QUESTION: Since we changed our company’s ERISA-covered major medical plan from fully insured to self-insured this year, do we have more flexibility in administering the plan’s terms? In particular, we would like to waive the plan’s waiting period for a group of employees hired in connection with an acquisition.
ANSWER: You might be able to waive the waiting period for certain groups of employees, but some complicated issues should be addressed. Although you are no longer bound by the terms of a group health insurance policy, your plan is nonetheless governed by a plan document and applicable legal rules. ERISA requires that the plan be operated in accordance with a written plan document and that its provisions be described in a summary plan description (SPD). Thus, any change to existing plan provisions would require amending the plan and issuing a summary of material modifications (SMM) describing the change. After consultation with experienced benefits counsel to assess the compliance risks, if the company decides to proceed, the individual or committee with authority to amend the plan would need to adopt a written amendment that specifies the special eligibility rules and describes the specific group of employees to whom they apply. Here are some issues to keep in mind when deciding whether to amend the plan in this way:
Code § 105(h) Nondiscrimination. You should first confirm that waiving the plan’s waiting period for this group of employees would not violate the nondiscrimination rules under Code § 105(h). These rules generally limit a plan’s ability to favor “highly compensated individuals” (HCIs)—a group that includes the company’s five highest-paid officers, the highest-paid 25% of all employees, and any owners of more than 10% of the company’s stock. If the group of incoming acquired employees does not include any HCIs, the proposed amendment should not cause nondiscrimination problems. If the intended group includes HCIs, you might consider instead shortening or eliminating the waiting period for all employees. (Keep in mind that waiting periods longer than 90 days are generally prohibited for group health plans.) A discriminatory plan can have severe tax consequences for HCIs because all reimbursements to an HCI during a disparate waiting period would be taxable to the HCI.
HIPAA Nondiscrimination. HIPAA prohibits group health plans from establishing eligibility rules (including waiting periods) that discriminate based on a health factor. Under this provision, HIPAA permits different eligibility rules for different groups of “similarly situated individuals,” including employment classifications based on date of hire or length of service. Your proposal appears to be permissible so long as it applies to all employees associated with the acquisition.
Stop-loss Coverage. Keep in mind that if the company has purchased (or caused the plan to purchase) stop-loss insurance to reimburse the employer (or the plan) for claims paid, you will need to coordinate with the stop-loss insurer before amending the plan to eliminate the waiting period for some or all employees. Most stop-loss insurance policies will reimburse only for claims paid under the terms of the plan in effect when the policy was issued; any amendments must be approved in advance by the stop-loss insurer or the stop-loss insurance will not count or cover those claims. For example, if you amend the plan to eliminate the waiting period, any claims incurred by employees and their dependents during the time that the waiting period otherwise would have applied probably would not be reimbursed under the stop-loss policy or counted toward satisfying the policy’s attachment points. Those claims will have to be paid without the backstop of stop-loss insurance.
For more information, see EBIA’s Self-Insured Health Plans manual at Sections IX.A (“ERISA’s Written Plan Document Requirement”), XII (“Nondiscrimination Rules Under Code § 105(h)”), XVI.B (“Waiting Periods for Eligible Individuals”), XVII.C (“Coordinating Stop-Loss Insurance Coverage and Plan Coverage”), and XXVIII.B (“Summary Plan Description (SPD) and Summary of Material Modifications (SMM)”); and EBIA’s HIPAA Portability, Privacy & Security manual at Section XI.C (“Nondiscrimination Rules for Eligibility and Benefits”). You may also be interested in our upcoming webinar, “Group Health Plans Year-End Update and Looking Ahead to 2022” (live on 12/16/2021).
Contributing Editors: EBIA Staff.