U.S. Supreme Court Upholds ACA Subsidies in Federal Exchanges

by

On June 25, 2015, the U.S. Supreme Court issued a final ruling in King v. Burwell. This case challenged the availability of health insurance Exchange subsidies in states with Exchanges run by the federal government.

In a 6-3 decision, the Court held that, in drafting the Affordable Care Act (ACA), Congress intended for the federal government to provide subsidies in all states—those that established their own Exchanges and those that have federally facilitated Exchanges, or FFEs.

According to the Supreme Court, without the availability of these subsidies in all states, several other key ACA provisions would not operate as intended (including the individual mandate and the employer shared responsibility rules). The Court’s ruling means that subsidies are available in all states, including those with FFEs.

Health Insurance Exchanges and Subsidies

The ACA requires each state to have an Exchange for individuals and small businesses to purchase private health insurance. The ACA delegated primary responsibility for establishing the Exchanges to each individual state. However, the Department of Health and Human Services (HHS) operates an FFE in any state that refuses or is unable to set up an Exchange. For 2015, only 13 states and the District of Columbia established their own Exchanges. HHS operates FFEs in the remaining states (with state assistance in some cases—but in most cases, with no state assistance).

The ACA also created health insurance subsidies to help eligible individuals and families purchase coverage through an Exchange. The subsidies are designed to make Exchange coverage more affordable by reducing out-of-pocket health care costs.

Of the approximately 11 million people who selected private health plans during the 2015 open enrollment period, nearly 9 million obtained coverage through an FFE. According to HHS, 87 percent of Exchange consumers have been determined to be eligible for subsidized insurance.

Overview of King v. Burwell

King v. Burwell is one of several lawsuits that were filed in response to an IRS rule authorizing subsidies in all states, including those with FFEs. These cases challenged the ability of the federal government to provide subsidies to individuals in states with FFEs.

This case was filed by four individuals who live in a state with an FFE. They argued that the IRS rule authorizing subsidies in all states conflicts with the text of the ACA. They asserted that, according to the law’s plain language, the ACA only authorized subsidies to be provided in states that have established their own Exchanges.

Although the Supreme Court agreed that text of the ACA is ambiguous, it noted that the ACA’s subsidy provision must be read in a manner “that is compatible with the rest of the law.”

If subsidies were not available in federal Exchanges, the Supreme Court concluded that “it would destabilize the individual insurance market in any State with a Federal Exchange, and likely create the very ‘death spirals’ that Congress designed the Act to avoid.” Also, if the federal government was unable to provide subsidies in states that have FFEs, the Court asserted that several other key ACA provisions would not operate as intended.

For example, the individual mandate “would not apply in a meaningful way, because so many individuals would be exempt from the requirement without the tax credits.” In addition, because the employer shared responsibility penalties are triggered only when an employee receives a premium tax credit, those penalties would not apply in any states where the subsidies were unavailable.

Therefore, according to the Supreme Court, it “stands to reason that Congress meant for those [subsidies] to apply in every state.”

A number of similar lawsuits are still pending in federal courts. These courts are required to follow the Supreme Court’s ruling when issuing their decisions. Therefore, it is expected that the decisions in other cases will be consistent with the Supreme Court’s ruling.

Impact on Employers

While the case was pending, the Obama Administration continued to make federal subsidies available to eligible individuals in all states, including those with FFEs.

On Nov. 7, 2014, the White House posted a statement, mirroring an earlier IRS statement, to confirm that nothing changed for individuals receiving advance payments of the premium tax credit and that tax credits remained available.

Because the Supreme Court ruled that ACA subsidies are available in all states, including those with FFEs, eligible individuals in all states may continue to receive subsidies for their Exchange coverage.

A ruling that struck down the availability of subsidies in FFEs would have had significant implications for employers as a result of the ACA’s employer mandate. Under the employer mandate, certain large employers may face penalties if they do not offer coverage to their full-time employees that meets certain requirements. These penalties apply only if an employee receives a subsidy to buy coverage through an Exchange.

If the subsidies were available only in state-based Exchanges, employers would not be subject to penalties for employees living in states with an FFE. However, because the subsidies remain available in all states, the employer shared responsibility penalties will still apply for employers in all states.

More Information

Please contact Clarke & Company Benefits, LLC for more information on the ACA’s federal subsidies or the employer mandate.

Health Savings Account (HSA) Contribution Rules (Part 2)

by

Many employers offer high deductible health plans (HDHPs) to control premium costs and pair this coverage with health savings accounts (HSAs) to help employees with their health care expenses.

