PPACA ADVISOR - PARAMETERS; MULTI-STATE

HHS ISSUES PROPOSED RULES ON 'BENEFIT AND PAYMENT' PARAMETERS,' MULTI-STATE PLAN PROGRAM

The following is a summary of proposed regulations. Some or all of the provisions may change when final rules are issued. 

On Dec. 5 and 7, 2012, the Department of Health and Human Services (HHS) issued two more sets of proposed rules that provide added details on how the Patient Protection and Affordable Care Act (PPACA) will probably unfold.
The "Benefit and Payment Parameters" proposed rule addresses a number of topics.  Of particular interest to employers are proposed rules regarding:

• The temporary reinsurance and risk adjustment programs
• Small-business health options program (SHOP) exchanges
• A timing change for medical loss ratio (MLR) beginning in 2014
• A user fee for those using federally facilitated exchanges

The public comment period for this proposed rule ends Dec. 31, 2012.  

Temporary Reinsurance Program
The Temporary Reinsurance Program (TRP) is intended to provide funding to cover additional costs associated with covering formerly uninsured individuals who may have unmet health needs.  The program will run from 2014 through 2016 and would be funded by both fully insured and self-funded plans. The estimated fee for 2014 is $5.25 per covered person per month ($63 per year).  This fee will decline by about one-third for 2015 and by yet another one-third for 2016.

The fee would be assessed based upon the average number of covered lives (employees, pre-Medicare retirees and dependents) covered by major medical plans during the year, which means that standalone dental and vision, specified disease, hospital indemnity, employee assistance programs (EAPs), wellness programs, health reimbursement arrangements (HRAs), health savings accounts (HSAs) and health flexible spending accounts (FSAs) would not be included.

The insurer would be responsible for reporting and paying the fee if the employer only offers one fully insured plan.  If the plan is self-funded, or if the employer offers multiple options, the plan sponsor (typically, this is the employer) would be responsible for determining the fee, to allow each person to only be counted once. The calculation would be similar to that used for the Patient Centered Outcomes Research (PCORI) fee, which among other things, allows use of a quarterly or monthly snapshot.   (Employers would be allowed to use different methods of counting covered lives for the PCORI and TRP reporting.)

Data would be reported by Nov. 15 based upon covered lives during the first nine months of the calendar year.  The amount to be available for this program is set out in the law ($10 billion to 12 billion in 2014, $6 billion to 8 billion in 2015 and $4 billion to 5 billion in 2016), so HHS would divide that amount by the reported covered lives to determine each entity's liability.  That amount would be billed mid-December and would be due around Jan.15 of 2015, 2016 and 2017.  Amounts would then be disbursed to insurers in the individual market to help pay large claims.

Risk Adjustment Program
The risk adjustment program is permanent, and will involve the annual transfer of funds from insurers who have a concentration of low-risk insureds to those with high-risk insureds.  The program will impact all nongrandfathered insured plans in the individual and small group markets, whether the plan is provided through or outside of an exchange.

Each year, an insurer's total risk would be calculated, and insurers below the average risk would transfer funds to insurers with a total risk above the average risk. Insurers would pay a fee to HHS each June to cover the administrative costs of the program; the fee is expected to be about $1 per covered life per year.

FFE Fee
HHS has proposed a fee of three and one-half percent of premium to cover the cost of running a federally facilitated exchange (FFE) for those states that choose not to run their own exchange.

SHOP Exchange
The proposed rule provides that, at least through 2016, eligibility for the small-business health option program (SHOP) exchange would be limited to small employers.  An employer would be "small" for exchange purposes if it has 100 or fewer employees, although a state could elect to use 50 employees for the limit in 2014 and 2015.  Employees would be counted the same way employees are counted for purposes of the employer shared responsibility/play or pay penalty (employees who average 30 or more hours per week would be considered full-time, and the hours of part-time employees would be totaled to calculate "full-time equivalent" employees).  In states that have a federally-facilitated exchange (because the state chose not to set up its own exchange), the maximum number of full-time and full-time equivalent employees an employer could have to be in the SHOP would be 100 employees.

In FFEs (and in states with their own exchanges unless the state opts to do otherwise), the employer would choose a metal level (bronze, silver, gold or platinum), and employees would choose the plan they want that is available at that metal level.  The employer would be required to offer coverage to all full-time employees who had satisfied the waiting period.  A 70 percent participation rate (excluding those with coverage through another employer, Medicare, Medicaid and TRICARE) would apply unless a different rate is generally used in the state.  The employer would choose the amount it would contribute toward the cost of coverage (carriers would be allowed to impose a minimum contribution requirement).

MLR Adjustments
The proposed rule provides that if an MLR payment is used to reduce premiums, it would need to be applied to the next premium due after the MLR due date.  Also, beginning in 2014, the MLR payment due date would be Sept. 30.

