Guidance Addresses ERISA Preemption of State Stop-loss Insurance Laws and More

Practical Law Legal Update 9-587-3525 (Approx. 6 pages)

Guidance Addresses ERISA Preemption of State Stop-loss Insurance Laws and More

by Practical Law Employee Benefits & Executive Compensation

FAQs on Reimbursement Arrangements

The DOL and Internal Revenue Service (IRS) previously issued guidance on whether certain employer health care arrangements, including health reimbursement arrangements (HRAs) and employer payment plans, comply with the ACA (see Legal Updates, Excise Taxes Apply to Employer Reimbursements of Employee Health Insurance Premiums and Guidance Addresses the ACA's Impact on EAPs, HRAs and Health FSAs).

The IRS indicated in the prior guidance that an employer payment plan involving employer reimbursements or direct payments of health plan premiums does not satisfy certain ACA market reforms, including:

The prohibition on annual dollar limits for essential health benefits (see Practice Note, Lifetime Limits, Annual Limits, and Essential Health Benefits Under the ACA).
The requirement to provide certain preventive care without cost sharing (see Practice Notes, Preventive Health Services Under the ACA, Other Than Contraceptives and Contraceptives Coverage Under the ACA).

As a result, these arrangements could result in excise taxes of $100 per day, per employee, under the tax code (26 U.S.C § 4980D; see Practice Note, Excise Tax Reporting for Group Health Plans (IRS Form 8928)).

The Departments' FAQs address why certain other employer health care arrangements do not comply with the ACA.

Employer Cash Reimbursements for Individual Policies

In the first FAQ, the Departments concluded that an employer arrangement that provides cash reimbursements to employees to purchase individual market policies will not satisfy the ACA’s group market reforms, for example, the requirement to provide preventive services without cost sharing. According to the Departments, this arrangement:

Is a group health plan and therefore subject to the ACA’s market reforms applicable to group health plans.
Cannot be integrated with an individual policy to satisfy the market reforms.
Will therefore, standing alone, violate the market reforms and be subject to substantial penalties, including excise taxes under Code Section 4980D (26 U.S.C. § 4980D.

Cash-or-coverage Arrangements for High Claims Risk Employees

In the second FAQ, the Departments concluded that an employer that offers the choice—only to employees with high claims risk—between cash or enrolling in the employer's standard group health plan would violate HIPAA's prohibition on discrimination based on a health factor. In the Departments’ view, this type of cash-or-coverage arrangement, offered only to employees with high claims risk, is not a form of "benign discrimination" (that is, a more favorable eligibility rule or reduced premium or contribution based on an adverse health factor) permitted under implementing regulations.

This type of cash-or-coverage arrangement violates HIPAA's nondiscrimination rules regardless of whether:

The employer treats the cash payment as pre-tax or post-tax to the employee.
The employer is involved in choosing or buying an individual market product.
The employee obtains any individual health insurance.

Expanding on its benign discrimination analysis, the government asserted that offering a cash alternative only to high-claims-risk employees means that these employees must include the cost of foregoing the additional cash in choosing to elect coverage. As a result, these employees effectively pay an increased premium that reflects the additional compensation the employee foregoes by enrolling in the plan. The Departments intend to propose guidance to clarify the scope of the benign discrimination rules.

The Departments also indicated that the choice between taxable cash and a qualified benefit (that is, the election of group health plan coverage) must be offered under a cafeteria plan (see Practice Note, Cafeteria Plans). According to the Departments, a requirement that effectively imposes an additional cost to elect group health plan coverage (that is, the cost of forgoing the cash amount in order to elect plan coverage) potentially discriminates in favor of highly compensated individuals in violation of the cafeteria plan nondiscrimination requirements.

Reimbursement Plans to Purchase Individual Policies

In the third FAQ, the Departments rejected a new market product under which employers are being encouraged to drop their group policies and establish a Code Section 105 reimbursement plan under which:

Insurance brokers assist the employer’s employees in selecting individual insurance policies.
Eligible employees could claim premium tax credits under the ACA’s health insurance exchanges.

In the Departments’ view, these arrangements are group health plans in their own right and therefore participating employees are ineligible for premium tax credits or cost-sharing reductions for exchange coverage. According to the Departments, an employer’s lack of involvement with an employee’s selection of the individual policy did not prevent the arrangement from being a group health plan. The Departments noted that under the DOL’s safe harbor for voluntary arrangements, many factors must be considered in determining whether a group health plan exists (see Practice Note, Voluntary Benefits).

Moreover, the Departments indicated that this product would need to satisfy the ACA’s market reforms and could not be integrated with an individual policy to do so. The product would therefore be subject to penalties that include Section 4980D excise taxes (see Employer Cash Reimbursements for Individual Policies).

Technical Release 2014-01

In Technical Release 2014-01, the DOL addressed whether ERISA preempts state laws regulating stop-loss insurance policies. As background, sponsors of self-insured health plans often purchase stop-loss insurance policies to protect against severe losses resulting from large claims. Stop-loss policies generally cover the cost of claims that exceed a certain amount, known as an attachment point. For example, a stop-loss policy might pay claims for:

A single enrollee once the claims exceed $500,000 in the plan year.
All claims that exceed 125% of expected claims per plan year for all covered employees.

In Technical Release 2014-01, the DOL recognized that some stop-loss insurers may offer policies with such low attachment points that, but for regulation by state insurance law, the insurer would assume virtually all of a plan sponsor's claims risk. In response, some states have enacted laws regulating stop-loss insurance, despite concerns regarding the applicability of ERISA's preemption rules. One of these rules (the "Deemer Clause") prohibits states from deeming employee benefit plans to be insurance companies to regulate them under insurance laws, which are excepted from ERISA's general preemption provision.

For example, in American Medical Security, Inc. v. Bartlett, the Fourth Circuit invalidated a Maryland law that would have deemed stop-loss insurance with low attachment points to be health insurance when sold to self-insured group health plans (111 F.3d 358 (4th Cir. 1997)). Maryland subsequently enacted a law prohibiting insurers from selling stop-loss insurance with either:

A specific attachment point of less than $10,000.
An aggregate attachment point of less than 115% of expected claims.

In addition, a 2002 model law adopted by the National Association of Insurance Commissioners (NAIC) prohibits the sale of stop-loss insurance with a specific annual attachment point below $20,000.

In Technical Release 2014-01, the DOL takes the view that states may regulate insurance policies issued to plans or plan sponsors if the law regulates the insurance company and the business of insurance. In doing so, the DOL cites the Supreme Court's Kentucky Association decision, in which the Court introduced a new test for assessing whether a state law is considered to regulate insurance under the savings clause exception to the preemption rule (538 U.S. 329 (2003)). According to the DOL, state regulation of stop-loss policies can have an effect similar to that of insurance regulation of group health insurance (that is, limiting insurance policy choices available to third parties, including employee benefit plans), without running afoul of ERISA's preemption general rule. As a result, a state law prohibiting insurers from issuing stop-loss contracts with attachment points below the applicable limit would not, in the DOL's view, be preempted by ERISA. To date, about ten states have enacted laws using the same approach as the NAIC model.

Guidance Addresses ERISA Preemption of State Stop-loss Insurance Laws and More | Practical Law