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Agencies Finalize Regulations on Limited Wraparound Coverage as Excepted Benefits

From the March 19, 2015 EBIA Weekly

[Amendments to Excepted Benefits, 26 CFR Part 54, 29 CFR Part 2590, 45 CFR Part 146, 80 Fed. Reg. 13995 (Mar. 18, 2015)]


News Release

The DOL, IRS, and HHS have finalized regulations that allow an employer to offer limited health coverage designed to wrap around either (1) eligible individual health insurance coverage or (2) coverage in a multi-state plan (MSP) and still qualify as an excepted benefit that is exempt from certain group health plan mandates under HIPAA and health care reform. Limited wraparound coverage as an excepted benefit was originally proposed in regulations published in December 2013 (see our article), followed by another proposal in December 2014, which included a pilot program (see our article). The pilot program, finalized in these regulations with some changes, applies to limited wraparound coverage that is first offered no earlier than January 1, 2016 and no later than December 31, 2018 and that ends three years after it is first offered (with a special rule for collectively bargained coverage). Here are a few details:

  • Meaningful Additional Benefits, Nondiscrimination, and Limited Amount Requirements. Under the pilot program, the wraparound coverage must provide meaningful benefits beyond cost-sharing. In addition to the previously proposed examples, the preamble to the final regulations describes several other types of benefits that qualify as meaningful benefits for this purpose (e.g., reimbursement for the full cost of primary care or the cost of prescription drugs not on the formulary of the primary plan). The wraparound coverage cannot be solely an account-based reimbursement arrangement (such as an HRA) and it cannot (1) impose preexisting condition exclusions; (2) discriminate in eligibility, benefits, or premiums based on a health factor; or (3) discriminate in favor of highly compensated individuals. In a modification to the proposed requirement limiting the amount of the wraparound coverage, the final regulations provide that the annual cost of the wraparound coverage for employees and dependents (considering both employer and employee contributions) cannot exceed the greater of the maximum annual salary reduction for health FSAs (i.e., $2,550 for 2015), or 15% of the cost of coverage under the primary plan.
  • Plan Eligibility Requirements. Wraparound coverage must comply with one of two alternative eligibility standards.
    • Non-Full-Time Employees. Under the first standard—applicable to coverage wrapped around eligible individual health insurance—eligibility for the wraparound coverage must be limited to part-time employees (those expected to average less than 30 hours per week, as reasonably determined at the time of enrollment), or retirees, who are eligible for other employer-sponsored health plan coverage that does not consist solely of excepted benefits (also, individuals eligible for wraparound coverage cannot be enrolled in a health FSA). The wraparound coverage can cover dependents, including spouses. And the employer sponsoring or participating in the wraparound coverage must offer its full-time employees coverage that (1) is substantially similar to coverage that the employer would need to offer to its full-time employees to avoid a Code § 4980H(a) penalty (even if Code § 4980H does not apply to the employer), (2) provides minimum value, and (3) is reasonably expected to be affordable.
    • MSP Coverage. Under a second standard specifically for MSP coverage (see our article about MSPs), the wraparound coverage must be approved by OPM and provide benefits in conjunction with MSP coverage. In addition, employers must meet a “maintenance of effort” requirement, under which they must have offered, for the 2013 or 2014 plan year, coverage “substantially similar” to the coverage that they would need to have offered to their full-time employees in order to avoid a Code § 4980H(a) penalty. For the 2013 or 2014 plan year, employers must also have offered affordable, minimum value coverage to a “substantial portion” of their full-time employees. And for the duration of the pilot program, annual aggregate employer contributions for both primary and wraparound coverage have to be “substantially the same” as total employer contributions for coverage offered to full-time employees in 2013 or 2014. (The final regulations clarify that the “substantially the same” condition will be met if contributions are at least 80% of contributions made in 2013 or 2014, applied on an average full-time worker basis to allow for fluctuations in the employer’s workforce.) [EBIA Comment: Since some employers may have made changes to their coverage in 2014 because Exchange coverage was first available in 2014, the final regulations permit plan sponsors to use either 2013 or 2014 as the base year for the maintenance of effort requirement. The proposal only allowed 2014 to be used as the base year.]
  • Reporting Requirements. Employers offering wraparound coverage to part-time employees or retirees must report to HHS information (to be specified in future guidance) reasonably required to determine if the exception for wraparound coverage allows employers to provide comparable benefits to workers whether they are enrolled in an individual policy with wraparound coverage or minimum essential coverage under an employer-sponsored plan. Separate reporting requirements apply for coverage wrapping around an MSP.

EBIA Comment: Citing “uncertainty and the lack of lead time,” and acknowledging that these final regulations have come too late for employers to implement limited wraparound coverage for the 2015 plan year, the final regulations have modified the implementation period of the pilot program to start with plans first offered in 2016 through 2018. According to the news release, wraparound coverage gives employees who otherwise may not be able to get employer-sponsored coverage access to “high-level benefits.” It appears that wraparound coverage would primarily appeal to some large employers seeking to offer additional limited benefits to part-time employees. As the preamble explains, the regulations are not intended to create an opportunity or incentive for employers to discontinue group health plan coverage and transition employees to the Exchanges—where they could purchase coverage subsidized with premium tax credits and still receive meaningful employer-sponsored health benefits. In addition, the agencies have made it clear that plan sponsors may not combine multiple excepted benefits (e.g., both a health FSA and wraparound coverage) into an arrangement that functions as a “material substitute for primary group health plan coverage” and still be exempt from applicable mandates. For more information, see EBIA’s Health Care Reform manual at SectionV.F (“Excepted Benefits: Certain Health FSAs, Dental, Vision, and Others”). See also EBIA’s HIPAA Portability, Privacy & Security manual at Section VI.F (“Excepted Benefits: Certain Health FSAs, Dental, Vision, and Others”) and EBIA’s Group Health Plan Mandates manual at Section IV.D (“Plans Providing Only Excepted Benefits Need Not Comply With Some Mandates”).

Contributing Editors: EBIA Staff.

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