider surcharge discussed above, the state will refer to documents that Massachusetts employers and employees will be required to file. Effective January 1, 2008, there will be another filing responsibility. For state income tax purposes, employers, insurers and employees will be required to report each employee s insurance coverage status on an annual basis. In most cases, the employer will be responsible for providing the annual statement. Prior to January 31 of each year, the employer will be required to provide a written statement to each covered individual residing in Massachusetts confirming coverage under the employer s plan. The covered individual can then attach that statement to his or her annual tax return to prove compliance with the individual mandate through participation in an employer plan. The employer is also required to send a separate report to the state verifying the written statements sent to individual participants. The state has not yet issued rules detailing these reporting requirements. The filing requirements will impose substantial administrative burdens on employers that sponsor health plans. We are not aware of an ERISA preemption challenge to a state filing requirement like that imposed by the Massachusetts law. In at least one case, however, a court held that a state law imposing an administrative requirement on ERISA plans was preempted. That case concerned a requirement to notify employees of benefit cancellation within 15 days. The administrative burden imposed by the filing requirements is much more significant, and it is likely that these requirements will be held to be preempted. Conclusion Employers must complete and file a HIRD form that discloses information about employees health insurance status including whether each employee was offered employersponsored insurance, whether the employer offered to arrange for the purchase of health insurance and whether the employee accepted or declined such offers. Employers must also get employees who decline the employer s offer of health insurance or cafeteria plan participation to complete and return a HIRD form, which the employer must then submit to the state. The employer must also retain a copy of each HIRD form for a period of three years. As of the date of this Alert neither the employer nor the employee HIRD forms are available. Details about these forms are expected to be released before July 1, 2007. The new Massachusetts law has stirred up considerable media attention and has been the basis of similar proposals in other states. Arguably, though, the law s requirements are preempted by ERISA to the extent that they apply to employers whose health plans would be subject to ERISA. Many, if not most, of the law s provisions might not survive a challenge on those grounds. Even so, it is anticipated that most employers will voluntarily comply and wait until the courts resolve the many legal issues stemming from this controversial and high-profile law. As of the date of this Alert, however, no legal challenge has been made. The compliance deadline is quickly approaching and it presents employers with a multitude of administrative challenges. This is particularly true given that some aspects of the law have not yet been finalized. Massachusetts has posted information on its web site that employers may find helpful, including a set of frequently asked questions and an employer handbook (http://www.mass.gov/?pageid=hichomepage&l=1&l0=home &sid=qhic). 4 Willis North America 06/07

Key Contacts US Benefits Office Locations Atlanta, GA 404 224 5000 Farmington, CT 860 284 6147 Minneapolis, MN 763 302 7100 San Diego, CA 858 678 2000 Austin, TX 800 861 9851 Florham Park, NJ 973 410 1022 Mobile, AL 251 433 0441 San Francisco, CA 415 981 0600 Baltimore, MD 410 527 1200 Ft. Worth, TX 817 335 2115 Naples, FL 239 659 4500 San Jose, CA 408 436 7000 Birmingham, AL 205 871 3871 Grand Rapids, MI 616 954 7829 Nashville, TN 615 872 3700 San Juan, PR 787 725 5880 Boston, MA 617 437 6900 Greenville, SC 864 232 9999 New Orleans, LA 504 581 6151 Seattle, WA 206 386 7400 Cary, NC 919 459 3000 Houston, TX 713 961 3800 New York, NY 212 915 5422 Tampa, FL 813 281 2095 Charlotte, NC 704 376 9161 Jacksonville, FL 904 355 4600 Omaha, NE 402 391 1044 Washington, DC 301 530 5050 Chicago, IL 312 621 4700 Knoxville, TN 865 588 8101 Orange County, CA 949 885 1200 Wilmington, DE 302 477 9640 Cincinnati, OH 513 762 7855 Cleveland, OH 216 861 9100 Columbus, OH 614 766 8900 Las Vegas, NV 702 432 7100 Long Island, NY 516 941 0260 Los Angeles, CA 213 607 6300 Orlando,FL 407 805 3005 Philadelphia, PA 610 964 8700 Phoenix, AZ 602 787 6000 Employee Benefits Alert is produced by Willis Legal & Research Group. The information contained in this publication is not intended to represent legal advice and has been prepared solely for educational purposes. You may wish to consult your attorney regarding issues raised in this publication. Dallas, TX 972 385 9800 Louisville, KY 502 499 1891 Pittsburgh, PA 412 586 1400 Denver, CO 303 218 4020 Memphis, TN 901 248 3100 Portland, OR 503 224 4155 Detroit, Ml 248 735 7580 Miami, FL 305 373 8460 Roswell, NM 505 317 3397 Eugene, OR 541 687 2222 Milwaukee, WI 414 271 9800 St. Louis, MO 314 721 8400 5 Willis North America 06/07