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Final Excepted Benefit Rules Address Limited Wraparound Coverage
Practical Law Legal Update 0-604-8487 (Approx. 9 pages)
Final Excepted Benefit Rules Address Limited Wraparound Coverage
by Practical Law Employee Benefits & Executive Compensation
| Published on 18 Mar 2015 • USA (National/Federal) |
The Departments of Labor, Health and Human Services, and Treasury have issued final regulations that modify the criteria for when limited wraparound coverage is an excepted benefit under HIPAA and the Affordable Care Act (ACA). The final regulations include several clarifications to the proposed regulations regarding limited wraparound coverage, which were issued in December 2014.
On March 16, 2015, the Departments of Labor (DOL), Health and Human Services (HHS), and Treasury (Departments) issued final regulations that update the criteria for limited wraparound coverage to qualify as an excepted benefit. In general, excepted benefits are exempt from certain requirements under the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the Affordable Care Act (ACA) (29 C.F.R. § 2590.732(c)(3); 26 C.F.R. § 54.9831-1(c)(3); 45 C.F.R. § 146.145(b)(3)). The regulations, which are effective May 18, 2015, finalize proposed regulations that were issued in December 2014, with several clarifications (see Legal Update, Proposed Excepted Benefit Rules Update Limited Wraparound Coverage Criteria).
Excepted Benefits
Certain group health plan requirements under the Employee Retirement Income Security Act of 1974 (ERISA), the Internal Revenue Code (Code) and the Public Health Service Act (PHSA), and including changes under the ACA, generally do not apply to "excepted benefits." The final regulations amend a subpart of one of the four general excepted benefits categories (specifically, the category for limited excepted benefits). This subpart was previously addressed in proposed guidance on excepted benefits issued in December 2013 (see Legal Update, Proposed Rules Include Excepted Benefits Wraparound Coverage Option and EAP Guidance). In September 2014, the Departments finalized a portion of the December 2013 proposed regulations (see Legal Update, New Guidelines for Employee Assistance Programs) but indicated they would issue additional guidance addressing limited wraparound coverage.
In December 2014, the Departments issued proposed regulations that set out five requirements for limited wraparound coverage to constitute an excepted benefit. After considering comments received on the proposed regulations, the Departments issued these final regulations. The final regulations, like the December 2014 proposed regulations, establish five requirements for limited wraparound coverage to be considered an excepted benefit. The final regulations also permit limited wraparound coverage under a pilot program that includes a sunset date (see Pilot Program and Sunset Date).
Limited Wraparound Coverage
Limited benefits provided under a group health plan can constitute excepted benefits if, in addition to satisfying the regulations' five requirements, the coverage wraps around either:
- "Eligible individual health insurance," defined as individual health insurance coverage that:
- is not a grandfathered health plan (see Practice Note, Grandfathered Health Plans Under the ACA);
- does not consist solely of excepted benefits; and
- is not a transitional individual health insurance market plan.
- Coverage under a multi-state plan program (MSPP) (see Practice Note, Multi-State Plans under the ACA and Legal Update, OPM Finalizes Changes to ACA Multi-State Plan Program).
First Requirement: Coverage of Additional Benefits
As a first requirement, limited wraparound coverage must:
- Be specifically designed to wrap around eligible individual health coverage or multi-state plan coverage.
- Provide "meaningful benefits" beyond coverage of cost sharing under eligible individual health insurance or multi-state plan coverage. This is because reduced cost sharing can be obtained by choosing an individual health insurance policy with a higher actuarial value.
- Not provide benefits solely under a coordination of benefits provision, or be solely an account-based reimbursement arrangement (rather, the coverage must be a risk-sharing product covering a defined package of services).
In response to comments requesting clarity on the type of benefits that would qualify as meaningful benefits, the Departments offered additional examples that include:
- Reimbursement for the full cost of primary care.
- The cost of prescription drugs not included in the primary plan's formulary.
