Frequently Asked Questions

May 24, 2022

FAQ: If an employee is injured on the job and goes out on workers’ compensation, must we continue their group health insurance coverage?

Expand/collapse »

Before discussing an employer’s health insurance obligations for an employee on workers’ compensation, it is important to note that workplace injuries and the state requirements surrounding them are employment issues that are outside of our benefits compliance scope. Employers should continue to work within their state’s rules for administering workers’ compensation for an employee that is injured on the job. Those rules may even involve requirements for the employer to provide medical care to address the workplace injury.

We can, however, address the question of what should be done regarding the employee’s group health plan benefits. Specifically, the continuation of group health plan benefits during workers’ compensation depends on whether FMLA must be offered or the terms of the plan.

FMLA applies to private employers with 50 or more employees for each working day in 20 or more workweeks in the current or preceding calendar year. It also applies to all public agencies and local educational agencies no matter the size (including public school boards, as well as public and private elementary and secondary schools). An eligible employee who is absent due to their own serious health condition is eligible for up to 12 weeks of unpaid leave. An eligible employee is one who has worked for the employer for at least 12 months, has worked at least 1,250 hours in the last 12 months, works within a 75-mile radius of 49 other employees, and has suffered a serious health condition. Note that an employee’s location for purposes of the 75-mile radius rule is the office to which the employee reports (which is an important distinction given the number of employees currently working remotely).

Importantly, FMLA applies any time an eligible employee is absent from work due to a serious health condition — even if that condition is work-related. This means that an employee who takes leave under workers’ compensation would be eligible for FMLA if the injury for which they are taking leave is a serious health condition, and they work for an employer that is subject to FMLA and are otherwise eligible under FMLA’s eligibility rules.

While on FMLA, the employer must give the employee an opportunity to continue benefits under the same conditions as if the employee were still actively at work. An employee only must pay their normal contribution amount. If active employees contribute to the cost of coverage, an employee on FMLA would as well. If the FMLA leave is paid, then the deduction would be taken as normal. If the leave is unpaid, other arrangements must be made for the premium. For employees who continue their coverage during an unpaid FMLA leave, the following payment options may be provided: prepay, pay-as-you-go and catch-up. The employee may also choose to discontinue coverage during FMLA.

Plans should be mindful of COBRA requirements too. For an FMLA leave, the qualifying event for COBRA would be a reduction of hours and would be triggered if the employee does not return at the end of the 12-week FMLA leave period. The event date would be the last day of the FMLA leave. Even if the coverage was terminated during the leave (for failure to pay premiums), COBRA is still not offered until the end of the 12-week leave period.

If FMLA does not apply (either because the employer is not subject to it or the employee is not eligible), then coverage should be terminated according to the employer’s and carrier’s policy for inactive employees on unpaid leave (typically 30-60 days). If active employees must work a certain number of hours per week to remain eligible, and there is no special provision for inactive employees on non-FMLA leave, then an employee on leave due to a work-related injury should be terminated from coverage if that threshold is not met. Then, depending on the circumstances, COBRA or state continuation would be offered for the reduction of hours.

May 10, 2022

Can a group health plan exclude coverage for Applied Behavior Analysis therapy related to treatment of autism spectrum disorder?

Expand/collapse »

It is not recommended that a group health plan exclude coverage for Applied Behavior Analysis (ABA) therapy related to the treatment of autism spectrum disorder (ASD). The recommendation applies to both fully insured and self-insured plans. Please see considerations below.

In its recent 2022 MHPAEA Report to Congress, the DOL stated that ASD is a developmental disorder and ABA is a primary treatment for the disorder. As such, the DOL stated their concern over an ABA coverage exclusion. The report detailed cases in which the DOL requested a comparative analysis of the exclusion and found the plans to be noncompliant. As a result of the findings, the DOL has established a national enforcement working group focused on the coverage of ASD.

Most states mandate certain coverage related to ASD, and policies governed by that state must provide the required coverage for ASD, which generally includes ABA.