An HSA is a tax-favored trust or account that can be contributed to by, or on behalf of, an eligible individual for the purpose of paying qualified medical expenses. For example, individuals can use their HSAs to pay for expenses covered under their HDHPs until their deductibles have been met, or they can use their HSAs to pay for qualified medical expenses not covered by their HDHPs, such as dental or vision expenses.

HSAs provide a triple tax advantage—contributions, investment earnings and amounts distributed for qualified medical expenses are all exempt from federal income tax, Social Security/Medicare tax and most state income taxes. Due to an HSA’s potential tax savings, federal tax law includes strict rules for HSA contributions.

Are there any special contribution limits for spouses?

There is a special contribution rule for married individuals, which provides that if either spouse has family HDHP coverage, then both spouses are treated as having only that family coverage.

If both spouses are HSA-eligible, the HSA contribution limit calculated under this special contribution rule is a joint limit, which is divided equally between the spouses (unless they agree on a different division). This means that if both spouses are HSA-eligible and either has family HDHP coverage, the spouses’ combined contribution limit is the annual maximum limit for individuals with family HDHP coverage.

This special contribution rule applies even if one spouse has family HDHP coverage and the other has self-only HDHP coverage, or if each spouse has family HDHP coverage that does not cover the other spouse.

The special contribution rule for married spouses does not apply to catch-up contributions. Married couples who both are over age 55 may each make an additional catch-up contribution ($1,000) to their separate HSAs.

Spouses who are HSA-eligible may allocate the joint contribution limit in any way they want. They may divide the limit equally or allocate it between their HSAs in any proportion, including allocating it entirely to one spouse.

In addition, keep in mind that HSAs are individual trusts or accounts, which means that spouses cannot share a joint HSA. Also, if a spouse has non-HDHP coverage (such as a low-deductible health plan, general purpose FSA or HRA) that covers the other spouse, both spouses are ineligible for HSA contributions.

The special contribution rule for married spouses does not apply when:
  • Only one spouse is HSA-eligible. The contribution limit is determined based on the HSA-eligible spouse’s coverage, without applying the special contribution rule. This means that the HSA–eligible spouse may contribute the full amount based on his or her HDHP coverage and no allocation is made to the ineligible spouse.
  • Neither spouse has family coverage. Contributions to each eligible spouse’s HSA are subject to the limit on contributions for persons with self-only coverage, plus any available catch-up contributions. One spouse cannot reduce his or her own HSA contributions in order to allow the other spouse to make contributions greater than the self-only coverage limit.

If employees make pre-tax HSA contributions, can they change their elections during a plan year?

HSAs are commonly offered with HDHPs under an employer’s Section 125 plan (or a cafeteria plan). This allows employees to make their HSA and HDHP contributions as pre-tax salary reductions.

As a general rule, cafeteria plan elections are irrevocable for an entire plan year. This means that participants ordinarily cannot make changes to their cafeteria plan elections during a plan year. The IRS, however, allows a cafeteria plan to be designed to permit mid-year election changes in limited situations.

IRS Notice 2004-50 confirms that the irrevocable election rules do not apply to a cafeteria plan’s HSA benefit. An employee who elects to make HSA contributions under a cafeteria plan may start or stop the election or increase or decrease the election at any time during the plan year, as long as the change is effective prospectively. If an employer places additional restrictions on HSA contribution elections under its cafeteria plan, then the same restrictions must apply to all employees. Also, to be consistent with the HSA monthly eligibility rules, HSA election changes must be allowed at least monthly and upon loss of HSA eligibility.

What are the rules for employer HSA contributions?

Employers may contribute to the HSAs of current or former employees. An individual’s HSA contribution limit is reduced by any employer contributions (including pre-tax salary deferrals under a cafeteria plan) made to his or her HSA (or Archer MSA).

When an employer makes a pre-tax contribution to an employee’s HSA, the employer should have a reasonable belief that the contribution will be excluded from the employee’s income. However, the employee, and not the employer, is primarily responsible for determining eligibility for HSA contributions.

IRS Notice 2004-50 states that an employer is only responsible for determining whether the employee is covered under an HDHP or any low-deductible health plan sponsored by the employer, including health FSAs and HRAs.

 

In addition, if an employer makes HSA contributions outside of a cafeteria plan, the employer must make comparable contributions to the HSAs of all comparable participating employees. As a general rule, contributions are comparable if they are the same dollar amount or the same percentage of the HDHP deductible. If an employer fails to comply with the comparability requirement during a calendar year, it will be liable for an excise tax equal to 35 percent of the aggregate amount contributed by the employer to the HSAs of its employees during that calendar year.

