While the EEOC continued to grapple with what level of financial incentives is acceptable under nondiscrimination laws (e.g., GINA and ADA), the DOL, HHS and Treasury (the “Departments”) issued final regulations addressing incentives for nondiscriminatory wellness programs in group health plans. The final regulations generally follow the proposed regulations issued by the Departments last November (see our prior post here), including increasing the maximum incentive threshold for health-contingent wellness programs from 20% to 30% (50% in the case of tobacco related programs) of the total cost of coverage, and provide numerous clarifications. For an overview of the new wellness rules, which are effective for plan years beginning on or after January 1, 2014, please see our recent client alert.
In addition to the usual commentary, the preamble to the regulations include a report of the findings of a study of wellness programs sponsored by the DOL and HHS and conducted by the Rand Corp. Seventy-three percent of respondents that offered wellness programs believed that they improved employee health and 52% believed that they reduced costs. Larger employers were more positive in believing that wellness programs reduced costs (68% versus 51%).
Although the evidence on the effectiveness of wellness programs was, in some previous studies, found to be promising, it was not conclusive and may not be supported by the Rand survey. In a 2010 survey conducted by Buck Consultants, 40% of employers measured the impact of their wellness program, and of these, 45% reported a reduction in the growth trend of their health care costs (between two to five percentage points per year). A recent article in the Harvard Business Review cited positive outcomes reported by employers in health care savings, reduced absenteeism and employee satisfaction. In studies evaluating the impact of smoking cessation programs (typically education and counseling), participation decreased the smoking rate among participating smokers by 30% in the first year. In the Rand survey, however, only approximately 50% of employers with wellness programs formally evaluated their program’s impact, and only 2% reported actual cost savings. Further, an in-depth evaluation of an extensive wellness program involving a hospital system found that although the wellness program reduced inpatient hospitalization costs, these cost savings were cancelled out by increased outpatient costs. A recent article in Health Affairs also found that employer savings from wellness programs may result more from cost-shifting, rather than healthier outcomes and reduced health care usage. In another study investigating the effectiveness of a smoking cessation program, significant differences in smoking rates were found at a one-month follow-up, but showed no significant differences in quit rates at six months. Nonetheless, employers generally seemed satisfied with their wellness programs, even those who did not know their programs’ return in investment.
Over two-thirds of Rand survey respondents use incentives to promote employee participation in wellness programs with the completion of a health risk assessment as the most commonly utilized incentive program. In contrast, only 10% of employers with more than 50 employees use incentives tied to health standards, only 7% link the incentives to health premiums and only 7% administer results-based incentives through their health plans. Not surprisingly, the most common form of outcome-based incentives were for smoking cessation, with almost the same percentage of employers rewarding actual smoking cessation (19%) as rewarding mere participation in a smoking cessation program (21%). The value of incentives varied widely with the average annual value ranging between $152 and $557, or between three and eleven percent of the average cost of individual coverage. According to the Rand survey, maximum incentives averaged less than 10% of the total cost. In light of employers’ relatively low use of incentives in wellness programs, the Departments determined that the increase to the maximum reward for participating in a health-contingent wellness program is unlikely to have a significant impact.
Of course, the remaining question is whether the new 30% total cost threshold under the recently issued final regulations (or even the 20% threshold under the prior 2006 regulations) will pass muster with the EEOC. Although the EEOC held a public meeting last month, it sill has provided no guidance on the level of wellness program incentives which an employer may offer without causing the program to be deemed impermissibly mandatory under nondiscrimination provisions other than the HIPAA nondiscrimination provisions.
While we have not heard it first-hand, we have heard through the grapevine that some insurance carriers are out there offering to their clients the ability to “renew early.” Part of the strategy is, apparently, to delay the application of health care reform provisions. The following discussion addresses some risks associated with reliance on such a strategy as a means of complying with the employer mandate and the insurance mandates.