The text of the proposed rule is here:  Proposed Rule - Benefit and Payment Parameters

Multi-State Plan Program
PPACA directs the federal Office of Personnel Management (OPM) to enter into contracts with private health insurance issuers to offer at least two Multi-State Plans (MSPs) through the exchanges. Health insurance issuers who wished to provide an MSP would apply to OPM. OPM would determine which issuers are qualified to become MSP issuers, enter into contracts with the issuers and approve the plans to be offered on exchanges.

The proposed rules:

• Would require the MSP issuer to be operating in all states by 2018 but allow it to phase in the states in which it offers coverage from 2014 to 2018
• Provide that insurers and nonprofits operating under a single service mark or common ownership could join together to provide the required national coverage
• Provide for assessment of user fees to help OPM cover the cost of running the MSP program
• Allow an MSP to choose between offering the state essential health benefits (EHB) package approved in each state in which it operates, or offering one of three EHB benchmark plans available to federal employees
• Provide that an MSP would have to comply with the same cost-sharing rules that apply to other plans in the exchange, would have to offer at least gold-level coverage and silver-level coverage and would be included in the state's risk pool

The text of the proposed rule is here: Proposed Rule - Multi-State Plan Program
Public comments are due Jan. 4, 2013.

Important: These rules are still in the "proposed" stage, which means that there may be changes when the final rule is issued.  Employers should view the proposed rules as an indication of how plans will be regulated beginning in 2014, but need to understand that changes are entirely possible.

Highlights of Rules On Health Insurance Market Rules

HIGHLIGHTS OF RULES ON HEALTH INSURANCE MARKET RULES

The following is a summary of proposed regulations. Some or all of the provisions may change when final rules are issued.

On November 20, 2012, the Department of Health and Human Services (HHS) issued proposed rules that address a number of health insurance market reforms. The rule is still in the "proposed" stage, which means that there may, and likely will, be changes when the final rule is issued. 

The proposed rule confirms that nongrandfathered health insurers (whether operating through or outside an exchange) would be prohibited from denying coverage to someone because of a pre-existing condition or other health factor. Individuals generally would be required to purchase coverage during an open enrollment period, with special enrollment periods available following qualifying events. Small employers would be able to purchase coverage throughout the year.

The proposed rule reiterates PPACA's limits on permissible premium variations for policies in the exchanges and individual and small group markets, providing that premiums may only vary based upon:

• Age (with a maximum 3-to-1 ratio, which is well below the 5-to-1 or t-to-1 ratio currently in use in some states)
• Tobacco use (with a maximum 1 and 1/2-to-1 ratio)
• Geographic location; and 
• Family size

Other parts of the proposed rule call for a great deal of standardization in implementation of the reforms, including:

• A proposal that rates be set by totaling rates that are calculated separately for each covered individual (although employers would be permitted to either use an average composite rate or a method that charges older employees and smokers the allowable surcharge when determining premium contributions)
• A proposal that all carriers use one-year age bands, with a prescribed age band table, for everyone except children under age 21 and adults over age 63
• A requirement that all individuals enrolled in nongrandfathered small-group plans be considered one risk pool (all those in nongrandfathered individual policies would be in another risk pool, although a state could choose to merge the two pools); this means that different blocks could no longer be considered different risk pools
• Allowing states to identify up to 7 geographic regions for rating purposes but requiring that any rating differences between the regions be actuarially justified
• Allowing employer contribution and group participation requirements to reduce adverse selection
• Requiring that all rate increases be submitted to HHS

The proposed rule may be found here: Health Insurance Market Rules

Important: This rule is still in the "proposed" stage, and HHS has asked for input on a number of issues. This means there may be a number of changes when the final rule is issued. The public may make suggestions until December 26, 2012, on how the proposed rule should be changed before it is finalized. Employers should view the proposed rule as an indication of how the exchanges and small group market will be regulated beginning in 2014, but need to understand that changes are entirely possible. 

IRS Posts Three Proposed Regulations Addressing Open Issues Under PPACA

On Nov. 20, 2012, the Department of Health and Human Services issued proposed rules that address:

·      Wellness programs under PPACA
·      Essential health benefits and determining actuarial value
·      Health insurance market reforms

All three rules are still in the "proposed" stage, which means that there may -- and likely will -- be changes when the final rules are issued.  There is a 30-day comment period on the essential health benefits and market reforms rules, and a 60-day comment period on the wellness rule.

Nondiscriminatory Wellness Incentives

The proposed rule largely carries forward the rules that have been in effect since 2006.  It reiterates that there are no limits on incentives that may be provided in a program that simply rewards participation, such as a program that reimburses the cost of a smoking cessation program, regardless whether the employee actually quits smoking.  Programs that are results-based (now called "health-contingent wellness programs") still must meet five conditions (the program must be reasonably designed to promote health or prevent disease, provide a chance to qualify for the reward at least once a year, provide an alternative standard for those for whom it is unreasonably difficult due to a medical condition to satisfy the standard, describe the availability of the alternative standard in program materials, and cap the reward or penalty at a percentage of the total cost of coverage).

