Recent Rule Changes Likely Require Updates To Health & Cafeteria Plan Documents, Administration Forms, Communications and Procedures; Act Quickly To Make Needed Changes Before Upcoming Enrollment Period
by Cynthia M. Stamer, P.C., Glast, Phillips & Murray, P.C., Dallas, TX
Time is getting short for employers and plan administrators to update their health plans and healthcare flexible spending plan documents, administrative forms, communications and practices to comply with changes to Federal regulations that are taking or have already taken effect this year. Since many of these changes impact eligibility and enrollment, most employers and plan administrators will want to ensure the required updates are completed before their upcoming annual enrollment periods. Highlights of some of these changes include newly mandated required notifications regarding employer-provided prescription drug coverage due in November, changes to the rules applicable to flexible spending accounts in cafeteria plans under Internal Revenue Code Section 125, new guidance regarding the special enrollment and creditable coverage mandates of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), and new COBRA regulations applicable to post-November 26, 2004 plan years.
Notice About Medicare Part-D Creditable Coverage
Required By November 15, 2005
By November 15, 2005, group health plans offering prescription drug coverage to Medicare-entitled retirees and active employees must notify the Medicare eligible individuals as well as the Centers for Medicare and Medicaid Services (“CMS”) whether the health plan’s prescription drug coverage is “creditable coverage” for purposes of the new “Medicare Part D” prescription drug coverage program created under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “MMA”). The new “Medicare Part D” coverage will provide voluntary prescription drug coverage as part of the federal Medicare program to eligible persons that timely enroll as of January 1, 2006. The notification requirement applies to all group health plans not otherwise specifically excluded from coverage, even those that do not provide retiree coverage. Current regulations presently reflect that notification is not required for a health flexible spending plan offered as part of a cafeteria plan because the current regulations exempt benefits offered under those arrangements from the definition of “creditable coverage” under current Medicare Part D regulations.
The MMA generally mandates that group health plan sponsors provide notification about whether their prescription drug coverage qualifies as “creditable” for purposes of the MMA. The rationale behind this requirement is that Medicare eligible individuals need to know this information to decide whether they should enroll in Part D during the Initial Enrollment Period which will run from November 15, 2005, through May 15, 2006. Individuals eligible for Medicare Part D enrollment who do not have “creditable coverage” under another health plan generally will be required to pay higher premiums if and when they seek to enroll at a later time in Part D coverage if they don’t enroll during their Initial Enrollment Period.
Prescription drug coverage generally is “creditable” for purposes of the MMA only if the actuarial value of the coverage equals or exceeds the actuarial value of the Part D prescription drug coverage. Under the safe harbor provisions in recently released regulations, a health plan’s prescription drug coverage also automatically qualifies as creditable if it:
- Covers both brand name and generic prescription drugs;
- Provides reasonable access to retail providers, and alternatively mail-order coverage;
- Is designed to pay at least 60 percent of the participants’ prescription drug expenses (on average); and
- Its maximum annual benefits and actuarial expectations satisfy at least one of the following:
- For plans with separate prescription drug and medical coverage, the plan either has no annual benefit maximum or an annual benefit maximum of at least $25,000;
- The plan expects to pay benefits equal to at least $2,000 per Part D-eligible participant; or
- For integrated prescription drug and medical coverage designed plans, the annual deductible is not higher than $250, and the plan does not have an annual benefit maximum or has at least a $1 million combined maximum lifetime benefit limit.
If the group health plan does not satisfy the safe harbor, the prescription drug coverage may still be creditable if the group health plan obtains an actuarial determination that the group health plan’s prescription drug coverage equals or exceeds the coverage under Part D.
The MMA generally mandates that covered group health plans provide the MMA-required notice to all Part D eligible individuals covered under, or who apply for, enrollment in a group health plan providing prescription drug coverage. This includes both active and retired employees and their dependents who are Medicare Part D eligible. Group health plans generally are required to provide the notification to Medicare eligible active and retired employees whether their prescription drug coverage is primary or secondary to Medicare. Furthermore, the notification is in addition to already existing responsibilities to notify and provide an opportunity to active employees and their dependent spouses to elect for Medicare to be primary to group health plan coverage by electing to disenroll in group health plan coverage when they become eligible for enrollment in Medicare.
Group health plan sponsors generally are required to provide the required notice at the following times using either the appropriate CMS-provided model notice or their own individually tailored notice:
- Before the Medicare Part D annual coordinated election period (November 15 - December 31) each year;
- Within the 12 months before an individual’s Initial Enrollment Period for Medicare;
- Before the effective date of coverage for a Medicare eligible individual beginning participation in the group health plan;
- When the plan’s prescription drug coverage ends or is no longer creditable; and
- Upon a beneficiary’s request.