EMPLOYER MANDATE: At the outset, let’s be clear about one fact: this does not get an employer out of play or pay. The employer mandate rules specifically say that a plan year can only be changed for a valid business purpose and that, in this case, avoiding the shared responsibility tax is not a valid business purpose. Renewing early is (assuming other legal niceties are satisfied) a change in plan year. Without a business purpose, the mandate will still apply to that employer effective January 1, 2014.
Note that this restriction also applies to fiscal year plans. A non-calendar year plan cannot now change its plan year (absent a valid business purpose) and delay the application of the play or pay penalty. In our view, such an employer would risk losing its ability to rely on the transition relief (which is already fairly skinny to begin with) by engaging in such a practice. Frankly, even if the employer has a valid business purpose, it is unclear whether changing the plan year would delay the application of the penalty.
INSURANCE MANDATES: Often times, the early renewal option is “sold” as a way to delay application of the insurance mandates. The guidance is unclear as to whether the insurance mandates can be delayed by using this tactic. Even assuming they could be, there are other issues to consider, including:
- The risk an employer takes with such an approach is getting hit with a $100/day penalty for each instance of noncompliance. Given the number of insurance mandates becoming effective in 2014 and the fact that the penalty would apply for each employee in the employer’s workforce, the penalties could add up quickly.
- Plans and plan related documents would need to be amended to reflect the short plan year
- Plans filing Forms 5500 would need to file a Form 5500 for the short plan year that ends on the early renewal.
- While the agencies have said that they plan to take a more compliance assistance-oriented approach to enforcement, that attitude may not last if a regulator finds an employer has been playing games with its plan year.
The bottom line is that taking an early renewal of health insurance coverage is not a health care reform compliance “strategy” that should be entered into lightly.
Some fiscal year plans may have extra time to comply with the play or pay mandate under either of two special transition rules for fiscal year plans (that is, plans with a plan year other than the calendar year). There are two transition rules for fiscal year plans. However, neither is a complete pass and both are highly specific, so employers with fiscal year plans should carefully consider the extent to which they may (or may not) qualify for the relief.
If the employer qualifies for the first transition rule, its compliance obligations will only be delayed for certain of its employees; other employees can trigger penalties.
If the employer qualifies for the second transition rule, transition relief has the potential to apply with respect to a broader spectrum of employees. The rules are described below.
Relief is available on an entity-by-entity basis. In other words, each entity in your controlled group needs to qualify independently for relief.
First Fiscal Year Rule
With respect to any employee, regardless of when hired, an employer is not subject to a penalty if
- The employer maintained a fiscal year plan as of December 27, 2012; and
- Under the eligibility terms of the plan in effect on December 27, 2012, the employee would be eligible for coverage; and
- The employer offers that employee affordable, minimum value coverage as of the first day of its first fiscal plan year that begins in 2014;
In other words, if the employer offers affordable, minimum value coverage to that employee (who would have been eligible for the plan under its December 27, 2012 terms) that is effective no later than the first day of the 2014 fiscal plan year, the employer will not be assessed either of the two PPACA penalties under the employer mandate for the period of time before its 2014 fiscal plan year starts just because that same employee goes out and gets subsidized coverage on the Exchange.
However, penalties could still be triggered if an employee who was not eligible under the terms of the plan in effect December 27, 2012 (“outside the scope of transition relief”) gets subsidized coverage on the Exchange.
- The large penalty ($2,000 x #FT employees less 30) could be triggered by employees who are outside the scope of transition relief who get subsidized coverage on the Exchange. It appears that the number of FT employees used to calculate this penalty would exclude those who would have been eligible for coverage under the terms of the plan in effect December 27, 2012.