The proposed rule also:

• Confirms that the maximum reward or penalty beginning with the 2014 plan year is 30   percent of the total cost of coverage (up from the current 20 percent limit)
• Would provide an exception to the 30 percent maximum reward/penalty for tobacco use, and would instead allow a penalty of 50 percent of the total cost of coverage for smoking (to be consistent with the 1.5:1 surcharge that will be allowed in the exchange and small employer market plans for tobacco use)
•  Confirms that grandfathered plans would be allowed to use the increased 30 (or 50) percent reward/penalty beginning in 2014
• Provides that the employer would have to locate and pay for the alternative standard program 
• Would prohibit limits on the number of times an employee could use an alternative standard (meaning, for example, that an employee would be eligible for the non-smoker discount if he continues to smoke, but participates in a smoking cessation program multiple times)

Essential Health Benefits (EHBs) and Actuarial Value

The proposed rule resolves an ambiguity in the law, and provides that the restrictions on cost sharing (i.e., maximum deductibles and out-of-pocket maximums) will not apply to self-funded and large employer plans.  The proposed rule also:

• Confirms that nongrandfathered plans in the exchanges and the small group market will be required to cover the 10 essential health benefits (ambulatory/outpatient, emergency, hospitalization, maternity and newborn care, mental health and substance use, prescription drugs, rehabilitative and habilitative services and devices -- e.g., speech, physical and occupational therapy, laboratory services, preventive and wellness services and chronic disease management, and pediatric services, including pediatric dental and vision care) and meet the "metal" standards (provide an actuarial value of 60, 70, 80 or 90 percent)
• Provides that states have 30 days from the date the proposed rule is published to elect the policy that will serve as their baseline for EHBs, and includes a list of state elections to date and the applicable default policy
• Provides a method for supplementing the baseline plan's benefits, if the baseline does not cover all 10 EHBs
• Provides that other policies in the exchange and small group market must generally provide the same coverage within each EHB category as the baseline plan, but that they may substitute an actuarially equivalent benefit within a category
• States that HHS will provide a calculator that must be used to determine actuarial value (with exceptions for unique plan designs); the proposed methodology for the calculator is provided in the proposed rule
• Provides that a plan that is within 2 percent of the metal standard would be acceptable (so, for instance, a plan with an actuarial value of 68 percent - 72 percent would be considered a "silver" plan)
• Provides that state mandates in effect as of Dec. 31, 2011, would be considered EHBs
• Confirms that self-funded plans and those in the large employer market would not need to provide the 10 EHBs; instead, they must provide an actuarial benefit of at least 60 percent and provide coverage for  hospital and emergency care, physician and mid-level practitioner care, pharmacy, and laboratory and imaging to be considered "minimum value"
• States that HHS and the IRS will provide a minimum value calculator and safe harbor plan designs that self-funded and large group plans could use to determine whether the plan provides minimum value
• Provides that current year employer contributions to a health savings account (HSA) or a health reimbursement arrangement (HRA) will be considered as part of the actuarial or minimum value calculation (essentially as a reduction of the deductible)

 Market Reforms

While the wellness and EHB proposed rules reflect previously published regulations or bulletins, there is much that is new in the market reform proposed rule.  The proposed rule reiterates PPACA's limits on permissible premium variations for policies in the exchanges and individual and small group markets, providing that premiums may only vary based upon:

•  Age (with a maximum three to one ratio)
• Tobacco use (with a maximum one and one-half to one ratio)
• Geographic location, and
• Family size

 Other parts of the proposed rule call for a great deal of standardization in implementation of the reforms, including:

•  A proposal that rates be set by totaling rates that are calculated separately for each covered individual (although employers would be permitted to either use an average composite rate or a method that charges older employees and smokers the allowable surcharge when determining premium contributions)
• A proposal that all carriers use one year age bands, with a prescribed age band table
• A requirement that all individuals enrolled in nongrandfathered small group plans be considered one risk pool (all those in nongrandfathered individual policies would be in another risk pool, although a state could choose to merge the two pools); this means that different blocks could no longer be considered different risk pools
•  Allowing states to identify up to seven geographic regions for rating purposes, but requiring that any rating differences between the regions be actuarially justified
• Allowing employer contribution and group participation requirements, to reduce adverse selection
• Requiring that all rate increases be submitted to HHS

The proposed rules may be found here:

Wellness: http://www.ofr.gov/OFRUpload/OFRData/2012-28361_PI.pdf

Essential health benefits and actuarial value: http://www.ofr.gov/OFRUpload/OFRData/2012-28362_PI.pdf

Market reforms: http://www.ofr.gov/OFRUpload/OFRData/2012-28428_PI.pdf

The proposed rules are quite lengthy.  We will provide additional information once we have had a chance to study them in more detail.

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WHAT DOES THE ELECTION MEAN FOR EMPLOYERS & PPACA?