The comparability rules do not apply to employer HSA contributions made through a cafeteria plan. Employer contributions to employees’ HSAs are made through the cafeteria plan when the cafeteria plan allows eligible participants to make pre-tax salary deferrals to fund their HSAs. When employer HSA contributions are made through a cafeteria plan, however, the employer’s contributions are subject to the nondiscrimination rules governing cafeteria plans.

What is the deadline for making HSA contributions?

Although the dollar limit for HSA contributions is determined on a monthly basis, HSA contributions do not have to be made in equal amounts each month. An eligible individual can contribute in a lump sum or in any amounts or any frequency that he or she wants.

 Deadline for HSA Contributions All HSA contributions for the eligible individual’s taxable year must be made by the date for filing his or her federal income tax return for that year, without extensions. For example, all contributions for 2015 would have to be made by April 15, 2016, the date for filing the 2015 federal income tax return, without extensions.

Are rollover contributions or transfers from other accounts allowed?

Rollovers from Other HSAs or Archer MSAs

HSAs may accept rollover contributions from another HSA or from an Archer MSA. These rollover contributions do not count toward the annual HSA contribution limit, and they are not required to be in cash. Also, an individual does not need to be HSA-eligible to make a rollover contribution from his or her existing HSA to a new HSA. To qualify as a rollover distribution, the amount must be distributed from the other HSA (or Archer MSA) to the HSA accountholder and then deposited into the individual’s HSA within 60 days of when the distribution was received.

This rollover exception only applies once every 12 months. In addition, HSA funds may be moved from one HSA trustee directly to another HSA trustee (called a trustee-to-trustee transfer). There is no limit on the number of trustee-to-trustee transfers allowed during a year.

Transfers from IRAs – Qualified HSA Funding Distributions

An HSA–eligible individual may irrevocably elect a direct trustee-to-trustee transfer of a qualified HSA funding distribution from his or her traditional IRA or Roth IRA into his or her HSA. Qualified funding distributions may not be made from ongoing SEP IRAs or SIMPLE IRAs.

Generally, only one qualified HSA funding distribution is allowed during the lifetime of an individual. Also, the distributions must be from an IRA to an HSA owned by the individual who owns the IRA, or, in the case of an inherited IRA, for whom the IRA is maintained. This means a qualified HSA funding distribution cannot be made to an HSA owned by any other person, including the individual’s spouse.

Qualified HSA funding distributions are counted as contributions when applying the annual HSA contribution limit for the taxable year in which they are contributed to the HSA.

In addition, the qualified HSA funding distribution rules require the individual to remain HSA–eligible during a testing period. The testing period begins with the month in which the qualified funding distribution is contributed to the HSA and ends on the last day of the twelfth month following that month. For example, if a qualified funding distribution is made on June 4, 2015, the testing period would begin in June 2015 and continue until June 30, 2016. If an individual loses his or her HSA eligibility at any time during the testing period, the amount of the qualified HSA funding distribution is included in the individual’s gross income, and the amount is subject to a 10 percent additional tax. These adverse tax consequences do not apply if an individual ceases to be HSA–eligible due to disability or death.

How are HSA contributions taxed?

All HSA contributions receive tax-favored treatment (unless they are excess contributions). The specific tax treatment, however, depends on who is making the contribution, as described in the table below.

Source of Contribution Tax Treatment
HSA  Accountholder Individuals who make contributions to their own HSAs get an above-the-line deduction for the contributions.
Family member or other person/entity (but not employer) These contributions may be subject to applicable gift taxes. Contributions made by anyone other than an employer are deductible by the HSA accountholder (but not necessarily by the contributor) in computing adjusted gross income (that is, as an above-the-line deduction).
Employer contributions (including employees’ pre-tax salary deferrals under a cafeteria plan) In general, these contributions are deductible by the employer and excludable from employee’s gross income. Also, they are not subject to income tax withholding or Social Security/Medicare taxes, if, at the time of contribution, it is reasonable to believe that the contribution will be excluded from the employee’s income.

HSA contributions that exceed an individual’s maximum contribution amount or that are made by or on behalf of an individual who is not HSA-eligible are considered “excess contributions.” Excess contributions are not deductible by the HSA owner. Also, employer HSA contributions are included in the gross income of the employee to the extent that they exceed the individual’s maximum contribution amount or are made on behalf of an employee who is not an eligible individual.

A 6 percent excise tax is imposed on the HSA owner for all excess contributions. The excise tax can be avoided if the excess contributions for a taxable year (and the net income attributable to those excess contributions) are distributed to the HSA owner by the deadline for filing the owner’s federal income tax return for the taxable year (that is, the following April 15).