- The smaller penalty ($3,000 x #FT employees who get subsidized Exchange coverage) could be assessed for each employee who is outside the scope of the transition relief and gets subsidized coverage on the Exchange
Second Fiscal Year Rule
If the employer can meet the requirements for this second fiscal year rule, transition relief has the potential to apply with respect to a broader spectrum of employees. Under this rule, the employer will not be liable for any play or pay penalties for months before the first day of its 2014 plan year with respect to a full-time employee if ALL of the following apply:
- The employer maintained a fiscal year plan as of December 27, 2012,
- The employer did not also maintain a calendar year plan as of December 27, 2012 for which that employee would have been eligible
- The employer offers that employee affordable, minimum value coverage that is effective no later than the first day of its first fiscal year plan that begins in 2014
- At least 1/4 of its employees are covered under one of more fiscal year plans that have the same plan year as of December 27, 2012; OR the employer offered coverage under those plans to at least 1/3 of its employees during the most recent open enrollment period before December 27, 2012
- The employer may determine the percentage of its employees covered under the fiscal year plan as of the end of the most recent open enrollment period or any date between October 31, 2012 and December 27, 2012
- In calculating whether the 1/4 or 1/3 thresholds are met, it appears that the employer must consider all employees – not just full-time employees
If the employer does not maintain a calendar year plan for which that employee would be eligible, it could be excused from all penalties until the first day of the fiscal year plan year if it meets the above-stated requirements.
Note that with respect to both transition rules, if the employer does not offer its full-time employees affordable, minimum value coverage that is effective as of the first day of the 2014 fiscal year (in other words, it decides to “pay” rather than “play”), it can still be subject to penalties for the months of 2014 that precede the first day of the 2014 fiscal year, even if it meets the other criteria above.
As noted in our client alert, the DOL recently released guidance on the Exchange/Marketplace notice required to be issued to existing employees no later than October 1, 2013. Followers of PPACA developments will recall that this notice was originally scheduled for distribution in March 2013, but was delayed at the last minute. In connection with this guidance, the DOL also revised the model COBRA election notice. Links to the DOL guidance and model documents are provided below.
The alert describes the requirements of the guidance, but the highlights are summarized below:
- All employers subject to the Fair Labor Standards Act are required to provide this notice, regardless of whether they provide health coverage or not. Generally, you’re subject if (i) you employ one or more employees who are engaged in, or produce goods for, interstate commerce or (ii) you are a hospital; a resident care institution for the sick, disabled, and aged; a school; or a state and local government agency. Additional details are in the alert.
- There are separate model notices for employers that offer coverage and those that do not.
- If you offer coverage, your notice must state whether the coverage provides “minimum value.”
- All employees, regardless of whether they have health coverage or are full- or part-time must receive the notice.
- Existing employees must receive the notice by October 1, 2013.
- Employees hired on or after October 1, 2013 must receive it on date of hire.
- For 2014, the DOL will consider the notice provided “on date of hire” if it is provided within 14 days of the date of hire, but as the guidance is written, this does not necessarily apply for October 1, 2013 through December 31, 2013. Additional clarification from the DOL would be appreciated here.
- The new model COBRA notice advises employees of the availability of coverage (and possibly subsidized coverage) through the Exchange/Marketplace.
Links to relevant documents:
Effective January 1, 2014, the Affordable Care Act “play or pay” rules become effective for employers subject to the rules. These “play or pay” requirements are also referred to as the employer mandate or the shared responsibility requirements of the Affordable Care Act. Whatever label is applied to the requirements, the law requires that covered employers offer affordable coverage to full-time employees. View a brief description of these requirements provided by Lisa A. Van Fleet, a partner in the Employee Benefits and Executive Compensation Group at Bryan Cave LLP.
The Affordable Care Act requires that employers offer affordable health care coverage to full-time employee beginning January 1, 2014 (or pay a penalty). Coverage is affordable if the employee’s contribution toward self-only coverage does not exceed 9.5% of his or her household income. Until now, it was not clear how wellness plan surcharges would impact the affordability calculations.
