Wrap Coverage Gets an Update with a Second Round of Proposed Rules

523558463On December 19, 2014, the Departments of Labor, Health and Human Services, and Treasury (collectively, the Departments) issued proposed regulations for two circumstances in which an employer can sponsor health coverage that wraps around and supplements individual health insurance and still qualifies as an excepted benefit: (1) limited wraparound coverage offered to part-time employees with individual policies and (2) limited wraparound coverage offered to employees with multi-state plan coverage. This post focuses on the proposed rules related to wraparound coverage offered to part-time employees. More about the multi-state plans can be found at the end of this post.

The notion of limited wraparound coverage as an excepted benefit was formally introduced by the Departments in late 2013. Since that time, the Departments have been collecting and analyzing comments in response to those proposed regulations, which had five requirements for limited wrap coverage to qualify as an excepted benefit. (See our post regarding the five requirements here.)

The opportunity to sponsor health coverage that qualifies as an excepted benefit is important for two reasons: (1) the employer sponsor does not risk penalties for violating the market reform requirements that apply to group health plans but not to excepted benefits and (2) the employees who are offered the excepted benefit are still eligible for tax credits in the Exchange (which is not the case when offered group health coverage).

Basic Premise

The basic premise of the proposed regulations is that an employer can offer “wraparound coverage” to part-time employees with individual policies. This is not, however, a proposal to allow employers to reimburse employees for the cost of individual polices – that is strictly prohibited and can cost employers large sums in tax penalties. (See guidance issued September 13, 2013; May 13, 2014; November 6, 2014) The proposed rules instead allow employers to offer benefits that supplement the benefits part-time employees would have from individual plans.* The idea is that the individual plan together with the wraparound plan would provide a low-wage part-time employee with benefits comparable to the primary employer sponsored group health plan that is available to full-time and part-time employees, but which is unaffordable for the part-time employees. As the requirements outlined below illustrate, however, the administrative burden of putting a limited wraparound plan in place may far outweigh the benefits for all but a few select employers.

*It is important to note that the individual plan being wrapped cannot be a grandfathered plan, a transition plan, or a plan consisting solely of excepted benefits.

Five Requirements

Under the proposed rules, there are still five requirements that must be met in order for limited wraparound benefits provided through an employer sponsored group health plan to constitute excepted benefits, although there are important changes from the original 2013 proposed rules. The first three requirements that must be met in order for limited wraparound coverage to be considered an excepted benefit are as follows:

  1. The wraparound coverage must be designed to provide “meaningful benefits beyond coverage of cost sharing under eligible individual health insurance;”
  2. The total cost of the wraparound coverage (both employer and employee contribution) must not exceed maximum annual contribution for health flexible spending accounts (i.e., $2550 in 2015); and
  3. The wraparound coverage must not impose any pre-existing condition exclusions, discriminate based on any health factor or discriminate in favor of highly compensated employees.

These first three requirements outlined in the proposed regulations leave some questions unanswered. For example, what exactly is meant by “meaningful benefits beyond coverage of cost sharing” and how does an employer satisfy that requirement? Even the Departments are not quite sure what this means, but offer up two examples – coverage that provides expanded in-network clinics and providers or coverage that provides benefits that are not EHC and not covered by the individual plan. The Departments also provide examples of what would not satisfy this requirement, including an account-based reimbursement arrangement. We have heard from the Departments more than once on that subject and these proposed rules do nothing to change the Departments’ position that employer reimbursement of the cost of an individual plan is impermissible. Beyond these examples, the Departments invite suggestions for safe harbors standardizing the benefits in limited wraparound coverage that would satisfy this requirement.

The fourth requirement relates to eligibility and has multiple parts:

  • The limited wraparound coverage can be available only to part-time employees or retirees;
  • Individuals eligible for the limited wraparound coverage must not be participants in an excepted health FSA;
  • The employer sponsor of the limited wraparound coverage must offer substantially all full-time employees coverage that (i) is “substantially similar” to coverage required by the Employer Mandate (Code Section 4980H) of the Affordable Care Act (i.e., minimum essential coverage to substantially all full-time employees and their dependents); (ii) provides minimum value; and (iii) is “reasonably expected to be affordable;”
  • Individuals eligible for the wraparound coverage must also be offered other group health plan coverage that is not limited to excepted benefits.

Again, questions arise in response to these proposed requirements. For example, what does it mean to offer coverage that is “substantially similar” to coverage required by the Employer Mandate? What is meant by “reasonably expected to be affordable?” How does that relate to the affordability requirement in 4980H and how does an employer satisfy this requirement? If a part-time employee is eligible for other group health coverage in addition to the limited wraparound coverage, how are they still eligible for tax credits in the Exchange? These and other questions will surely be addressed by stakeholder comments to the proposed regulations, which will be accepted until January 22, 2015.

The fifth and final requirement for limited wraparound coverage to qualify as an excepted benefit is a reporting requirement that must be satisfied by the employer sponsor (and health insurance issuer). The proposed rules simply state that an employer sponsor of limited wraparound coverage must report to HHS information required to determine if the exception for limited wraparound coverage allows employer sponsors to provide part-time employees with comparable benefits to those enrolled in minimum essential coverage under a group health plan. The Departments promise additional details regarding this reporting requirement in future guidance.

Effective Date

The proposed rules are presented as a pilot program with a sunset date. As a pilot program, the rules would be effective for limited wraparound plans offered no later than December 31, 2017 and would remain effective for three years. Presumably the Departments will decide if the exception for limited wraparound coverage should be extended, terminated or expanded when the rules sunset.

Conclusion

As complicated as these proposed regulations may be, it appears that the Departments are trying to find a way to encourage employers to provide health benefits to part-time employees without replacing the employer sponsored primary group coverage offered to full-time employees and without jeopardizing part-time employees’ potential eligibility for tax credits in the Exchange. It will be interesting to see what comments are submitted and what the next round of limited wraparound coverage regulations bring.

 

A note about the multi-state plan (MSP) program

The MSP program was established by the ACA and directs the Office of Personnel Management (OPM) to contract with private health insurers in each State to offer high-quality, affordable health insurance options through the Exchange called Multi-State Plans. Tax credits are available to eligible individuals seeking to enroll in MSP plans. OPM is also responsible for administering the Federal Employees Health Benefits (FEHB).

In order for limited employer sponsored coverage intended to wrap around a multi-state plan (as opposed to an individual plan) to be considered an excepted benefit, eligibility requirements must be satisfied (in addition to the first three requirements noted above):

  • The coverage must be specifically designed and approved by OPM to provide benefits in conjunction with multi-state plan coverage;
  • Beginning in 2014, the employer must have offered coverage that is “substantially similar” to coverage that the employer would need to offer in order to avoid penalties under the Employer Mandate (section 4980H of the Code) of the ACA;
  • Beginning in 2014, the employer must have offered coverage meeting the ACA’s minimum value and affordability requirements “to a substantial portion of full-time employees;”
  • The employer’s annual aggregate contributions for both primary and limited wraparound coverage must be substantially the same as its aggregate contributions for coverage offered to full-time employees in 2014.

 

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