Application for Medicare Prescription Drug Coverage Employer Subsidy Due September 15, 2005
Employers sponsoring employment-based retiree health coverage that intend to seek employer prescription drug coverage subsidies available under the MMA in 2006 generally must apply for the subsidy by September 30, 2005.
When the MMA Part D prescription drug coverage takes effect next year, employers currently offering prescription drug and other health coverage for retirees generally will retain the option to terminate or cut back the prescription drug coverage offered under their existing programs. As an employer incentive not to cancel retiree prescription drug coverage, Section 1860D-22 of the MMA established special subsidy payments to sponsors of qualified retiree prescription drug plans beginning on January 1, 2006. The subsidy provisions of the MMA provide that an employer offering a qualified retiree prescription drug plan can apply to receive a tax-free subsidy equal to 28% of qualifying enrollees’ allowable annual prescription drug costs between $250 and $5,000 (i.e., up to $1,330 per enrollee). CMS has projected the 2006 average subsidy to be $668 per enrollee.
The complexity of the regulations and other factors require employers interested in the subsidy to engage in complex analysis of their options under the MMA. For employers that maintain a qualified retiree prescription drug plan that have decided to pursue the subsidy, however, application for the 2006 subsidy generally involves a five step process: (1) Submitting (electronically or otherwise) an application by September 30, 2005, to qualify for the retiree drug subsidy beginning January 1, 2006; (2) Attaching to the application an actuary's attestation that the plan meets the MMA's actuarial equivalence standard; (3) Certifying that the creditable coverage status of the plan has or will be disclosed to plan participants and CMS; (4) Electronically submitting and periodically updating enrollment information about retirees and dependents; (5) Electronically submitting aggregate data about drug costs incurred and reconciling costs at year-end (submission of detailed individual claims data is not required, though claims records must be maintained for audits for six years). A plan will be a qualified retiree prescription drug plan only if the sponsor applies for the subsidy at least 90 days before the beginning of each plan year – September 30, 2005 for payments for 2006- and the program otherwise qualifies as a qualified prescription drug plan under the MMA.
Sponsors Can Amend Flexible Spending Account Plans To Delay Forfeitures
Employers and other cafeteria plan sponsors can amend their cafeteria plans to allow a participant an extra 2-1/2 months after the close of the cafeteria plan year to use amounts contributed to his cafeteria plan flexible spending accounts during the plan year before the “use-it-or-lose-it” rule under Internal Revenue Code (Code) § 125 will require the participant to forfeit the balance of any unused amounts contributed to the cafeteria plan.
IRS Notice 2005-42, published May 18, 2005, modifies the “use-it-or-lose-it” requirements traditionally applicable to cafeteria plans under Code § 125 to include a new 2-1/2 month grace period exception. Under the modified rules, Code § 125 continues to prohibit cafeteria plans from allowing participants to defer compensation beyond the close of the plan year. Under IRS Notice 2005-42, however, a sponsoring employer can amend its cafeteria plan document to permit participants to use unused contributions or benefits remaining in the participant’s cafeteria plan account at the close of the plan year to pay for or reimburse expenses for qualified benefits incurred by the participant during the 2-1/2 month period immediately following the close of the plan year. If an employer timely amends its cafeteria plan to take advantage of this new grace period exception, the participant may have as long as 14 months and 15 days (the 12 months in the current cafeteria plan year plus the grace period) to use the benefits or contributions for a plan year before the plan must forfeit those amounts under the “use- it-or-lose-it” rule. To the extent any unused benefits or contributions from the immediately preceding plan year remain in the cafeteria plan after the grace period ends, however, the “use-it-or-lose-it” requirements of Code § 125 continue to prohibit the carry over of any of those remaining unused benefits or contributions to any subsequent period (including any subsequent plan year). The unused amounts remaining at the close of the grace period still must be “forfeited” under the “use-it-or-lose-it” rule.
Health Plan Special Enrollment and Pre-Existing Condition Rules Impacted For Post June 30, 2005 Plan Years By Updated Regulations
Health plans and health plan issuers also generally must update their health plan documents and practices to comply with final HIPAA portability regulations for all plan years beginning after June 30, 2005. Newly-restated regulations implementing the portability mandates of the Health Insurance Portability and Accountability Act of 1996 were published on December 30, 2004.
While substantially preserving many of the rules contained in the previously issued interim regulations, the new HIPAA portability regulations dictate changes to the content and form of certificates of creditable coverage and other required notifications relating to these rules, as well as modifying the rules governing the interpretation and administration of these HIPAA-dictated plan requirements in several other minor respects. Furthermore, the updated regulations update the definition of the types of coverage that must be treated as creditable coverage to reflect changes in federally provided healthcare programs, such as the new Medicare Part D coverage.