A self-insured plan is generally not subject to state insurance mandates. However, a non-grandfathered group health plan is subject to the federal prohibition on annual and lifetime maximums of essential health benefits. To administer this federal mandate, the plan must identify a state benchmark plan to which they will match for the purpose of defining essential health benefits. A plan should provide the same coverage as the benchmark and should not place a greater restriction on a benefit identified as an essential health benefit. (Many states include ABA therapy as an essential health benefit.)

Finally, there is also case law establishing the exclusion of ABA as a possible violation of the Americans with Disabilities Act and/or the Mental Health Parity and Addiction Equity Act.

If an employer wishes to exclude coverage for ABA therapy, we recommend working with outside counsel and documenting the comparative analysis for the exclusion.

April 26, 2022

Is an employer’s short-term disability (STD) coverage sufficient to meet the compliance requirements of the various states’ Paid Family and Medical Leave (PFML) programs?

Expand/collapse »

In short, likely no. A growing number of states have implemented or are planning to implement statutory PFML programs soon. A statutory PFML generally applies to an employee who works in the state (including telecommuting) regardless of the physical office location or employee’s residence state. For example, an employee who works from his or her home in California is subject to California’s paid family leave (PFL) and disability insurance even if his or her company is located outside of California and does not have any physical offices there. Having a basic STD insurance from a private insurer is likely not sufficient to satisfy the statutory PFML requirements for several reasons.

First, many of the states’ PFML programs require employers to offer not only medical leave insurance but also family leave insurance. Medical leave insurance covers employees’ own serious health conditions or disability (including incapacity from pregnancy) like what standard STD insurance covers. On the other hand, family leave insurance covers an employee to take time off to care for the employee’s eligible family members’ serious health conditions or to bond with the employee’s new child, which is generally excluded from standard STD coverage.

Second, even those states that permit a private plan option require employers to purchase a private plan that meets the specific state’s PFML requirements, and a private plan must receive approval from each state. Therefore, simply having a STD policy does not automatically provide an exemption from complying with a state’s PFML program.

Third, Washington DC and Rhode Island’s PFML programs do not allow a private plan option. In these states, employers must participate in the district and the state’s programs even when an employer’s STD coverage is comprehensive and satisfies all the requirements.

Finally, below is a list of states that have enacted PFML programs. The effective dates are noted for the new PFML programs that will begin soon. Employers should review their employees’ work locations to confirm that they understand and satisfy the applicable states’ PFML program requirements, including private plan option availability, premium collection and submission processes, and employee disclosures (e.g., notices and poster).

  • California
  • Colorado (Payroll deduction begins on 1/1/2023 and benefits effective 1/1/2024)
  • Connecticut
  • District of Columbia
  • Hawaii
  • Maryland (Payroll deduction begins on 10/1/2023 and benefits effective 1/1/2025)
  • Massachusetts
  • New Hampshire (Participation is voluntary for private employers. Benefits effective 1/1/2023)
  • New Jersey
  • New York
  • Oregon (Payroll deduction begins on 1/1/2023 and benefits effective 9/1/2023)
  • Puerto Rico
  • Rhode Island
  • Washington

Note: The above list is current as of the date this FAQ is issued. Furthermore, some states, such as NY and CA, label their programs as PFL and disability insurance rather than PFML. However, for simplicity, the FAQ uses the term statutory PFML programs to include paid family leave and disability insurance.

Lastly, we have a Quick Reference Chart on Statutory PFML programs that provides each state’s PFML program’s highlights. To receive a copy of the publication, please contact your NFP benefits consultant.

April 12, 2022

FAQ: Illinois requires employers to disclose certain information concerning their health plans to employees who work in that state. Have there been any updates concerning the requirement?

Expand/collapse »

Employers with workers employed in the state of Illinois should be aware of the Illinois Consumer Coverage Disclosure Act (or CCDA). The law became effective on August 27, 2021. The CCDA requires all private employers and non-federal governmental employers to provide Illinois employees with a disclosure that compares their coverage to essential health benefits (EHBs) required for coverage received through the Illinois marketplace. The employer must provide a disclosure for each group health plan that covers Illinois employees. The CCDA does not impose additional coverage requirements on these employers, only the disclosure requirements. Ask your account executive for a copy of our whitepaper on the CCDA, which includes links to the IL DOL FAQs and the model disclosure form.