If a corrective distribution is made, then:
  • The net income attributable to the excess contributions is included in the HSA owner’s gross income for the taxable year in which the distribution is received.
  • The 6 percent excise tax is not imposed on the excess contributions; and
  • The distribution of the excess contributions is not taxed (but the excess contribution is included in the owner’s gross income because it is not deductible or excludable for tax purposes).

The 6 percent excise tax is cumulative and will continue in future years if a corrective distribution is not made. For each year, the HSA owner must pay excise tax on the total of all excess contributions in the account. However, the amount on which the tax is assessed is reduced in certain circumstances. For example, if HSA contributions for any year are less than the maximum limit for that year, the amount subject to the excise tax is reduced (for that year and subsequent years) by the difference between the maximum limit for the year and the amount actually contributed.

Health Savings Account (HSA) Contribution Rules (Part 1)

by

Many employers offer high deductible health plans (HDHPs) to control premium costs and pair this coverage with health savings accounts (HSAs) to help employees with their health care expenses.

An HSA is a tax-favored trust or account that can be contributed to by, or on behalf of, an eligible individual for the purpose of paying qualified medical expenses. For example, individuals can use their HSAs to pay for expenses covered under their HDHPs until their deductibles have been met, or they can use their HSAs to pay for qualified medical expenses not covered by their HDHPs, such as dental or vision expenses.

HSAs provide a triple tax advantage—contributions, investment earnings and amounts distributed for qualified medical expenses are all exempt from federal income tax, Social Security/Medicare tax and most state income taxes. Due to an HSA’s potential tax savings, federal tax law includes strict rules for HSA contributions.

Who can contribute to an HSA?

Only an eligible individual can establish an HSA and make HSA contributions (or have them made on his or her behalf). An individual’s eligibility for HSA contributions is generally determined monthly, as of the first day of the month.

To be HSA-eligible for a month, an individual must:

  • Be covered by an HDHP on the first day of the month;
  • Not be covered by other health coverage that is not an HDHP (with certain exceptions);
  • Not be enrolled in Medicare; and
  • Not be eligible to be claimed as a dependent on another person’s tax return.

HSA contributions can be made by the HSA account holder or by any other person on his or her behalf, including an employer or family member. An individual who is no longer HSA-eligible may still contribute to his or her HSA (or have contributions made on his or her behalf) for the months of the year in which he or she was HSA-eligible.

How much can be contributed to an HSA each year?

For each month an individual is HSA-eligible, he or she may contribute one-twelfth of the applicable maximum contribution limit for the year. This limit is called the general monthly contribution rule. The applicable maximum contribution limit depends on whether the individual has self-only HDHP coverage or family HDHP coverage on the first day of the month.

  • Self-only HDHP coverage is HDHP coverage for only one HSA–eligible individual.
  • Family HDHP coverage is HDHP coverage for one HSA-eligible individual and at least one other individual (regardless of whether the other individual is HSA–eligible).

The maximum HSA contribution limits are subject to an annual adjustment for inflation. By June 1 of each calendar year, the Internal Revenue Service (IRS) publishes the cost-of-living adjustments that will become effective as of the next Jan. 1.

Maximum Contribution Limit

Type of coverage 2014 2015 2016
Self-only HDHP coverage $3,300 $3,350 $3,350
Family HDHP coverage $6,550 $6,650 $6,750

Except for rollover contributions, all HSA contributions made by or on behalf of an HSA–eligible individual are aggregated for purposes of applying the maximum contribution limit. However, HSA administrative fees or account maintenance fees paid by the HSA accountholder (or someone on his or her behalf) are not HSA contributions, and do not count toward the annual contribution limit. Also, all HSA contributions, except rollover contributions, must be made in cash. For example, HSA contributions cannot be made in stock or other property.

In addition, if an HSA accountholder has an Archer MSA, the maximum contribution limit for the HSA is reduced by any amounts contributed to the Archer MSA for the taxable year.

Keep in mind that there are some special contribution rules for individuals who are age 55 or older, mid-year HDHP enrollees and married spouses with family HDHP coverage. These rules, which are discussed below, may impact how much can be contributed to an individual’s HSA each year.

Who is eligible to make catch-up contributions?

Individuals who are age 55 or older by the end of the tax year are permitted to make additional HSA contributions, called “catch-up contributions.” The maximum annual catch-up contribution is $1,000. Because the catch-up contribution limit is not adjusted for inflation, it remains the same year after year. As with the general HSA contribution limit, the catch-up contribution limit is determined on a monthly basis.

The HSA catch-up contribution limit is not reduced for the year in which the individual reaches age 55 if he or she reaches age 55 after Jan. 1. For example, an individual who is HSA-eligible for all of 2015 and who turns age 55 on Dec. 1, 2015, may make a full $1,000 catch-up contribution for 2015.