On November 6th, 2012, America re-elected President Barack Obama into office. Below we detail what this could mean for you as an employer: 

Maintenance of the status quo in Washington, D.C. (the re-election of Barack Obama, with a Republican majority in the House of Representatives and a Democratic majority in the Senate) means that implementation of the Patient Protection and Affordable Care Act (PPACA) will move forward largely as the law was passed in 2010.

The law left the task of working out many of the details to the regulatory agencies (the Department of Labor, the IRS and the Department of Health and Human Services), and with many questions remaining unanswered, employers can expect that an enormous number of regulations and other types of guidance will be issued between now and the end of 2013.

Of greatest interest to many employers is the employer shared-responsibility (“play or pay”) requirement.  As of Jan. 1, 2014, employers who have 50 or more full-time or full-time equivalent employees must offer “minimum essential” (basic) medical coverage for their full-time (30 or more hours per week) employees or pay a penalty of $2,000 per full-time employee, excluding the first 30 employees.  Employers who offer some coverage but whose coverage is either not “affordable” or fails to provide “minimum value” must pay a penalty of $3,000 for each employee who receives a premium tax credit.  (Coverage is not “affordable” if the employee’s cost of single coverage is more than 9.5 percent of income.  Coverage does not provide minimum value if it is expected to pay less than 60 percent of anticipated claims.  Regulations are still needed to provide details on how the penalty will be determined and collected for employers who do not provide health coverage to their full-time employees, what exactly is the “minimum value” coverage that must be provided to avoid the penalties, and when dependent coverage is “affordable.”)

The health insurance exchanges are also scheduled to begin operation in January 2014. (While PPACA is a federal law, the health insurance exchanges were designed to be operated by the states.)  A number of states have delayed work on the exchanges pending the outcome of this election, while a few have affirmatively decided not to create a state exchange. If a state is unable or chooses not to create an exchange, the federal government will run the exchange on the state’s behalf.  According to the Kaiser Family Foundation, as of Sept. 27, 2012, the following have established exchanges: California, Colorado, Connecticut, District of Columbia, Hawaii, Kentucky, Maryland, Massachusetts, Nevada, New York, Oregon, Rhode Island, Utah, Vermont, Washington and West Virginia. Arkansas, Delaware and Illinois were planning for a partnership exchange with the federal government.  Alaska, Florida, Louisiana, Maine, New Hampshire, South Carolina and South Dakota have stated that they will not create an exchange (meaning the federal government will run the exchange on the state’s behalf).  The remaining states are studying their options but could well end up with a federally run exchange at least for 2014 as the deadline to submit the state’s plan for implementing an exchange is next week (Nov. 16).  It remains to be seen whether the federal government will be able implement so many exchanges on behalf of the states by the 2014 target date. It also remains to be seen whether a change of governor, insurance commissioner or control of a state legislature or political realities, will change a state's stance on the exchanges. Because employees may choose to obtain coverage through the exchange even if they have access to coverage through their employer and because the exchanges likely will request information from employers when determining eligibility for premium tax credits, all employers will want to have an understanding of the status of their state’s exchange. 
In addition to deciding whether to “play” (provide health coverage) or “pay” (the penalties), employers (including those with fewer than 50 employees) have a number of compliance obligations between now and 2014, including:

• Expanding first-dollar preventive care to include a number of women’s services, including contraception, unless the plan is grandfathered
• Distributing medical loss ratio rebates if any were received from the insurer
•  Issuance of summaries of benefits and coverage (SBCs) to all enrollees
• Reducing the maximum employee contribution to $2,500, if the employer sponsors a health flexible spending account (FSA), beginning with the 2013 plan year
• Withholding an extra 0.9 percent FICA on those earning more than $200,000 beginning in 2013
• Providing information on the cost of coverage on each employee’s 2012 W-2 if the employer issued 250 or more W-2s in 2011
• Providing a notice about the upcoming exchanges to all eligible employees in March 2013
•   Calculating and paying the Patient Centered Outcomes Fee in July 2013 if the plan is self-funded (insurers are responsible for calculating and paying the fee for insured plans but will likely pass the cost on)
• Working with the exchanges to identify those employees eligible for premium tax credits
• Removing annual limits on essential health benefits and pre-existing condition limitations for all individuals, beginning with the 2014 plan year
• Reporting to the IRS on coverage offered and available (the first reports are actually due in 2015 based on 2014 benefits)

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If you have questions or would like additional information about your options and obligations under PPACA,

please contact us at 319.364.5193 or 1.800.798.4080.

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2013 Annual Benefit Plan Amounts

2013 INFLATION ADJUSTMENTS

Following recent announcements by both the IRS and the Social Security Administration, we now know most of the dollar amounts that employers will need to administer their benefit plans for 2013.  Many of the new numbers are slightly higher than their 2012 counterparts. For instance, the annual 401(k), 403(b), or 457(b) deferral limit will increase from $17,000 to $17,500; the Section 415 limit on annual additions to a participant's account will go from $50,000 to $51,000; and the annual compensation limit will increase from $250,000 to $255,000.  (The annual retirement plan catch-up contribution limit -- $5,500 -- will remain unchanged for 2013.)