- Ten doctor visits per year.
- Services considered out-of-network under the primary plan.
- Access to on-site clinics at no cost.
- Benefits for a specific population (for example, orthopedic injuries).
- Home health coverage.
- Coverage of benefits that are not essential health benefits (EHBs) under the primary plan (see Practice Note, Lifetime Limits, Annual Limits, and Essential Health Benefits Under the ACA).
Second Requirement: Cost of Coverage Limits
In a change from the proposed regulations, the annual cost of coverage per employee (and covered dependents) under the limited wraparound coverage cannot be more than the greater of:
- The maximum permitted annual salary reduction contribution for health flexible spending accounts (health FSAs), as indexed for inflation ($2,550 for 2015). Also, the cost of coverage under the limited wraparound coverage:
- includes both employer and employee contributions towards coverage; and
- is determined using the same method used for calculating COBRA premiums (see Practice Note, COBRA Overview).
- 15% of the cost of coverage under the primary plan. The cost of coverage under the primary plan and the limited wraparound coverage:
- includes both employer and employee contributions towards the coverage; and
- is determined using the same method used to calculate COBRA premiums.
The per-employee, annual cost of coverage determination is made on an aggregate basis using sound actuarial principles. The Departments rejected a request to adopt a higher cost of coverage limit, for example, using the limits for health savings accounts (see Practice Note, Defined Contribution Health Plans).
Third Requirement: Nondiscrimination
Limited wraparound coverage must satisfy each of the following nondiscrimination requirements:
- Consistent with the ACA, the coverage may not impose preexisting condition exclusions (see Practice Note, Preexisting Condition Exclusions and Rescissions Under the ACA).
- The coverage may not discriminate against individuals in eligibility, benefits or premiums based on a health factor of the individual or a dependent.
- The coverage and any employer-sponsored group health plan coverage must, as applicable:
- satisfy the ACA's nondiscrimination requirements for insured, non-grandfathered plans (see Practice Notes, Nondiscrimination Requirements for Insured Group Health Plans Under the ACA and Grandfathered Health Plans Under the ACA); and
- not fail to be excludible from the individual's income under Code Section 105(h).
The Departments noted that any possible interactions between excepted benefits and the ACA's excise tax on high-cost coverage would be addressed in future guidance (see Practice Note, Cadillac Plan Excise Tax Under the ACA and Legal Update, IRS Cadillac Tax Rules Highlight Need for COBRA Guidance).
Fourth Requirement: Plan Eligibility
Limited wraparound coverage must also satisfy several plan eligibility requirements. For example, individuals eligible for limited wraparound coverage cannot be enrolled in excepted benefit coverage that is a health FSA (see Practice Note, Cafeteria Plans: Flexible Spending Arrangements).
In addition, the coverage must satisfy either of two separate eligibility requirements:
- Rules for wraparound coverage offered in coordination with eligible individual health insurance for non-full-time employees (see Limited Wraparound Coverage in Conjunction with Eligible Individual Health Insurance for Non-Full-Time Employees).
- Standards for coverage that wraps around certain multi-state plan coverage (see Limited Wraparound Coverage Offered in Conjunction with Multi-State Plan Coverage).
Limited Wraparound Coverage in Conjunction with Eligible Individual Health Insurance for Non-Full-Time Employees
The first set of eligibility standards is intended for employers that:
- Generally offer affordable, minimum value coverage to full-time employees.
- Also want to offer additional benefits to their part-time workers.
Limited coverage offered in conjunction with eligible individual health insurance for non-full-time employees must meet three requirements:
- For each year that wraparound coverage is offered, the employer sponsoring the plan offering wraparound coverage must offer its full-time employees coverage that:
- is substantially similar to coverage the employer must offer its full-time employees to comply with the ACA's employer mandate (see Employer Mandate Toolkit);
- provides minimum value (see 26 U.S.C. § 36B(c)(2)(C)(ii)); and
- is reasonably expected to be affordable (see 26 C.F.R. § 54.4980H-5(e)(2)).