A married couple may make two HSA catch-up contributions, as long as both spouses are at least age 55. However, in order for a married couple to make two HSA catch-up contributions, a separate HSA must be established in the name of each spouse.

What is the full-contribution rule for mid-year enrollees?

The full-contribution rule is an exception to the general rule that the maximum amount of HSA contributions for a year is determined monthly, based on the individual’s HSA eligibility for that month.

Full-contribution Rule Under the full-contribution rule, an individual is treated as HSA-eligible for the entire calendar year for purposes of HSA contributions, if he or she becomes covered under an HDHP in a month other than January and is HSA-eligible on Dec. 1 of that year.

The eligible individual is treated as enrolled in the same HDHP coverage (that is, self-only or family coverage) as he or she has on the first day of the last month of the year. For example, if an individual first becomes HSA-eligible on Dec. 1, 2015, and has family HDHP coverage, he or she is treated as an eligible individual who had family HDHP coverage for all twelve months in 2015.

The full-contribution rule applies regardless of whether the individual was an eligible individual for the entire year, had HDHP coverage for the entire year, or had disqualifying non-HDHP coverage for part of the year. However, an individual who relies on this special rule must generally remain HSA-eligible during a 13-month testing period, with exceptions for death and disability.

The full-contribution rule applies to both the general monthly contribution limit and to the additional HSA catch-up contribution limit for eligible individuals who reach age 55 by the end of the year.

The full-contribution rule, however, does not change the requirement that expenses incurred before the date the HSA was established cannot be reimbursed by the HSA. An HSA is not established before the date that the HSA is actually established, even when individuals are treated as HSA–eligible for the entire year under the full-contribution rule.

How does the full-contribution rule work?

The full-contribution rule can increase, but not decrease, the amount that an individual would otherwise be eligible to contribute to his or her HSA under the general monthly contribution rule.

An individual who is eligible for the full-contribution rule can contribute the greater of:
  • The maximum amount determined under the general monthly contribution rule for the taxable year, based on the individual’s HDHP coverage—that is, self-only or family coverage—for each month of the year that he or she is HSA-eligible (without regard to the full-contribution rule); OR
  • The full HSA contribution limit for the taxable year based on the type of HDHP coverage (that is, self-only or family coverage) that he or she had on Dec. 1 of that year.

Thus, under the full-contribution rule, an individual who has self-only HDHP coverage for most of the taxable year, but who switches to family HDHP coverage late in the year and who still has family HDHP coverage on Dec. 1 of that year, will be able to contribute significantly more to his or her HSA for the year than if he or she had kept self-only HDHP coverage for all 12 months of the year.

What is the testing period for the full-contribution rule?

If an individual makes additional HSA contributions (or if contributions are made on his or her behalf) under the full-contribution rule, and the individual does not remain HSA-eligible during the 13-month testing period, he or she will experience adverse tax consequences.

These adverse tax consequences do not apply, however, if an individual loses his or her HSA eligibility during the testing period due to disability or death.

Also, to remain HSA-eligible during the testing period, an individual is not required to keep the same level of HDHP coverage during the testing period. Thus, if an HSA-eligible individual merely changes his or her HDHP coverage level (from self-only to family coverage, or vice versa) during the testing period, he or she will not suffer any adverse tax consequences.

The testing period begins on Dec. 1 of the year for which the HSA contributions were made, and it ends on Dec. 31 of the following year.

Adverse Tax Consequences

If an individual makes additional contributions under the full-contribution rule and then ceases to be HSA-eligible during the testing period, the additional contributions that were made under the full-contribution rule will be:

  • Includible in the individual’s gross income (for the taxable year containing the first month of the testing period for which the individual ceases to be HSA–eligible); and
  • Subject to an additional 10 percent tax.

The amount that is included in the individual’s gross income is computed by subtracting the amount that could have been contributed under the general monthly contribution rule from the amount actually contributed under the full-contribution rule.

Earnings on the taxable amount are not included in gross income and are not subject to the 10 percent additional tax, as long as the earnings remain in the individual’s HSA or are used for qualified medical expenses.

The 10 percent additional tax for the failure to remain HSA-eligible during the testing period applies regardless of the individual’s age (that is, it applies even after the individual attains age 65).

This additional tax cannot be avoided by withdrawing the taxable amounts from the HSA. An amount included in an individual’s federal gross income because the individual failed to remain HSA-eligible during the testing period is not an “excess contribution.” Withdrawing the taxable amount (and not using the withdrawn amount for qualified medical expenses) will result in double taxation because the withdrawn amount will again be included in the individual’s gross income and (unless the individual has died, become disabled or attained age 65) will also be subject to the additional 20 percent tax on nonmedical distributions.