The Illinois Department of Labor (IL DOL), the agency charged with administering and enforcing this requirement, maintains a list of FAQs that provide general guidance on this requirement. Although the IL DOL has not updated this information, the agency has provided us with a few answers to questions raised concerning the agency’s model form.

Many employers use the model form provided by the IL DOL. The form asks for the “Name of the Issuer.” According to the IL Department of Labor, the “Name of the Issuer” is the name of the plan’s issuer or carrier. Note that this would not apply to self-insured plans. The IL DOL has not provided guidance on that point, but one possible response for a self-insured plan is to provide the name of the employer, followed by “(self-insured, administered by [name of TPA]).”

The form also requires employers to identify the “Plan Marketing Name.” According to the IL DOL, this is the name the issuer uses or assigns to the major medical product. If the plan is self-insured, a possible response is the name of the employer followed by “(self-insured).”

The most important criteria to remember when completing the disclosure form is that the employee should be able to identify the plan(s) that the employer offers and which Illinois EHBs those plans provide. It should be emphasized that the disclosure requirement does not require plans to provide EHBs that they do not already provide.

March 29, 2022

FAQ: We sponsor a fully insured group health plan but are considering changing to a level-funded plan arrangement. Would this transition affect our benefits compliance obligations?

Expand/collapse »

In short, yes. A level-funded plan is often viewed as a blended solution for employers that want to switch from a fully insured plan but are not prepared to completely self-insure. An employer sponsoring a level-funded plan pays a set monthly amount to a carrier to cover the estimated cost of anticipated claims, the stop-loss premium and plan administrative costs. If the claim costs are lower than expected at the plan year-end, a refund may be provided to the employer.

However, a level-funded plan is considered a self-funded plan for benefits compliance purposes. Therefore, a plan transitioning from a fully insured plan to a level-funded plan should be aware of the additional compliance obligations, including (but not limited to) requirements under the ACA, HIPAA, ERISA and the Section 105 nondiscrimination rules.

With respect to the ACA, the employer would have additional ACA reporting obligations. For example, an applicable large employer (ALE) with 50 or more full-time employees in the prior year needs to provide information regarding minimum essential coverage on Forms 1094/5-C (in Part III). A small employer (non-ALE) needs to report minimum essential coverage using Forms 1094/5-B.

The employer would also be responsible for reporting and paying the PCOR fee required of carriers and self-funded plans. The reporting on IRS Form 720 and fee based on the average number of lives for the plan year is due on July 31 of the year following the last day of the plan year.

With respect to HIPAA, the level-funded plan would have to comply with the full range of HIPAA privacy and security obligations, including providing a HIPAA privacy notice (previously provided by the carrier under the fully insured plan), conducting a risk assessment, implementing more extensive privacy and security procedures and training staff.

Under ERISA, if the employer is holding plan assets in a segregated account, the plan would generally be considered funded and subject to the ERISA trust and fidelity bond requirements. If the plan is considered funded, then the exemption from the Form 5500 filing requirements for a small plan (with less than 100 participants at the plan year start) would no longer apply. Furthermore, if the plan receives a refund, any portion considered plan assets (such as amounts attributable to participant contributions towards premiums) must be returned to the plan participants (like an MLR rebate for a fully insured plan) in some manner.

The employer sponsoring the level-funded plan may also have ERISA fiduciary obligations regarding claim appeals (which were previously assumed by the carrier under the fully insured plan). Additionally, the level-funded plan would no longer be subject to state insurance laws, such as coverage mandates, because these would be preempted by ERISA.

Section 105 nondiscrimination rules will apply to level-funded plans, too. Under these rules, self-insured health plans cannot discriminate in favor of highly compensated employees (HCEs) with respect to eligibility or benefits. For this purpose, “highly compensated” includes the top 25% of the employer’s workforce, which is a broader definition than that found in Section 125 nondiscrimination rules (which apply to all cafeteria plans).

Accordingly, despite the funding differences between level-funded and self-funded plans, the level-funded plans are generally considered self-funded for benefits compliance purposes. Employers considering a change from a fully insured to a level-funded (or self-funded) plan should consult with counsel and their advisors for further information regarding the additional compliance requirements.