Based on the pre-release of guidance that is expected to be published today (May 3), wellness plan surcharges must be included in the premium for purposes of the affordability calculation. Two exceptions are provided for arrangements that satisfy the wellness plan rules: (1) surcharges based on tobacco use; and (2) for any plan year beginning prior to January 1, 2015, surcharges for any wellness arrangement, but only to the extent the terms of the wellness arrangement were in effect on May 3, 2013. Under this guidance, the premium that applies to non-tobacco users is used to test affordability for all employees regardless of tobacco use; however, any other wellness surcharge (except those described above in the transitional relief provision) must be included in the employee’s share of the premium when calculating affordability.
On Tuesday, the PPACA triumvirate of DOL, Treasury/IRS and HHS issued a new set of FAQs (number 14, for those still counting) covering changes to the Summary of Benefits and Coverage. The only changes (as emphasized in multiple places in the FAQs) are to add two disclosures:
- Whether the plan provides “minimum essential coverage” (or MEC)
- Whether the plan meets, or does not meet, the “minimum value” requirements.
MEC, simply put, is an employer-sponsored plan that complies with health care reform (whether or not its grandfathered). Minimum value (which is also relevant for play or pay purposes) generally means that the plan’s share of the total allowed costs of benefits provided under the plan or coverage is not less than 60 percent of such costs.
The good news is that the agencies did not add additional coverage examples or otherwise modify the SBC format, even though they had previously said that they would.
The agencies also extended much of the transition relief provided in prior guidance (see Q5). However, there is some question as to whether the transition relief afforded under Q10 of Number IX Set of FAQs, was extended. That FAQ provides, in relevant part, that for the first year only, a group health plan utilizing two or more insured products under a single health plan (as where the plan separately insures medical and prescription drugs) may issue separate partial SBCs for the different insured pieces of the plan. Additional clarification from the agencies would be helpful; however, we think the better interpretation is that this relief from the prior FAQ is extended.
The minimal SBC changes are welcome news for plan sponsors in dealing with this additional disclosure obligation. Plan sponsors should be sure to update their SBC templates for the new disclosures mentioned in the FAQs.
Update: The post below has been updated. After discussing this post with an alert reader, we have concluded that the correct reading of the regulations is reflected in Q8-10 below. The good news is: we don’t think there is a hole in the play or pay regulations! However, this reading of the rules results in John Boy (in our example) not getting coverage for more than two full years! Please see below.
In a prior post we discussed the general rules for hours counting and what it means to be full time under the play or pay/shared responsibility rules under ACA (a.k.a. health care reform). In this post, we address the special rules for new hires/new employees and how those rules overlap with the rules for ongoing employees. As before, we retain our Q&A format.
Q1: Who is considered a new employee?
Someone who has not been employed for at least one standard measurement period (SMP) is a new employee. (See our prior post for more detail on SMPs).
Q2: Do I have to count hours for all my new employees?
You don’t have to count hours for anyone if you just offer coverage to all your employees. However, assuming you don’t want to do that, then to the extent you choose to count hours, you can only count hours for new employees who are either (1) seasonal employees or (2) variable hour employees.
Q3: Who is a seasonal employee?
Right now, we don’t know. The definition is “reserved.” The IRS has said any reasonable, good faith interpretation may be used. However, it is not reasonable to treat an employee of an educational organization (e.g. teachers/professors) as “seasonal” even though they may not work a full 12-month year. (Note that “seasonal employee” is different than “seasonal worker,” which is the term that applies for determining if an employer is subject to the play or pay/shared responsibility tax.)
Q4: Who is a variable hour employee?
A variable hour employee is someone who, as of his/her start date, you cannot tell whether that employee is reasonably expected to work an average of at least 30 hours per week during the initial measurement period (IMP). This is a “facts and circumstances” determination, which basically means you have to take all relevant information into account and the IRS is unlikely to provide much, if any, guidance on what facts and circumstances are relevant. However, the IRS has said that, beginning in 2015, you cannot take into account the likelihood that the employee may terminate employment before the end of the IMP, so at least you know that.