The annual compensation threshold used in identifying highly compensated employees (HCEs) remains unchanged for 2013 (at $115,000).  In identifying HCEs for 2013, employers should consider employees who earned at least $115,000 during 2012 (as well as 5% owners during either 2012 or 2013).  This is due to the "look-back" nature of the HCE definition.

The annual limit on IRA contributions (whether traditional or Roth) will increase from $5,000 to $5,500, while the annual limit on IRA catch-up contributions will remain at $1,000.

The maximum contribution to an HSA will increase slightly -- from $3,100 to $3,250 for individual coverage, and from $6,250 to $6,450 for family coverage -- while the maximum HSA catch-up contribution will remain at $1,000.  The minimum deductible for any high-deductible health plan (which must accompany any HSA) will also increase slightly -- from $1,200 to $1,250 for individual coverage, and from $2,400 to $2,500 for family coverage.

A new $2,500 limit on employee deferrals to health FSAs will apply for plan years beginning on or after January 1, 2013.  This $2,500 limit applies only to salary reduction contributions under a health FSA and not to employer contributions.  For this purpose, however, any employer FSA contributions that could have been received in cash are treated as salary reduction contributions.

The Social Security taxable wage base will increase for 2013 -- from $110,100 to $113,700.  A question yet to be answered is whether employees will continue to enjoy a temporary reduction in the long-standing 6.2% "OASDI" tax rate.  For 2011 and 2012, that rate has been temporarily reduced by two percentage points (to 4.2%), as a way of helping to stimulate the economy.  Although there does not appear to be significant sentiment in either of the major political parties to extend this reduction, there is a slight chance that the 4.2% rate will remain in effect for 2013.  (In any event, the employer OASDI tax rate will remain at 6.2%.)

The Medicare tax rate has long been set at 1.45% -- for both employees and employers.  Beginning in 2013, however, the employee Medicare tax rate will increase by 0.9% (to a total of 2.35%) on wages in excess of $200,000 for single filers or $250,000 for joint filers ($125,000 for married individuals filing separately).  Employers must start withholding this additional Medicare tax once an employee's Medicare wages have exceeded $200,000.  This additional Medicare tax does not apply to the employer's share.
To obtain a quick reference card listing the 2013 annual benefit plan amounts, please contact your UBA Member Firm.

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COMPLIANCE ALERT: Defined Benefit Plan Deadlines

CRITICAL AMENDMENT DEADLINE APPROACHING FOR DEFINED BENEFIT PLANS

Sponsors of single-employer defined benefit pension plans will need to amend those plans soon to comply with a critical requirement of the Pension Protection Act of 2006 (the PPA).  As explained more fully below, meeting this deadline is crucisal because the IRS has conditioned anti-cutback relief on a timely amendment.  If the cutbacks required under the PPA are implemented without a timely amendment, the plan risks disqualification, and the plan sponsor may be liable to participants and beneficiaries.

MANDATORY FUNDING-BASED RESTRICTIONS

One of the many requirements introduced by the PPA was a new regime of restrictions on benefit accruals under, distributions from, and amendments to certain underfunded defined benefit plans.  These restrictions arise under Section 436 of the Tax Code, a new section added by the PPA.  Under Section 436, a plan's underfunded status triggers the following mandatory cutbacks:

• If the plan has an adjusted target funding attainment percentage (AFTAP) of less than 60 percent for a plan year:
• the plan is not permitted to make lump-sum distributions or certain other accelerated payments, such as unpredictable contingent event benefits (e.g., plant shutdown benefits), and
• benefit accruals under the plan must cease. 
• If the plan has an AFTAP of less than 80 percent for a plan year (but not less than 60 percent):
• the portion of any benefit that may be paid as a lump sum (or other accelerated form) is limited, and
• the plan cannot be amended to increase benefits. 

(The Section 436 rules are quite complex and have been simplified for purposes of this summary.)

CATCH 22:  PPA'S ANTI-CUTBACK RELIEF

Thus, Section 436 requires benefit cutbacks (based on a plan's funded status) that are specifically prohibited by the anti-cutback rules in ERISA and the Tax Code.  To resolve this contradiction, the PPA created a limited window during which sponsors may adopt the necessary amendments without violating the anti-cutback rules.

WHEN AND WHY NEW AMENDMENTS ARE NECESSARY

Although the Section 436 restrictions have been in effect since the first day of the plan year that began in 2008, Congress has since revised the applicable funding rules (in both the Worker, Retiree, and Employer Recovery Act of 2008 and the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010).  Moreover, following the PPA's enactment, the IRS has issued no fewer than five pieces of formal guidance on Section 436 (two sets of proposed regulations, two notices, and final regulations).  As the statutory changes and regulatory guidance have accumulated, the IRS has repeatedly extended the amendment deadline--and therefore the anti-cutback relief.  (We first reported on this delay in an August 2010 article.)