March 15, 2022

FAQ: If an employee experiences a reduction in hours as a reasonable accommodation under the ADA, are they entitled to remain enrolled on the health plan?

Expand/collapse »

The Americans with Disabilities Act (ADA) applies to employers with 15 or more employees and requires them to provide individuals with disabilities an equal opportunity to benefit from the full range of employment-related opportunities available to others. However, an employee that experiences a reduction in hours due to a reasonable accommodation would not be entitled to remain enrolled on the health plan if their reduction in hours drops them below the eligibility threshold. Under the ADA, the only exception for this would be if the employer allows non-disabled participants that drop below the eligibility threshold to remain covered under the plan.

If the plan terms are such that the employee loses eligibility due to the lower numbers of hours worked, the understanding would be that the employer would terminate their coverage in accordance with the plan terms (i.e., end of the month after or date of event) and would then offer the employee COBRA.

Although the general rule is as discussed above, there are also two other compliance concepts that the employer will need to consider. First, under the ACA’s employer mandate, an employer may not be able to drop the person from coverage if the employer utilizes the lookback measurement method and the person is in a stability period. The rules for change in status don’t always allow employers to immediately terminate coverage when someone experiences a reduction in hours. So, the employer should also analyze whether they must continue to offer coverage to this employee due to the employer mandate’s rules. (We discuss the change in status rules at length in a white paper entitled “ACA Look-Back Measurement Method: Offers of Coverage and Changes in Status.” You may request the paper from your advisor.)

Second, if the employee’s disability would also entitle them to rights under the FMLA, they would be able to continue coverage based on the idea that they are taking intermittent FMLA. Remember that FMLA entitles employees to continued employment and benefits for a period of no less than 12 weeks per year. So, if their disability is also a serious condition or illness and they are eligible for FMLA, then FMLA could also entitle them to remain covered under the group health plan benefits.

March 01, 2022

FAQ: Is providing a COBRA Initial Notice in our enrollment packet for eligible employees sufficient to meet the distribution requirement?

Expand/collapse »

No, distributing the COBRA Initial Notice (also known as the General Notice) to all newly hired eligible employees in an enrollment packet is not sufficient for several reasons. As a reminder, the notice must be distributed to all newly enrolled employees and spouses within 90 days after commencement of coverage.

First, the Initial Notice should only go to covered participants. The first paragraph of the notice begins, “You’re getting this notice because you recently gained coverage under a group health plan (the Plan). This notice has important information about your right to COBRA continuation coverage.” Providing the notice to all newly eligible employees before enrollment is providing them with inaccurate information of rights that they do not yet have and never will have if they waive coverage. A plan administrator is required to provide the notice within 90 days after the participant enrolls and coverage begins.

Second, the Initial Notice is required to be distributed to covered employees and covered spouses. An enrollment packet is distributed only to the employee. The spouse is not considered a recipient of an enrollment packet. As such, the notice should be mailed to the home address on file with the spouse indicated in some manner on the envelope, such as John Doe and Spouse, John and Jane Doe or Mr. and Mrs. John Doe. If the employee and spouse enrolled at the same time, a single notice is sufficient if they are not known to have separate addresses.

This is one of the most difficult notices for a plan administrator in terms of compliance dates. Many employers only think of the notice as a new employee notice. However, the notice is required to be provided to any newly enrolled employee or spouse. Consider the following scenarios:

  • A newly hired employee waives enrollment when initially eligible but enrolls in single-only coverage during the next open enrollment.
  • An employee is enrolled in single-only coverage. During the year, he gets married and adds his spouse.
  • A newly hired employee waives enrollment when initially eligible but enrolls in family coverage midyear upon the loss of other coverage.

A COBRA Initial Notice is required to be distributed in all these scenarios. Failure to comply could put an employer at risk for legal action brought by participants and an ERISA $110 per day fine. If the violation is not corrected within 30 days of discovery, then the employer may need to self-report the violation on IRS Form 8928 with a civil penalty of $100 per day being assessed.

