This article addresses three important issues related to health coverage:
1. For plan years beginning on or after January 1, 2014, the Affordable Care Act (ACA) establishes a maximum eligibility waiting period of 90 days, which isn’t the same as three months. Is your plan in compliance?
2. In 2018, some employers will face a 40% excise tax — commonly known as the “Cadillac tax” — on plan values that exceed a prescribed cap under the Affordable Care Act (ACA). Will you be subject to the Cadillac tax?
3. This past April, the Protecting Access to Medicare Act of 2014 was passed into law, which eliminates limitations on annual deductibles previously mandated under the Affordable Care Act (ACA). How does this affect the types of plans you offer?
1. Does our plan comply with the ACA’s excessive waiting period rules?
Question: We sponsor a grandfathered, non-calendar-year, self-insured health plan that imposes a three-month eligibility waiting period. As an employer with a grandfathered plan, are we required to comply with the Affordable Care Act’s (ACA’s) prohibition on excessive waiting periods? And, if so, would we be in compliance with the existing three-month waiting period?
Answer: Yes, your plan must comply. And, no, a three-month waiting period doesn’t meet the requirement. For plan years beginning on or after January 1, 2014, the ACA establishes a maximum eligibility waiting period of 90 days, which isn’t the same as three months.
Even grandfathered plans – those in existence on March 23, 2010, that have not undergone certain changes – must comply with the requirement prohibiting “excessive” waiting periods. However, application of a reasonable and bona fide employment-based orientation period may, in certain situations, delay when the 90-day waiting period begins.
Defining a waiting period
A waiting period is defined as the period that must pass before coverage becomes effective for an employee or dependent who’s otherwise eligible to enroll under the terms of a group health plan. (Individuals are “otherwise eligible” if they have satisfied the plan’s substantive eligibility conditions, such as being in an eligible job classification or obtaining a job-related license.)
To comply with the waiting period requirement, your plan cannot require an otherwise eligible employee or dependent to wait more than 90 days before coverage becomes effective. For this purpose, three months isn’t necessarily equivalent to 90 days — as all calendar days (including weekends and holidays) are counted toward the 90 days, beginning with the first day of the waiting period. Because three months can be longer than 90 days, a three-month waiting period wouldn’t comply with the 90-day limit.
Final regulations issued in February 2014, introduce a reasonable and bona fide employment-based orientation period as a permissible eligibility condition that delays commencement of the 90-day waiting period. This orientation period is one during which the employer and employee evaluate whether the employment situation is satisfactory, and standard orientation and training processes begin.
Under proposed regulations issued concurrently with the final regulations, the maximum length of such an orientation period would be one month. The plan’s waiting period would begin on the first day after the orientation period.
Amending a plan
We recommend you consult with your benefits advisor about amending your plan to comply with the maximum 90-day waiting period, starting with the plan year beginning in 2014. In addition, you could add an orientation period.
Note that if your plan is amended to impose the maximum 90-day waiting period, and the 91st day is a weekend or holiday, your plan may choose to permit coverage to be effective earlier than the 91st day for administrative convenience. The plan may not, however, make the effective date of coverage later than the 91st day — even if the 91st day is a weekend or holiday.
Warning to large employers
If you’re a large employer as defined under the ACA, you should review the final regulations regarding the employer shared-responsibility (“play or pay”) penalties. Those regulations explain the conditions under which affected employers will avoid potential penalties by offering coverage to new full-time employees. The rules are similar to — but not entirely the same as — the rules for waiting periods explained above. Large employers should familiarize themselves with both sets of rules.
2. Gearing up for the ACA’s “Cadillac tax”
Employers now have another reason to keep health care costs low, other than for the sake of the business. In 2018, some employers will face a 40% excise tax on plan values that exceed a prescribed cap under the Affordable Care Act (ACA).