Those extensions are now at an end.  Late last year, in Notice 2011-96, the IRS finally issued a model amendment and finalized the Section 436 amendment deadline.  Although there are exceptions, the general deadline is the last day of the 2012 plan year.  For calendar-year plans, this makes the deadline December 31, 2012.

Many sponsors have long-since adopted a "good-faith" Section 436 amendment as part of a comprehensive amendment to implement the PPA.  Sponsors should no longer rely on these temporary amendments.  Instead, these place-holders should be replaced with the IRS's model language before the applicable deadline to ensure that any benefit reductions required under Section 436 are protected by the PPA's anti-cutback relief.

OPTIONAL PROVISIONS

In addition to formalizing the Section 436 rules, the IRS's model amendment includes four optional modifications.  Each of these aims to help participants who are adversely affected by mandatory benefit restrictions.

Two of these optional provisions would allow participants who are prohibited from taking accelerated distributions to later elect those distributions when the plan's funding level has improved sufficiently for the Section 436 restrictions to be lifted.  The third expands the timing and payment options available to participants during any period when distribution options are limited by Section 436.  The fourth optional provision automatically restores benefit accruals that were cancelled during a period when such accruals were limited by Section 436.  Sponsors may elect any or all of these options.

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THE "HIPAA POLICE" ARE HERE

After several years during which the Department of Health and Human Services (HHS) operated essentially in “complaint-driven” mode with respect to enforcement of the HIPAA Privacy and Security Rules, recent activity suggests a trend toward stricter HIPAA enforcement.  The latest evidence comes in a recently-announced settlement between HHS and the Massachusetts Eye and Ear Infirmary and Massachusetts Eye and Ear Associates, Inc. (collectively, MEEI).

In this settlement, MEEI has agreed to pay $1.5 million to settle potential violations of the HIPAA Security Rule.  MEEI also agreed to develop a corrective action plan that includes reviewing and revising its existing Security Rule policies and procedures and retaining an independent monitor for a three-year period to conduct semi-annual assessments of MEEI’s compliance with the corrective action plan and report back to HHS.

HHS began its investigation of MEEI after MEEI submitted a breach report, as required by the HIPAA Breach Notification Rule.  The report indicated that an unencrypted personal laptop containing the electronic protected health information (ePHI) of MEEI patients and research subjects had been stolen.  The HHS investigation concluded that MEEI had failed to comply with certain requirements of the HIPAA Security Rule – particularly with respect to the confidentiality of ePHI maintained on portable devices – and that those failures had continued over an extended period of time.

The MEEI settlement is just the latest in a string of recent penalties and settlements stemming from alleged HIPAA privacy and security violations.  From 2003 through 2010, HHS reported that it had received nearly 58,000 privacy complaints and, of those, had resolved more than 52,000.  In fact, during this initial eight-year period after the HIPAA Privacy Rule went into effect, HHS did not impose a single civil monetary penalty for HIPAA violations. 

In February of 2011, however, HHS imposed a $4.3 million penalty against Cignet Health of Prince George’s County, Maryland.  HHS found that Cignet had failed to respond to patients’ requests for access to their medical records and that Cignet refused to cooperate in HHS’s investigation.  Later that same month, Massachusetts General Hospital entered into a $1 million settlement with HHS arising out of an incident in which an employee left paper records containing the PHI of 192 patients, including patients with HIV/AIDS, on the subway.

The recent increase in enforcement efforts may be partially attributable to the fact that the available civil penalties increased dramatically as a result of the Health Information Technology for Economic and Clinical Health (HITECH) Act, enacted as part of the American Recovery and Reinvestment Act of 2009.  The HITECH Act provides HHS with substantial leverage in settlement negotiations. 

These steep penalties and settlements should serve as a reminder of how important it is to comply with the HIPAA Privacy and Security Rules.  Health plan sponsors should review their existing policies and procedures and remain vigilant in their training of employees.

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FULL TIME EMPLOYEES 90 DAY WAITING PERIOD

Starting in 2014, larger employers (generally, those with 50 or more employees) may face "shared responsibility" penalties if any of their "full-time" employees receive subsidized health coverage through an "Affordable Insurance Exchange."  At the same time, virtually all employer health plans will become subject to a 90-day limit on any eligibility waiting period.  On August 31, the agencies charged with implementing health care reform issued additional guidance on both of these requirements.

In Notice 2012-58, the IRS outlines several safe-harbor methods for determining whether "variable hour" or seasonal employees fall within the "full-time" category (which is generally defined as working 30 or more hours per week).  And in Notice 2012-59, the IRS explains how the maximum 90-day eligibility waiting period is affected by various types of eligibility conditions.  (Notice 2012-59 was also issued in virtually identical form by both the Department of Labor - as Technical Release 2012-02 - and the Department of Health and Human Services.)