Lookout for part 2 on Thursday!

 

Final Rule Updates the SBC Requirement

by

On June 16, 2015, the Departments of Labor (DOL), Health and Human Services (HHS) and the Treasury (Departments) published final regulations on the summary of benefits and coverage (SBC) and uniform glossary requirement under the Affordable Care Act (ACA).

These regulations finalize provisions in proposed regulations that were published on Dec. 30, 2014, in order to amend prior final regulations from Feb. 14, 2012. According to the Departments, the changes made by these final regulations are designed to improve consumers’ access to important health plan information and to provide clarification that will make it easier for group health plans and health insurance issuers to comply with the SBC requirement.

Effective Date

The final regulations generally apply to coverage that begins on or after Sept. 1, 2015. However, for disclosures to individuals and dependents in the individual market, the requirements apply to coverage that begins on or after Jan. 1, 2016.

Until these final regulations become applicable, plans and issuers must continue to comply with the 2012 final regulations, as applicable.

New SBC Template

In conjunction with the December 2014 proposed regulations, the Departments issued a draft-updated template, instructions and supplementary materials. The Departments previously issued an FAQ on March 31, 2015, announcing that the finalized template, instructions and uniform glossary are not expected to be finalized until January 2016. The final rule reiterates this expected timeline.

These new documents will apply for plan years beginning on or after Jan. 1, 2017 (including open enrollment periods in fall of 2016 for coverage beginning on or after Jan. 1, 2017).

SBC and Uniform Glossary Requirements

The ACA expanded ERISA’s disclosure requirements by requiring group health plans and issuers to provide an SBC to applicants and enrollees at certain times, such as before enrollment and re-enrollment. The SBC requirement became effective for plan coverage that began on or after Sept. 23, 2012.

In addition, plans and issuers must make a uniform glossary of health coverage-related terms and medical terms available to participants. Plans and issuers must provide the uniform glossary upon request, in either paper or electronic form, within seven business days after receipt of the request.

The 2012 regulations require plans and issuers to provide the SBC and uniform glossary in a standardized format. In conjunction with the 2012 regulations, the Departments provided a template for the SBC and related materials, including a uniform glossary, for plans and issuers to use (available on the DOL website).

After the 2012 regulations were issued, the Departments released a series of FAQs on the SBC requirement. FAQs Parts VII, VIII, IX, X, XIV and XIX addressed questions related to compliance with the 2012 regulations, implemented additional safe harbors and released updated SBC materials.

On Dec. 30, 2014, the Departments issued additional proposed regulations, as well as a new proposed SBC template, instructions, an updated uniform glossary and other materials.  The draft-updated template, instructions and supplementary materials are available on the DOL website under the heading “Templates, Instructions, and Related Materials—Proposed (SBCs On or After 9/15/15).”

The ACA establishes a penalty of up to $1,000 for each willful failure to provide the SBC. Failing to provide the SBC may also trigger an excise tax of $100 per individual for each day of noncompliance. However, the Departments have stated that their approach to implementation emphasizes assisting (rather than imposing penalties on) plans, issuers and others that are working diligently and in good faith to understand and come into compliance with the SBC requirement.

Overview of the Final Regulations

The 2015 regulations generally finalize the December 2014 proposed regulations without significant changes, which implement certain changes to the SBC requirement. Overall, the modifications in the final regulations:

  • Clarify when and how a plan or issuer must provide an SBC;
  • Streamline the SBC template; and
  • Add certain elements to the SBC template that the Departments believe will be useful to consumers.

In addition, the final regulations make some of the SBC enforcement safe harbors and transitions permanent, with several modifications.

Providing the SBC

The final regulations provide additional guidance on when a plan or issuer must provide the SBC to participants and beneficiaries. For example, the final regulations clarify how to satisfy the requirement to provide an SBC in the following situations:

  • The issuer provides the SBC upon request before application for coverage—If the issuer provides the SBC upon request before application for coverage, the requirement to provide an SBC upon application is deemed satisfied, and the issuer is not required to automatically provide another SBC upon application to the same entity or individual (provided there is no change to the information required to be in the SBC). However, if there has been a change in the information required to be included in the SBC, a new SBC that includes the changed information must be provided upon application (that is, as soon as practicable following receipt of the application, but in no event later than seven business days following receipt of the application).
  • The terms of coverage are not finalized—If the plan sponsor is negotiating coverage terms after an application has been filed and the information required to be in the SBC changes, an updated SBC is not required to be provided to the plan or its sponsor (unless an updated SBC is requested) until the first day of coverage. The updated SBC is required to reflect the final coverage terms under the policy, certificate, or contract of insurance that was purchased.