The “Cadillac tax” will apply to the value of health plans exceeding $10,200 for single coverage, and $27,500 for family coverage. The cost calculation encompasses both employers’ and employees’ coverage shares. Employers’ contributions toward Health Savings Accounts and Flexible Spending Accounts are also included.
The value thresholds will rise by 1%, per the consumer price index (CPI), in 2019 and 2020, and then equal the CPI thereafter. Because the historic inflation rate for medical services is around 6% — well ahead of the CPI — it’s easy to see how more employers will be affected over time.
As reported in a CEB survey jointly conducted with HighRoads, a benefits plan provider and compliance firm, recommended steps include:
Embracing high-deductible plans. By definition, “high” means at least $1,250 for individual, and $2,500 for family, coverage. Meeting these standards allows an employer to incorporate a Health Savings Account into the plan design.
Shifting from copay to coinsurance for office visits. With coinsurance, rising costs are shared proportionately. In contrast, copays can be arbitrary and bear little relationship to the underlying costs.
Increasing out-of-pocket maximums (OOPMs). Two years ago, 49% of surveyed employers had out-of-pocket maximum employee contributions of $2,500 or more. This year, the proportion has grown to 66%.
Focusing on early detection and disease/injury prevention. Emergency room visit copays are on the rise. In response, many employers are offering no-cost coverage for physicals, the cornerstone of health promotion and early detection for disease.
The CEB/HighRoads cautioned that plans implementing the above changes may face unintended consequences in addition to constraints by the ACA’s minimum-value and affordability requirements.
For example, employees may postpone needed medical services if coinsurance levels become high and they don’t know what they’ll be paying. Employees can also be nervous about high OOPMs. The solution, CEB maintains, is transparency, ensuring participants have maximum access to medical service pricing data, emphasizing strategies employees may use to manage health care costs, as well as stressing how uncommon it is for the average employee to actually encounter the OOPM.
Another plan option that employers can ponder in relation to the Cadillac tax is dependent coverage. Although the ACA mandates that plans offer coverage to dependents until they reach age 26, it doesn’t require that the cost be subsidized or “affordable.” Also, spouses aren’t considered dependents.
These factors give employers considerable flexibility in how they handle dependent benefits. Regarding spouses, most employers don’t offer coverage to employee spouses already covered by another health plan. Another approach is to offer it but impose a surcharge that could make the coverage more costly than what the spouse already has.
It is estimated that 16% of employers will be subject to the Cadillac tax. However, employers should not base decisions on health coverage on this consideration alone. Do you believe healthy employees are more productive and, ultimately, less expensive than unhealthy ones? If so, don’t lose sight of that conviction as you consider ways to avoid the Cadillac tax.
3. New law repeals mandated annual deductible cap for small group policies
The Protecting Access to Medicare Act of 2014 eliminated limitations on annual deductibles previously mandated under the Affordable Care Act (ACA) for many small businesses.
As though it never happened
Starting in 2014, annual deductibles for health care plans were to max out at $2,000 for a plan covering a single individual and $4,000 for any other plan (indexed for inflation).
In February 2013, however, the Department of Health and Human Services clarified that these limits would apply only to the small group insurance market, not to self-insured employer plans or to the large group insurance market. Repealing these deductible limits is effective not just immediately, but “as if included in the enactment” of the ACA — essentially treating the limits as though they’d never been part of the law.
A little more about HDHPs
HDHP arrangements are subject to the same aggregate employee out-of-pocket expense caps as other kinds of health plans. The limits for this year are $6,350 for single coverage and $12,700 for family coverage.
The out-of-pocket caps cover deductibles, copays, coinsurance and similar charges — to the extent that they pay for the ACA’s “essential” health benefits. Payments for nonessential health services, as well as out-of-network care, aren’t subject to the out-of-pocket limit.
Never a better time
Advocacy groups had been pushing for the repeal of the ACA-mandated deductible limits out of concern that the caps would inhibit small businesses from adopting HDHPs. If you’ve been eyeing one of these arrangements, there’s never been a better time to consider the possibilities.