Q5: How long can an IMP be?
It can be between 3 and 12 months, as selected by the employer.
Q6: When does an IMP start?
It can start any time between date of hire and the first of the month following date of hire. You could even pick two days in a month. For example, you could say that the IMP for all employees hired on the first through 15th will be the 15th and the IMP for all employees hired after that will begin on the last day of the month.
Q7: What if I determine that my new seasonal or variable hour employee worked more than 30 hours/week or 130 hours/month during the IMP?
Then you have to treat her as full time (i.e. offer coverage for her and her non-spouse dependents) during the following stability period. The stability period has to be at least six months long and cannot be shorter than your IMP. However, there are special rules for when the person moves from being a “new” employee to an “ongoing” employee” discussed below.
Q8: And if I determine that he didn’t?
Then you can treat him as not full-time/not have to offer him coverage during the stability period. In this case, the stability period is subject to a few rules:
(1) it cannot be more than 1 month longer than the IMP
(2) it cannot exceed the remainder of the SMP (plus any administrative period) in which the IMP ends.
So for example, say you have an SMP of October 15 to October 14 and an administrative period that runs through December 31. Say you’ve also chosen an 12-month IMP and a 12-month stability period following the IMP. John Boy is hired on October 31, 2013 and he’s a variable hour employee. You measure JB’s hours from October 31, 2013 to October 30, 2014 and determine that he was not full-time. Under rule (2) immediately above, John Boy’s stability period cannot exceed the remainder of the SMP (plus any administrative period) in which the IMP ends. Shall we read this to mean that the period in which the IMP ends includes the associated administrative period, or that it does not? October 30, 2014 falls in the administrative period following the 2013-2014 SMP, but it also falls within the 2014-2015 SMP that begins on October 15, 2014. While the regulations are a bit unclear, we think the better reading is that the period in which the IMP ends does not include the associated administrative period, and therefore, that John Boy’s initial stability period does not end December 31, 2014, but can last the full 12 months.
Q9: Do I get any kind of administrative period for new employees?
Yes, it can also be up to 90 days, but there are a couple of catches. First, you do not have to start your IMP on a date of hire (as noted above). But if you pick a later date (like first of the month following date of hire), any days between date of hire and that later date count against the 90-day period.
Perhaps more important, however, is that the combination of your IMP and the administrative period for new employees cannot extend beyond the last day of the first calendar month beginning on or after the first anniversary of date of hire. So in the example above with John Boy, the combined IMP and administrative period could not extend beyond November 30, 2014. This creates an incentive to hire employees early in the month but after the first of the month to provide as much time as possible for the administrative period. This is particularly true for employers who choose a date other than date of hire to start the IMP.
Q10: You mentioned some rules about new hires transitioning to ongoing employees. Can you talk about that some more?
Basically, once an employee has been employed for one full SMP, he or she is an ongoing employee. This means there could be significant overlap between the SMP and IMP and their respective stability periods. There are essentially 4 scenarios:
(1) Employee determined to be full-time during IMP and SMP – This is an easy one. The employee must be offered coverage for the stability period following the IMP and the stability period following the SMP. Going back to the John Boy example, assuming you took the maximum administrative period (through November 30), he would have to be offered coverage for the month of December 2014 and all of 2015.
(2) Employee determined to be full-time during the IMP, but not during the SMP – This employee has to be offered coverage for the entire stability period following the IMP. In the John Boy example, he would be offered coverage through November 30, 2015.
(3) Employee not full-time during IMP, but is full time during SMP – The employee does not have to be offered coverage until the stability period following the SMP. In the John Boy example, the initial stability period would go through November 30, 2015. At that point, JB has been through an SMP (October 15, 2014 – October 14, 2015), but his coverage (if elected) does not need to begin until January 1, 2016. Note that under our facts, John Boy is not offered coverage for more than two years from his date of hire (October 31, 2013)!