The final portability regulations issued last December require that health plan sponsors and administrators update their health plan practices, notifications and procedures to comply with updated interpretations about the health plan eligibility, special enrollment, preexisting condition, creditable coverage, and notice mandates imposed under the HIPAA portability requirements no later than the first day of the first plan year beginning after June 30, 2005. In addition to required updates to health plan documents, notices and administrative forms, conforming changes to cafeteria plan election and enrollment forms, and health care flexible spending account programs are likely to be required in most instances.
Updated COBRA Regulations Effective For Plan Years After February 26, 2005
The rollout of the new HIPAA portability regulations comes only months after the Department of Labor’s implementation of its recently restated and expanded federal medical coverage continuation rules interpreting the requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”). These new COBRA rules generally apply to all group health plans of employers with more than 20 employees regulated by the Employee Retirement Income Security Act (“ERISA”) for plan years that begin after November 26, 2004.
Among other things, the new regulations generally require plan administrators to update the content of the initial notice of rights and the notices sent to qualified beneficiaries following the occurrence of a qualifying event triggering COBRA rights. In addition, the new regulations dictate that plan administrators comply with a host of newly required notices and procedures relating to COBRA rights under various circumstances, as well as provide updated guidance about the allowable procedures for delivering required notifications and a host of other administrative matters. The new regulations also require employers to develop and communicate (via the summary plan description) procedures that qualified beneficiaries use to report the occurrence of certain qualifying events. Virtually all ERISA-covered health plan administrators are required to tweak their existing COBRA administration forms and practices in response to these new requirements. Since the HIPAA Portability regulations include requirements to deliver updated notifications of creditable coverage when a qualifying event occurs as well as when COBRA expires, health plan sponsors and administrators will want to conduct a coordinated review of their COBRA and HIPAA portability practices and documentation to ensure that the updates to their COBRA notifications and procedures and HIPAA portability notifications and procedures are properly and optimally integrated.
Military Leave Regulations Expected In Final Form In September
Final regulations interpreting the health plan rights of employees taking military leave and reinstatement to health coverage following return to employment are expected to be released in September. Meanwhile, proposed regulations published September 20, 2004 provide helpful insights about the interpretations that the Department of Labor is likely to apply when considering the adequacy of a health plan’s compliance with the health coverage continuation and reinstatement mandates of the Uniformed Services Employment and Reemployment Rights Act of 1994 ("USERRA") . The impending regulations, when finalized, are in addition to developing legal precedent, as well as guidance recently issued by the Labor Department concerning the application of USERRA’s employment protections for employees taking military leave, the Treasury Department’s guidance about the coordination of USERRA’s military leave protections with the Code’s tax qualification rules, and previously issued Department of Labor guidance concerning coordination of USERRA’s military leave requirements with the requirements imposed by the Family and Medical Leave Act of 1990. Given continuing high levels of troop deployment, most employers and health plan fiduciaries can anticipate a high likelihood that their health plans will be impacted by these federal regulations. Consequently, employers and health plan administrators should review their existing documents, practices, and procedures in light of this new guidance and make warranted changes promptly.
Protecting Health Information Under HIPAA Privacy and Security Regulations
Since April 20, 2005, health plans (other than small heath plans) and health plan issuers have been required to comply with the requirements for the protection of “electronic protected health information” imposed under the “Security Standards for the Protection of Electronic Protected Health Information” (the “Security Standards”). The deadline for small health plans to comply with these new Security Standards, which were imposed pursuant to HIPAA, is April 20, 2006. The new Security Standards mandates are in addition to tough new privacy mandates about the use, access and disclosure of “protected health information” that have applied to most health plans, health plan issuers and other covered entities under the “Standards for Privacy of Individually Identifiable Health Information” (the “Privacy Standards”) since April 14, 2005. CMS officials have indicated that the drafting of health plan eligibility language can impact when eligibility related data collected by an employer for health plan purposes converts from plan sponsor data not regulated by the Privacy and Security Standards to protected health information protected under these Standards.
Caution Needed When Relying Upon Vendors To Provide Solutions
As for many other legal mandates, many health plan sponsors, plan administrators and fiduciaries assume that their health plan compliance responsibilities will be handled as a matter of course by their health plan consultants and service providers. Absent proper verification, these assumptions may prove perilous for health plans, their sponsors or fiduciaries. While service providers and consultants may provide substantial valuable assistance to plan sponsors in this and other respects, employers and other plan sponsors need to recognize the need to verify the appropriateness of consultant or vendor provided materials and practices to avoid unanticipated exposures. Therefore, before relying upon consultant or vendor supplied plan documents, administrative forms or procedures, plan sponsors and fiduciaries should carefully review both the legal appropriateness of vendor or consultant provided documents and materials as well as the contractual commitments and fiduciary implications of the applicable consultant or vendor documents and materials.