Low attachment points may be prohibited
Employers may opt to have a self-insured plan rather than an insured plan for various reasons including avoiding the health insurer fee, avoiding state premium tax and having flexibility in design (e.g., not having to cover state mandated benefits). Employers who face large fluctuations in claims frequently seek to reduce this risk by purchasing stop-loss insurance with low attachment points (e.g., a $5,000 specific deductible/$100,000 aggregate deductible).
Use of stop-loss insurance with such low attachment points effectively gives nearly all the risk protection of a conventional health insurance policy without the consumer protections of an insured plan. Low attachment point stop-loss insurance also has the potential to create adverse selection in the risk pool and increase premiums in the fully-insured small group market, including in the Small Business Health Options (SHOP) Marketplaces, by encouraging small employers with healthier employees to self-insure and thus increasing the proportion of less healthy enrollees in insured coverage.
This issue has prompted some states to consider measures for protecting the viability of their health insurance markets.
Self-funded group health plans are generally regulated by federal law only and state insurance laws are deemed to be “preempted” by ERISA. As states seek to restrict the use of stop-loss insurance with respect to self-funded group health plans, the question has been raised as to whether the state insurance laws would apply and allow the stop-loss restrictions or if ERISA preemption would prohibit a state from limiting the use of stop-loss insurance as a means to manage risk by employers that self-fund their group health plans.
In Technical Release 2014-01 issued on November 6, 2014, the DOL expressed its view that states may regulate insurance policies issued to plans or plan sponsors, including stop-loss insurance policies, if the law regulates the insurance company and the business of insurance without contravening the ERISA preemption doctrine. In the Department’s view, a state law that prohibits insurers from issuing stop-loss contracts with attachment points below specified levels would not be preempted by ERISA.
What is your effective date?
The first step to determining employer penalty exposure is identifying the effective date. The effective date for large employers (50 or more FTEs in preceding calendar year) is January 1, 2015. There are two important exceptions to this effective date: transition relief for non-calendar year plans, and transition relief for employers with 50-99 FTEs for 2015.
Transition relief of effective date for non-calendar year plans
The following transition relief is available for a non-calendar year plan to the first day of the 2015 plan year only if the plan year was not modified after December 27, 2012 to begin at a later calendar date:
- For any employees who are eligible for coverage under the terms of an employer’s plan as of February 9, 2014 (regardless of whether they take the coverage)
- For any other employees:
- if at least 25 percent of its employees (or 33 percent of its FTEs) are covered under any non-calendar year plans as of any date from February 10, 2013 to February 9, 2014; or
- at least 33 percent of its employees (or 50 percent of its FTEs) were offered coverage during the open enrollment period that ended most recently before February 9, 2014.
In both cases above, the FTE must be offered affordable coverage that provides a minimum value no later than the first day of the 2015 plan year in order for the employer to avoid a penalty.
2015 transition relief for employers with 50-99 full-time employees
The final rules provide relief for mid-sized employers to delay the employer penalty until 2016. An employer is eligible for this transition relief if it satisfies the following conditions
- Limited Workforce Size: The employer employs on average at least 50 FTEs (including full-time equivalent employees) but fewer than 100 FTEs (including full-time equivalent employees) on business days during 2014.
- Maintenance of Workforce and Aggregate Hours of Service: During the period beginning on February 9, 2014 and ending on December 31, 2014, the employer does not reduce the size of its workforce or the overall hours of service of its employees in order to satisfy the workforce size condition described in (1) above. Bona fide business reasons for a reduction in workforce size or overall hours of service will not be considered to violate this provision. For example, reductions of workforce size or overall hours of service because of business activity such as the sale of a division, changes in the economic marketplace in which the employer operates, terminations of employment for poor performance, or other similar changes unrelated to eligibility for this transition relief are for bona fide business reasons and will not affect eligibility for the transition relief.
- Maintenance of Previously Offered Health Coverage: During the coverage maintenance period, the employer does not eliminate or materially reduce the health coverage (if any) it offered as of February 9, 2014. “Coverage maintenance period” means
- for an employer with a calendar year plan, the period beginning on February 9, 2014 and ending on December 31, 2015; and
- for an employer with a non-calendar year plan, the period beginning on February 9, 2014 and ending on the last day of the plan year that begins in 2015. An employer is not treated as eliminating or materially reducing health coverage if:
- it continues to offer each employee who is eligible for coverage during the coverage maintenance period an employer contribution toward the cost of employee-only coverage that either:
- is at least 95 percent of the dollar amount of the contribution toward such coverage that the employer was offering on February 9, 2014, or
- is the same (or a higher) percentage of the cost of coverage that the employer was offering to contribute toward coverage on February 9, 2014;
- when there is a change in benefits under the employee-only coverage offered, that coverage provides minimum value after the change; and
- it does not alter the terms of its group health plans to narrow or reduce the class or classes of employees (or the employees’ dependents) to whom coverage under those plans was offered on February 9, 2014.
- Certification of Eligibility for Transition Relief: The large employer certifies on Form 1094-C that it meets 1-3 above.
Application of transition relief to non-calendar year plans
The transition relief applies to all calendar months of 2015 plus any calendar months of 2016 that fall within the employer’s 2015 plan year. It will cover non-calendar year plans but only if the employer did not modify the plan year after February 9, 2014 to begin on a later calendar date (for example, changing the start date of the plan year from January 1 to December 1).