Finally, an employer who fails to comply with the notice requirement related to spouses could not impose the 60-day notification period following a divorce for an ex-spouse electing COBRA coverage. If the spouse was never notified of the obligation to notify the plan within 60 days of the divorce to preserve their COBRA right, the employer might be responsible for offering the coverage regardless of when they are notified of the divorce. Further, a carrier (including a stop-loss carrier) could deny coverage because of the notice failure, which would leave the employer paying out-of-pocket for the ex-spouse’s claims.

If an employer is not in compliance with this requirement, the best practice is to distribute the notice to all currently enrolled employees and spouses, then implement a compliant procedure going forward.

If you have any questions or would like to request a copy of the model notice, please ask your consultant.

February 15, 2022

FAQ: For an applicable large employer (ALE) who sponsors a fully insured plan, does the ALE need to report their retirees and COBRA participants who are enrolled in its plan on Forms 1094 and 1095-C? How about an ALE who sponsors a self-insured plan, does the ALE need to issue Forms 1095-C for those individuals?

Expand/collapse »

ALEs are employers who employ on average at least 50 full-time employees (including equivalents) on a controlled group basis in the previous calendar year. ALEs are subject to the ACA employer mandate as well as annual ACA reporting via Forms 1094 and 1095-C. For the 2021 reporting, ALEs need to file Forms 1094 and 1095-C with the IRS by February 28, 2022, if filing by mail (available only for ALEs who file fewer than 250 forms) or March 31, 2022, if filing electronically. Additionally, by March 2, 2022, ALEs are required to furnish copies of Forms 1095-C to their full-time employees and other enrolled individuals (if they sponsor a self-insured plan).

An ALE who sponsors a fully insured plan does not need to report their retirees or COBRA participants if they were not active employees in any month in the reporting year (i.e., 2021 for this year’s reporting deadlines). If a retiree or COBRA participant was an active employee in any month before being terminated or retiring in mid-year, then the ALE needs to report them on Forms 1094 and 1095-C.

An ALE who sponsors a self-insured plan needs to report their retirees or COBRA participants if they were enrolled in the ALE’s plan during the reporting year, even if they were not an active employee in any months. This is because self-insured sponsors are also subject to another ACA reporting requirement under IRC Section 6055 to report whether a plan provided minimum essential coverage (MEC) to enrolled individuals during the year. Though the individual mandate provision’s penalty no longer applies, insurers and self-insured employers are required to satisfy the IRS Section 6055 MEC reporting continuously. For fully insured plans, their medical insurers have an obligation to satisfy the IRC Section 6055 reporting requirement rather than the employers. For non-full-time employees and non-employees who are enrolled in self-insured health coverage, the ALEs have an option to use Forms 1094 and1095-B rather than the -C forms. Additionally, they have an option to use the alternative manner of furnishing statements rather than furnishing the copies of Forms 1095-C. For more detailed information, the IRS’s 2021 Instructions for Forms 1094-C and 1095-C are helpful.

By contrast, a small employer that offers self-insured health coverage but is not an ALE member should not file Forms 1094-C and 1095-C but should instead file Forms 1094-B and 1095-B to report information for enrolled employees and non-employees, such as COBRA participants and retirees.

To summarize, ALEs sponsoring fully insured plans do not need to report on Forms 1094 and 1095 and issue Forms 1095 for non-full-time employees (e.g., COBRA qualifying beneficiaries and retirees) who were not active employees in any month in the reporting year. On the other hand, ALEs sponsoring self-insured plans need to report enrolled non-full-time employees and non-employees, including COBRA participants and retirees, on Forms 1094 and 1095.

February 01, 2022

FAQ: Is there a penalty if an employer fails to timely file Medicare Part D disclosures to CMS? Are there penalties if the employer fails to provide Medicare Part D disclosures to employees?

Expand/collapse »

Employers must report the creditable status of their prescription drug plan coverage to the Centers for Medicare & Medicaid Services (CMS) within 60 days after the start of the medical plan year (policy year or contract year, regardless of the ERISA plan year).

