The Conundrum of Sick Participants

One question we are often asked is how plan sponsors can deal with participants and dependents who have higher than average claims or are dealing with a chronic disease that will require expensive, ongoing care. At times, these issues can be resolved with adjustments to stop loss coverage, whether aggregate or lasered, or adding medical necessity or step therapy protocols. Other times, no matter what steps are taken, the participant and the plan are stuck with large medical bills. Knowledge about other funding avenues can make the conundrum more difficult. For example, what if the employee would be better off without your plan? What if finding them other funding sources results in a win-win for all involved? The unfortunate answer is that there is no simple way to simultaneously help the participant and move them off the plan. Below we discuss some popular ideas and the compliance risks that arise from them.

The Patient Protection and Affordable Care Act

The ACA requires non-grandfathered group health plans to comply with the Public Health Services Act (PHSA) provisions, which include the requirement to cover preventive care, the prohibition on annual and lifetime limits, and the requirement to count costs for essential health benefits (EHBs) toward the out-of-pocket maximum (collectively, the ACA market reforms). A group health plan must comply with the ACA market reforms and any employer-sponsored plan that provides medical care will be considered a group health plan unless it can be categorized as an excepted benefit. Common benefits that are typically “excepted” are limited scope dental and vision plans, employee assistance plans (EAPs) that do not provide significant medical care, and properly designed fixed indemnity plans.

Large employers are also subject to the Employer Shared Responsibility provisions, which requires them to offer minimum essential coverage (MEC) to at least 95% of their full-time employees and their child dependents that provides minimum value and is affordable to the employee in order to avoid penalties. The IRS outlines specific rules on how to calculate affordability, including whether an unconditional opt-out bonus is paid.

Paying for Individual Health Insurance

Employers have only one avenue if they want to pay for an employee’s or dependent’s individual health insurance – the individual coverage health reimbursement arrangement (ICHRA). The ICHRA is an employer sponsored HRA that is integrated with an employee’s individual health insurance coverage and can reimburse premiums for that health insurance as well as other medical expenses. ICHRAs are subject to a variety of requirements, including that the employer cannot offer employees a choice between an ICHRA and employer-provided health coverage. Additionally, when an ICHRA is not offered to the entire employee population, the IRS permits the employer to categorize employees into only certain classes of employees. The ICHRA rules permit classes such as full-time, part-time, collectively bargained, salaried, and hourly, employees, but the employer may not create a class of sick employees.

It is also impossible to create a compliant administrative process that reimburses individual health insurance premiums outside of an ICHRA. While pre-ACA that may have been possible, post-ACA, the IRS named those programs employer payment plans (EPPs) and noted in Notice 2015-87 and in later guidance that such programs are group health plans whether the premiums are reimbursed on a pretax or after-tax basis. Because EPPs are group health plans, they are subject to the ACA market reforms, but, because of their design, are not ACA compliant. Therefore, practically, neither the ICHRA nor the EPP is an option that can deal specifically with high claims employees.

Offering Employees Cash to Opt-Out

When an employer offers an opt-out bonus to employees, the opt-out bonus must be “conditional” to avoid negatively impacting a large employer’s affordability calculation. To be a conditional opt-out, the employer cannot pay the opt-out bonus until the employee 1) waives enrollment in the employer-sponsored coverage and 2) provides reasonable evidence that the employee and their tax dependents will have MEC that is not individual coverage. If an opt-out bonus is not correctly designed, the amount of the bonus is added to the employee’s required contribution to determine if the plan is affordable under the ACA, and thus, would not result in penalties. For example, if an employer’s lowest cost, self-only coverage was $1,200 per year, then the employer is able to use the federal poverty line (FPL) safe harbor to avoid all penalties related to unaffordable coverage during the year. However, if the same employer offered a $10,000 unconditional opt-out bonus to a sick full-time employee, then that employee’s lowest-cost, self-only premium would be $11,200/per year, and would no longer affordable under the FPL safe harbor.

While it may seem like the employer is doing that employee a favor by handing them $10,000, it will negatively impact the employer’s ACA strategy. Further, it is viewed as discriminatory to incentivize the employee to drop the employer-provided coverage.

Action Steps

Employers that have implemented or are considering how to approach this issue should review the risk before taking action. See more in our Spotlight, Moving the Sickest Employees to the Marketplace. Spotlight on Moving Sickest Employees to Marketplace (adobeconnect.com)