"Full-Time" Employees

In guidance issued late last year (Notice 2011-36), the IRS first proposed a "look-back/stability period" safe harbor by which plan sponsors could determine whether ongoing (as opposed to newly hired) employees fall within the "full-time" category for purposes of the shared responsibility penalties.  Under this safe harbor, a sponsor may track an employee's hours during a "standard measurement period" of 3 to 12 months.  If an employee averages at least 30 hours per week during that period, he or she would be considered full-time during a subsequent "stability period" of at least six months (but no shorter than the measurement period).  If an employee averages fewer than 30 hours per week, he or she would not be considered full-time during the subsequent stability period - even if he or she actually works 30 or more hours per week.

Earlier this year (in Notice 2012-17), the IRS proposed a similar - though slightly different - approach for determining whether a new employee meets this full-time threshold.  (For this purpose, a "new" employee is defined as one who has not yet completed a standard measurement period.)  If a new employee is reasonably expected to work at least 30 hours per week, he or she would be considered full-time as of the date of hire.  

However, if it cannot reasonably be determined whether a new employee is expected to meet this 30-hour threshold (thereby constituting a "variable hour employee"), the sponsor would be allowed to count the employee's actual hours during his or her first 3 months (or, in limited cases, 6 months) and then apply rules similar to those previously proposed for ongoing employees.
In response to numerous comments, the IRS has now extended to 12 months the maximum measurement period for newly hired employees.  As a result, this "initial measurement period" could now be as long as the "standard measurement period" applicable to ongoing employees.

Moreover, Notice 2012-58 would allow plan sponsors to apply this 12-month initial measurement period not only to variable hour employees, but also to seasonal employees.  And through at least the end of 2014, sponsors would be allowed to use any reasonable, good-faith definition of a "seasonal employee."
Notice 2012-58 also allows for an "administrative period" between any measurement period and its related stability period.  This administrative period is intended to allow a plan sponsor to determine which employees are eligible for coverage, notify those employees of that fact, and then enroll them in the plan.  In general, an administrative period may last for up to 90 days.

There are various constraints on this provision, however.  For instance, to prevent a lengthy administrative period from creating a gap in coverage for an ongoing employee, any administrative period for an ongoing employee must overlap with the prior stability period.  Accordingly, any ongoing employee who was considered full-time during the prior stability period must retain that status throughout the following administrative period.

Moreover, if a plan sponsor chooses to use an initial measurement period of 12 months, the subsequent administrative period must be shorter than 90 days.  This is because the total combined length of an initial measurement period plus the subsequent administrative period may not exceed 13 months, plus any portion of a month remaining until the first day of the following month.

As a general rule, Notice 2012-58 requires that a plan use the same measurement period for all employees.  Of course, a plan sponsor may - and probably will - use an initial measurement period that differs from the standard measurement period.  The initial measurement period will likely run from each employee's date of hire, whereas the standard measurement period will not.
In either event, the Notice would allow for different measurement periods (and associated stability periods) in the following four circumstances:

1. Collectively bargained versus non-collectively bargained employees;
2. Salaried versus hourly employees;
3. Employees of different entities; and
4. Employees located in different states. 

Notice 2012-58 also provides guidance on rules to be followed when transitioning an employee from his or her initial measurement period to the plan's standard measurement period.  Once an employee has been employed for an entire standard measurement period, he or she must be retested for full-time status using that standard measurement period.  If the employee would be considered a full-time employee using that standard measurement period, he or she must be considered full-time during the associated stability period - even if the employee would not be considered full-time during the remainder of his or her initial stability period.

90-Day Limit on Eligibility Waiting Period

Unlike the shared responsibility penalties (which will apply only to larger employers), the 90-day limit on eligibility waiting periods will apply to virtually all employer health plans - regardless of the employer's size and even if a plan remains "grandfathered" under health care reform.  All employers should thus familiarize themselves with the guidance in Notice 2012-59.

Citing regulations issued in 2004, the agencies define a "waiting period" as "the period that must pass before coverage for an employee or dependent who is otherwise eligible to enroll under the terms of a group health plan can become effective."  (Emphasis added.)  Consistent with the italicized language, the agencies note that nothing in health care reform requires a plan to provide coverage to any particular category of employees.  (Of course, as noted earlier, a large employer may incur a shared responsibility penalty if the exclusion of a full-time employee results in that employee receiving subsidized coverage through an Exchange.)

Much of Notice 2012-59 is devoted to explaining when the agencies will view an eligibility condition as being designed to avoid compliance with the 90-day waiting period limitation - and therefore a violation of this requirement.  For instance, a plan may validly require that an employee be in an eligible job classification - such as hourly, salaried, or working at a specified location - in order to participate.  And any period in an ineligible classification need not be counted against the 90-day limit. On the other hand, any eligibility condition that is based solely on the lapse of time may last no longer than 90 days.

So far, this is all clear enough.  But the guidance then goes on to address certain harder cases.  For instance, what if a plan conditions an employee's eligibility on working "full-time" (under either the 30-hour-per-week standard or otherwise) and an employee is hired on a variable hour or seasonal basis?  Here, Notice 2012-59 refers to the "initial measurement period" concept outlined in Notice 2012-58.  As explained above, this concept could allow for a period of up to twelve months (plus a brief administrative period) for a plan to determine whether an employee has satisfied this eligibility condition - even though such a period greatly exceeds 90 days.