Reducing Duplication

The 2012 regulations provide three special rules to avoid unnecessary duplication when providing the SBC. For example, the 2012 regulations provide that if either the plan or the issuer provides the SBC to a participant or beneficiary in accordance with the timing and content requirements, both will have satisfied their SBC obligations. The final regulations retain these rules, and also add new rules to prevent unnecessary duplication where:

  • A group health plan utilizes a binding contractual arrangement where another party assumes responsibility to provide the SBC;
  • A group health plan uses two or more insurance products provided by separate issuers to insure benefits with respect to a single group health plan; and
  • The SBC for student health insurance coverage is provided by another party (such as an institution of higher education).

Formatting and Content Changes

The ACA limits the length of the SBC to four pages, but the 2012 regulations interpret this requirement to be four double-sided pages. The final regulations retain this interpretation, allowing the SBC to be four double-sided pages.

However, some plans and issuers have expressed concern regarding the difficulty of complying with the page limit while including all of the required information. Therefore, the final regulations provide that the Departments will address specific issues related to completing the four-page template, as well as the issues plans and issuers encounter while meeting these requirements, with the finalization of the new template and associated documents, separate from the final regulations.

The proposed regulations also included a number of changes to the content of the SBC and uniform glossary to reflect the ACA’s insurance market reforms. For example, references to annual limits for essential health benefits and pre-existing condition exclusions would be removed. In addition, the disclosures relating to continuation of coverage, minimum essential coverage and minimum value would be revised to provide more useful information to consumers, including those shopping in the individual market. These content changes were not finalized in the final regulations, but will likely be addressed when the new template and associated documents are finalized.

However, the final regulations do clarify that all plans and issuers must include the following on the SBC:

  • Contact information for questions; and
  • A Web address where a copy of the actual individual coverage policy or group certificate of coverage can be reviewed and obtained.

Source: U.S. Departments of Labor, Health and Human Services and the Treasury

Embedded Out-of-Pocket Maximum of Family Coverage

by

The Affordable Care Act (ACA) requires non-grandfathered health plans to include an annual limit on total enrollee cost sharing for essential health benefits (EHB). This annual limit is often referred to as an “out-of-pocket maximum” or “maximum out-of-pocket” (MOOP).

Recent guidance from the Department of Health and Human Services (HHS) and the Department of Labor (DOL) provides that, effective for plan years beginning on or after Jan. 1, 2016, non-grandfathered health plans must apply the ACA’s self-only MOOP to all individuals, regardless of whether they have self-only or family coverage.

This guidance requires group health plans to embed an individual out-of-pocket maximum in the plan’s family coverage when the family out-of-pocket maximum exceeds the ACA’s out-of-pocket maximum for self-only coverage. This guidance applies to all non-grandfathered group health plans, including self-funded plans and insured plans of all sizes. However, it will likely have the biggest impact on high deductible health plans (HDHPs) because these plans have higher cost-sharing limits.

ACA Cost-sharing limit

The ACA’s limit on total enrollee cost sharing became effective for plan years beginning on or after Jan. 1, 2014. It applies to all non-grandfathered plans. This includes, for example, non-grandfathered self-insured health plans and insured health plans of any size. The ACA’s out-of-pocket maximum for EHB does not apply to plans with grandfathered status.

Cost sharing includes any expenditure required by or on behalf of an enrollee with respect to EHB, such as deductibles, copayments, coinsurance and similar charges. It excludes premiums and spending for noncovered services. out-of-pocket maximum limits

The ACA’s for EHB are as follows:

2014 2015 2016
Self-only Coverage $6,350 $6,600 $6,850
Family Coverage $12,700 $13,200 $13,700

The out-of-pocket maximum applies for the plan year and not the calendar year for non-calendar year plans. Also, plans and issuers are permitted, but not required, to count out-of-network cost sharing against the annual out-of-pocket maximum.

Once the out-of-pocket maximum is reached for the year, the enrollee is not responsible for additional cost sharing for EHB for the remainder of the year. According to HHS, the out-of-pocket maximum ensures that health plans pay for significant health expenses and limits the risk of medical debt or bankruptcy for insured individuals.

HDHP/HSA rules

Federal tax law also imposes a minimum deductible and an out-of-pocket maximum on HDHPs that are compatible with health savings accounts (HSAs). The HDHP out-of-pocket maximum is less than the ACA’s out-of-pocket maximum. In order for a health plan to qualify as an HDHP, the plan must comply with the lower out-of-pocket maximum for HDHPs.

With the exception of preventive care benefits, no benefits can be paid by an HDHP until the minimum annual deductible has been satisfied.