- Eligibility for limited wraparound coverage must be limited to employees who are non-full-time employees or retirees (and their respective dependents). According to the Departments, full-time employees are employees that are reasonably expected to work at least an average of 30 hours per week, though not necessarily using the definition of full-time employee under the employer mandate rules (see Practice Note, Employer Mandate Under the ACA: Determining Full-time Employees for Employer Payments).
- Group health plan coverage that is not limited to excepted benefits must be offered to individuals who are eligible for the wraparound coverage. Only individuals eligible for the other group health plan coverage may be eligible for the wraparound coverage. The final regulations clarify that employers need not offer group health plan coverage to workers who are not full-time employees, but may only offer wraparound coverage to workers otherwise eligible for group health plan coverage.
The final regulations clarify that, if an employer has no full-time employees but the plan covers retirees or part-time employees, the first of the above three requirements (and its three subparts) are considered satisfied.
Limited Wraparound Coverage Offered in Conjunction with Multi-state Plan Coverage
Limited wraparound coverage offered in conjunction with MSPPs must meet four requirements, which were modified from the proposed regulations:
- The coverage must be specifically reviewed and approved (but not designed) by the Office of Personnel Management (OPM) to provide benefits in conjunction with coverage under an MSPP (see Practice Note, Multi-State Plans Under the ACA). OPM's role is to review and approve the limited wraparound coverage.
- The employer must have offered coverage in plan years beginning in either 2013 or 2014 that is similar to coverage that the employer would need to have offered its full-time employees to avoid employer mandate liability, if the mandate had applied.
- In the plan year that began in 2013 or 2014, the employer must have offered coverage to a substantial portion of full-time employees that provided minimum value and was affordable.
- The employer's annual total contributions for both primary and limited wraparound coverage must be substantially the same as the employer's total contributions for coverage offered to full-time employees in 2013 or 2014. According to the Department, "substantially the same" means that contributions were at least 80% of contributions made in 2013 or 2014, as applied on an average, full-time worker basis. This equivalence must continue for the duration of the pilot program for which limited wraparound coverage is allowed as an excepted benefit (see Pilot Program and Sunset Date).
Fifth Requirement: Reporting
The limited wraparound coverage also must be reported to the government. Specifically:
- The plan sponsor of a group health plan offering limited wraparound coverage must provide information to HHS so that HHS can determine whether the coverage is adequate.
- A self-insured plan, or a health insurer offering MSPP wraparound coverage, must provide information to OPM so that OPM can determine whether the coverage is sufficient.
Pilot Program and Sunset Date
The final regulations allow limited wraparound coverage under a pilot program with a specified sunset date. Under the proposed regulations, limited wraparound coverage could be offered as an excepted benefit if it was offered by December 31, 2017. However, after receiving comments requesting a longer implementation period, the Departments revised this date. As a result, the final regulations provide that limited wraparound coverage can be offered as excepted benefits if the coverage is first offered:
- No earlier than January 1, 2016.
- No later than December 31, 2018.
Also, the coverage must end on the later of the date:
- That is three years after the date that wraparound coverage is first offered.
- On which the last collective bargaining agreement relating to the plan terminates after the date the wraparound coverage is first offered.
Practical Impact
The final regulations on limited wraparound coverage are the latest in a series of guidance from the Departments addressing the scope of excepted benefits (as another example, see Legal Update, New Guidelines for Employee Assistance Programs). These final regulations are intended to offer employers a way to provide certain employees, dependents and retirees who have enrolled in individual market coverage with overall coverage analogous to what they could receive under the employer's group health plan. However, the wraparound coverage is subject to a significant set of compliance requirements and design restrictions that may limit its appeal for many employers. However, the government did appear willing to allow a relatively broad set of benefits to be offered as "meaningful benefits" in the limited wraparound context, as reflected by the additional examples it provided.