Early ACA Renewal Strategy – Keeping It Legal

With major provisions of the Affordable Care Act (ACA) becoming effective as of the first plan year beginning on or after January 1, 2014, many small employers are considering an “early renewal” strategy to defer, as long as possible, some of the impact of these changes.  Under this strategy, a small employer renews its insurance contract early, for example on December 1, 2013, and makes corresponding changes to its plan documents, so the ACA provisions at issue don’t take effect until December 1, 2014.  While this approach may be a fit for some employers, it doesn’t work in all circumstances, is not without risks, and requires some additional paperwork.  Some states may restrict efforts to defer the implementation of healthcare reform change.

Community Rating

Small employers with a relatively healthy workforce have perhaps the largest incentive to consider the early renewal strategy because medical insurance rates for groups under 50 up to 100 in size, depending on the state, will be community rated starting with plan years beginning on or after January 1, 2014.  With community rating, all groups, those with serious medical challenges as well as healthy groups, are pooled together as one group to determine insurance rates.  Rates can vary by geography, age, family, and smoking status. The net effect to healthy groups, not currently rated up by insurance companies, will likely be significant rate increases.  An early renewal strategy could amount to thousands of dollars in savings.
Less healthy groups, those already rated up, will enjoy the new community rates allowing them to share their risk with more healthy groups.  If these employers have an effective date later than January 1, 2014, they too may want to consider an early renewal strategy (switching to a January 1st effective date), if the new pooled rates are better than what they currently have.

Small Employers Only

The early renewal strategy generally does not work for large employers (more than 50 full-time employee equivalents) subject to the “Shared Responsibility” (Play or Pay) requirements of the ACA.  Under the federal Shared Responsibility regulations, attempts during 2013 to change the applicable plan year are considered invalid and will not delay the employer’s effective date.

ERISA Requirements

As covered in our recent article on “Secrets to Passing an ERISA Audit,” ERISA legislation requires employers to provide a Summary Plan Description for their medical insurance plan and all health and welfare plans.  There is no small company exemption—all ERISA-governed employers, regardless of size, are required to provide a Summary Plan Description.

There is a common misperception that the information provided by insurance providers (e.g., the Certificate of Coverage or its Summary of Benefits) meets SPD requirements.  Many small employers erroneously think the insurance company or their insurance broker is responsible to provide them with these required plan documents.  However, the Plan sponsor (typically the employer) is the one held accountable when the plan is subject to an audit by the Department of Labor’s ERISA compliance division, the Employee Benefits Security Administration (EBSA).  Under healthcare reform, the EBSA has increased audits, including those of small employers.  DOL statistics show as many as three out of four plans have ERISA violations, with 70% resulting in fines.

ERISA requires SPDs to contain the following information:

• The Plan name;
• The Plan Sponsor/employer’s name and address;
• The Plan Sponsor’s EIN;
• The Plan administrator’s name, address, and phone number;
• Designation of any named fiduciaries;
• The Plan number for ERISA Form 5500 purposes;
• Type of Plan or description of benefits;
• The date of the end of the Plan Year for maintaining Plan’s fiscal records;
• Each trustee’s name, title, and address of principal place of business, if the Plan has a trust;
• The name and address of the Plan’s agent for service of the legal process, along with a statement that service may be made on a Plan trustee or administrator;
• The type of Plan administration;
• Eligibility terms and the effective date of participation;
• How insurer refunds are allocated to participants;
• Plan Sponsor’s amendment and termination rights and procedures, and what happens to Plan assets, in the event of Plan termination;
• Summary of Plan provisions governing benefits, rights, and obligations of participants under the Plan on termination, amendment, or elimination of benefits;
• Summary of Plan provisions governing the allocation and disposition of assets upon Plan termination;
• Claims procedures and time limits for lawsuits;
• A statement identifying circumstances that may result in loss or denial of benefits;
• The standard of review for benefits decisions;
• ERISA model statement of Participants’ rights;
• The sources of Plan contributions, and the method by which they are calculated;
• Interim SMMs since SPD was adopted or last restated;
• The fact that the employer is a participating employer or a member of a controlled group;
• Whether the Plan is maintained pursuant to one or more collective bargaining agreements, and that a copy of the agreement may be obtained upon request;
• A prominent offer of assistance in a non-English language (depending on the number of participants who are literate in the same non-English language);
• Identity of the insurer(s), if any.
Additionally, for group health plan SPDs, there must be:
• A detailed description of Plan provisions and exclusions;
•  A link to network providers;
• Plan limits, exceptions, and restrictions;
• Information regarding COBRA, HIPAA, WHCRA, among other federal mandates;
• Name and address of health insurer(s), if any and;
• A description of the role of health insurers.
Many of these requirements are provided in the certificate of insurance, provided by the insurance carrier.  But the employer and Plan-specific information, e.g., the Plan Sponsor’s name, address, and EIN, are clearly not provided in the generic Certificate of Insurance from the insurance company.

SPD Wrap

In order to address this legal inadequacy, some employers use what is referred to as a Summary Plan Description (SPD) “wrap” document, which serves to provide the missing, employer-specific information to the generic insurer documents, i.e. to “wrap” the insurer documents with the missing, required ERISA language.  The wrap document works together with the Certificate of Coverage to constitute the legally sufficient SPD.
Document Change Requirements
To be compliant, an early renewal strategy requires that governing plan documents, including the SPD, properly reflect the different plan year.  If the plan’s governing documents don’t reflect a different plan year, the market reform provisions of the ACA, e.g., small employer community rating, will in most cases default to a January 1, 2014 effective date, and the employer will be out of compliance.  Employers must document a valid business reason for changing their plan year.

Most employers currently have either a full Cafeteria 125 plan or a 125 premium only plan to allow employees to pay for their portion of medical or dental insurance on a pre-tax basis.  These documents must also be revised to avoid any fines or penalties.

Although federal regulators have not specifically addressed whether or not they support this strategy, many employers are moving forward with this approach.  They should proceed with caution, making sure that all documentation requirements have been satisfied.
by Ken Spencer, President and HR Coach, HR Service, Inc. & ERISA Solutions, Inc.
The foregoing is provided for general educational purposes only and is not intended as legal advice. Employers are well-advised to seek their own legal counsel before entering into these arrangements.

Greg Matis, Senior Counsel, Intermountain Healthcare
David P. Williams, ERISA Attorney, Snell & Wilmer L.L.P.