The cost-sharing limits for HDHPs are as follows:

Type of Limit 2014 2015 2016
HDHP Minimum Deductible Self-only $1,250 $1,300 $1,300
Family $2,500 $2,600 $2,600
HDHP Out-of-pocket Maximum Self-only $6,350 $6,450 $6,550
Family $12,700 $12,900 $13,100

The minimum deductible and out-of-pocket expense limits for HDHP coverage are adjusted for increases in the cost-of-living. By June 1 of each calendar year, the IRS publishes the cost-of-living adjustments that will become effective as of the next Jan. 1. For HDHPs with non-calendar plan years, the adjusted limits for the calendar year in which the HDHP’s plan year begins can be applied for that entire plan year.

Embedded Out-Of-Pocket Maximum

Currently, most group health plans that offer self-only and family coverage have separate out-of-pocket maximums for these levels of coverage, and do not apply the self-only MOOP to individuals who have family coverage. For example, if a plan has a $6,000 MOOP for self-only coverage and a $12,000 MOOP for family coverage, individuals who have family coverage would have their expenses paid at 100 percent for a year, only after the family satisfies the $12,000 MOOP, even if one individual incurred all of the out-of-pocket expenses. According to HHS and the DOL, this type of plan design is no longer permitted for non-grandfathered plans, effective for plan years beginning in or after 2016.

On Feb. 27, 2015, HHS issued its 2016 Notice of Benefit and Payment Parameters under the ACA. In the preamble to this final rule, HHS stated that the ACA’s annual out-of-pocket maximum for self-only coverage applies to all individuals, regardless of whether an individual is covered by self-only coverage or coverage other than self-only (that is, family coverage).

Example: If an HDHP’s family coverage has a $10,000 out-of-pocket maximum and one individual in the family coverage incurs $20,000 in expenses from a hospital stay, then that individual would only be responsible for paying the cost sharing related to the costs of the hospital stay covered as an EHB up to the annual limit on cost sharing for self-only coverage ($6,850 for 2016).

In addition, on May 8, 2015, HHS issued an FAQ explaining how this new guidance affects HDHPs with family deductibles that are higher than the ACA’s cost-sharing limit for self-only coverage.

According to HHS’ FAQ, for 2016: ·        An issuer can offer a family HDHP with a $10,000 family deductible, as long as it applies a maximum annual limitation on cost sharing of $6,850 to each individual in the plan, even if the family $10,000 deductible has not yet been satisfied. This standard does not conflict with IRS rules on HDHPs.

·        Except for preventive care, an HDHP cannot provide benefits for any year until the minimum annual deductible for that year has been met ($2,600 for family coverage for 2016). Because the $6,850 self-only maximum annual limitation on cost sharing exceeds the 2016 minimum annual deductible amount for family HDHP coverage ($2,600), it will not cause the plan to fail to satisfy the requirements for a family HDHP.

On May 26, 2015, the DOL issued an FAQ to clarify the application of the new guidance to self-funded and large group health plans and the effective date for the new guidance. In the FAQ, the DOL confirmed that:

  • Like the ACA’s out-of-pocket maximum for EHB, the requirement that the self-only MOOP be applied to all individuals (regardless of whether they are enrolled in self-only or family coverage) applies to all non-grandfathered group health plans. There are no exceptions for self-funded plans and large group health plans.
  • This new requirement does not apply to 2015 plan years. It applies to plan years that begin in or after 2016.

The DOL also provided the following example of how the embedded individual MOOP should be applied when a group health plan has a family MOOP that exceeds the ACA’s out-of-pocket maximum for self-only coverage.

Example: Assume that a family of four individuals is enrolled in family coverage under a group health plan in 2016 with an aggregate annual limitation on cost sharing of $13,000 for all four enrollees. Assume that individual #1 incurs claims associated with $10,000 in cost sharing, and that individuals #2, #3 and #4 each incur claims associated with $3,000 in cost sharing (in each case, absent the application of any annual limitation on cost sharing). In this case, under the new guidance discussed above, because the self-only maximum annual limitation on cost sharing ($6,850 in 2016) applies to each individual, cost sharing for individual #1 for 2016 is limited to $6,850, and the plan is required to bear the difference between the $10,000 in cost sharing for individual #1 and the maximum annual limitation for that individual, or $3,150.  With respect to cost sharing incurred by all four individuals under the policy, the aggregate $15,850 ($6,850 + $3,000 + $3,000 + $3,000) in cost sharing that would otherwise be incurred by the four individuals together is limited to $13,000, the annual aggregate limitation under the plan, under the assumptions in this example, and the plan must bear the difference between the $15,850 and the $13,000 annual limitation, or $2,850.