(4) Employee not full-time during either measurement period – This result is the one you think it is – no coverage during either period.
Q11: Can I have different IMPs and IMP stability periods, like I do for SMPs, for different categories of employees?
Yes, and they’re the same categories as we detailed in the prior post.
Q12: What if I determined that John Boy was full-time during the IMP and during the stability period he tells me he wants to go back to the prairie and only work part-time (because of the long commute)?
The same rules as we described in the prior post apply: he still must be considered full-time and eligible for coverage during the stability period.
Q13: Does the same rule apply if he is not full-time, but then I promote him to a full-time position during the IMP?
Here it’s a bit different. Under these rules, you have to treat John Boy as a full-time as of the earlier of:
(1) the first day of the fourth month following his promotion; or
(2) The first day of the first month after the end of the IMP and any administrative period.
However, other health reform rules currently require you to offer coverage within 90 days of when someone becomes full-time, which will likely be less than the first day of the fourth month following the promotion. Failure to comply with the 90-day rule could result in other penalties being assessed on the employer. It’s not yet clear how these rules interact, so the safest bet is to make the offer no later than 90 days following the promotion or the period described in (2), at least until the IRS clears up this confusion.
Q14: What if John Boy quits and then I rehire him? How do I count hours? What about leaves of absence? I still have so many questions left unanswered!
This is already getting kind of long, so we’ll address those in a future post.
Health insurance exchanges will offer government-regulated and standardized healthcare plans from which individuals may purchase health insurance eligible for federal subsidies. These exchanges must be ready to begin enrollment by October 1, 2013.
Every state, plus the District of Columbia, must have an exchange. States may choose to operate the exchange itself, operate it in partnership with the federal government or allow the federal Department of Health and Human Services (HHS) to operate the exchange.
Currently, it appears that 25 will have federal-run exchanges, 18 will have state-run exchanges, and 8 will have jointly-run (state/HHS) exchanges. The following identifies the respective state choices.
|Planned partnership exchange|
Whenever an employer wants to implement a wellness program, we are always compelled to advise them that the Equal Employment Opportunity Commission (EEOC) has yet to give us official guidance on the application of the Americans with Disabilities Act to wellness programs. The issue under the ADA is that, generally speaking, wellness programs usually involve disability-related inquiries, as that term is defined under the ADA. As such, to satisfy the ADA’s requirements, in the EEOC’s view the programs have to be voluntary. A program is voluntary for this purposes as long as the employer neither requires participation, nor penalizes employees who do not participate.
There was a 2009 informal discussion letter that was released and then subsequently revised wherein the EEOC, in the first version, said that compliance with the HIPAA nondiscrimination rules would make a program compliant with the ADA. The letter was subsequently revised to say that the EEOC has not ruled on whether compliance with HIPAA would meet compliance with the ADA.
The EEOC recently released a letter from January of this year involving a wellness program for employees with diabetes. The program waived the annual deductible for employees who met certain requirements, such as enrollment in a disease management program or adherence to a doctor’s exercise and medication recommendations. The EEOC said that reasonable accommodations would have to be made for those who could not meet the wellness program’s standard due a disability (as broadly defined in the ADA). This is, of course, similar to the reasonable accommodation standard under the HIPAA nondiscrimination rules. The EEOC yet again did not express an opinion on what level of inducement would cause a wellness program to be involuntary.
In fairness, these discussion letters are not official, binding guidance, so they would make a bad place for the EEOC to provide an opinion on such an important issue. However, their failure to address it through formal regulation remains somewhat troubling.
Interestingly, when courts have considered wellness programs under the ADA, they analyzed wellness programs differently. They have generally held that the wellness programs are part of a bona fide benefit plan, and thus fall under a separate ADA exemption that does not implicate the voluntariness issue. Of course, there are limitations to those holdings, as described in our prior post on one of those cases.
The bottom line is that, in designing a wellness program, employers should always consider the ADA risk involved before proceeding.