What about a different type of eligibility condition, such as one offering coverage to part-time employees only after they have completed a total of 1200 hours of service?  An example in Notice 2012-59 specifically approves of this approach, even though the employee in that example was therefore required to work nearly a year before entering the plan.  Interestingly, however, the Notice appears to set a 1200-hour limit on such an eligibility condition, noting that the agencies would consider a requirement to complete more than 1200 hours to be designed to avoid compliance with the 90-day waiting period limitation.

Finally, Notice 2012-59 connects the 90-day limit on eligibility waiting periods to the shared responsibility penalties discussed in Notice 2012-58.  It does so by noting that a large employer may require even a full-time employee to satisfy a waiting period of up to 90 days without thereby running the risk of incurring a shared responsibility penalty.  Moreover, during that waiting period, the employee may qualify for subsidized coverage through an Exchange.  In this way, the Notice closes an analytical gap in the statutory language.

What to Do Now

Although neither of the requirements discussed in this article will take effect until January 1, 2014, sponsors of employer health plans will want to begin planning for their implementation well before that date.  In fact, any employer planning to use the look-back/stability period safe harbor for identifying full-time employees during 2014 must begin counting hours of service during 2013.

Moreover, the agencies have stated that this interim guidance will remain in effect through at least the end of 2014 - with any more restrictive guidance taking effect no earlier than 2015.  Accordingly, employers can be certain that these are the rules that will apply during the first year the requirements are effective.

IRS ISSUES TEMPORARY GUIDANCE FOR IDENTIFYING FULL-TIME EMPLOYEES AND APPLYING WAITING PERIODS

On Aug. 31, the IRS issued Notices 2012-58 and 2012-59, which provide safe harbors for 2014 (and perhaps beyond that date) on how to address some of the open questions on how the employer-shared responsibility penalties will apply.

The notices affirm that employers that hire new employees who are reasonably expected to work full-time on an annual basis and who do work full-time during the first 90 days of employment must offer those employees minimum-value, affordable coverage by the end of that period or pay a penalty.

The rules described in the notices will provide substantial relief to employers that have seasonal employees or hire employees who work variable (fluctuating) hours.  Under the safe harbor, employers with employees in these categories may use a measurement period of up to 12 months to determine whether the employee is full time.  The rules are complex but essentially require a corresponding period of time after the measurement period during which the employee's status as a full-time or non-full-time employee will be deemed to continue, regardless of actual hours worked.  No penalty will apply during the measurement period, even if coverage is not offered.

The notices also:

• Confirm that employers may use W-2 income when determining whether coverage is affordable (but do not clarify how this standard applies -- if at all -- to dependent coverage)
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• Clarify that during an eligibility waiting period (including an extended measurement period for seasonal or variable-hours employees), an employee is not considered to have access to affordable, minimum value coverage for purposes of the premium tax credit
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• Clarify that the extended measurement period for seasonal and variable hours employees is an acceptable exception to the requirement that waiting periods not exceed 90 days

The notices are available at http://www.irs.gov/pub/irs-drop/n-12-58.pdf and http://www.irs.gov/pub/irs-drop/n-12-59.pdf .

Spencer Fane will be providing a Compliance Alert on this topic in the near future.  UBA will be posting an updated PPACA Summary by the end of this week and is in the process of updating the "Counting Employees" guide for advisors to reflect this new guidance. 

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HCR EXCHANGE NOTICE HIGHLIGHTS

HIGHLIGHTS OF THE EXCHANGE NOTICE REQUIREMENT

As of March 1, 2013, employers must give a notice about the upcoming health exchanges to all existing employees and new hires.  It is not yet clear whether employers who are not subject to the Fair Labor Standards Act (because they only operate in one state and have sales below $500,000) must give the notice. 

So far, there is no information about the requirements of the notice, beyond what is in the PPACA itself.  It is very possible that the government will issue a model notice.   It is also possible this notice requirement will be delayed. What we do know is that the notice will need to include:

• A statement about the existence of the exchanges
• A description of the services provided by the exchange
• Contact information to request assistance from the exchange
• If the plan provided by the employer has less than a 60 percent actuarial value, that the employee may be eligible for a premium tax credit and/or a cost-sharing reduction if he or she purchases a qualified plan through the exchange
• A statement that if the employee purchases coverage through the exchange, the employee may lose his or her employer contribution toward health benefits, and that the employer contribution may be tax-free

ACTION STEPS:

•  Watch for updates about this requirement
•  The effective date may be delayed if work to implement the exchanges is behind schedule
• A model notice may be issued
• Verify that you can easily determine which states that employees are living in, as the notice may need to contain state-specific information

This information is general and is provided for educational purposes only. It is not intended to provide legal advice. You should not act on this information without consulting legal counsel or other knowledgeable advisors.

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