Plan sponsors must also provide the Notice to Part D Eligible Individuals on the occurrence of five different events:

  • On an annual basis prior to October 15 (the first day of the Medicare enrollment period). Thus, the notice must be provided no later than October 14 each year.
  • Prior to an individual's initial enrollment period for Part D. For most individuals, the initial enrollment period for Part D is generally concurrent with the initial enrollment period for Part B, which is the seven-month period that begins three months before the month an individual first meets the eligibility for Parts A and B and ends three months after.
  • When the individual originally becomes eligible under the group plan. Upon a change in the plan's creditable status, including termination of the prescription drug plan. Timely delivery of the notice allows the individual the opportunity to enroll in Part D if creditable coverage is lost and avoid late enrollment penalties.
  • Upon an individual's request.

There are no specific penalties for failing to provide these notices (at least currently), and CMS does not have a process for correcting if a plan fails to provide them. The only specified penalty relates to a retiree plan attempting to receive the retiree drug subsidy. Such a plan would be denied the subsidy if it had not complied with the required Medicare Part D notifications. Note also that plan sponsors have a fiduciary duty under ERISA to comply with all federal laws related to their plans.

However, the real issue here is that Medicare eligible individuals could have delayed enrollment in Part D because they believed their coverage to be creditable based on an incorrect or missing notice. The individual could be penalized when they go to enroll in Medicare. This is because a Medicare eligible individual can only delay Part D (without penalty) if they have creditable coverage. If they have gone without creditable coverage for 63 days or more, they will be limited as to when they can enroll in Part D (annual enrollment starting October 15) and will receive a premium penalty based on the number of months that they did not have creditable coverage.

If an employer failed to provide these disclosures in the past, then they should consider distributing these disclosures as soon as possible and make sure that they are distributed in a timely manner going forward.

January 19, 2022

FAQ: Our employee is enrolled in an HSA qualified HDHP plan that also covers her spouse, who will soon be eligible for Medicare. Can the employee still contribute to an HSA, and if so, how much? Can she use the HSA to pay for her spouse’s medical expenses?

Expand/collapse »

Answer: First, it is important to keep in mind that the employee’s HSA eligibility is based upon whether she meets the HSA eligibility criteria, regardless of whether her spouse or any other individual enrolled on the HDHP is also HSA eligible.

To review, to be eligible to make or receive HSA contributions, an individual must:

  • Be covered by a qualified HDHP.
  • Not have other “impermissible coverage” (i.e., coverage that provides medical benefits before the HDHP statutory minimum deductible is met, with certain exceptions - e.g., preventive care).
  • Not enrolled in Medicare (It is actual enrollment in, and not simply eligibility for, Medicare that precludes HSA eligibility).
  • Not be claimed as a dependent on someone else’s tax return.

Therefore, if the employee’s spouse enrolls in Medicare, the spouse would no longer be eligible to make HSA contributions. However, the employee’s HSA eligibility would not be impacted.

Second, the employee’s HSA contribution limit would be based upon the IRS annual maximum for the applicable HDHP coverage tier. For 2022, the annual HSA contribution limit is $3,650 for self-only coverage and $7,300 for family coverage; the additional catch-up contribution (for those ages 55 or older) is $1,000.

Accordingly, if the employee maintains the family HDHP coverage through 2022, the annual family limit of $7,300 would apply. (The family HSA contribution limit applies to an employee with family tier coverage, regardless of the HSA-eligibility status of the other covered individuals.) If the spouse did not make any HSA contributions in 2022 prior to Medicare enrollment, the employee could make or receive a total of $7,300 in contributions to her HSA plus, if applicable, the additional $1,000 catch-up contribution. (Note that if the spouse had remained HSA eligible, the couple could not collectively contribute more than the annual family coverage limit.)

Alternatively, if the employee switches to single-only coverage midyear following the spouse’s Medicare enrollment, the employee could only contribute the maximum based upon the single coverage tier for the remainder of the year. For example, assume the employee is HSA eligible for the entire 2022 tax year but switches from family to single HDHP coverage as of July 1, 2022. In such a case, the employee could contribute 6/12 (or 1/2) of the family contribution maximum of $7,300 or $3,650, plus 1/2 of the single contribution maximum of $3,650 or $1,825. So, her maximum permitted contribution would be $5,475 plus an additional $1,000 catch-up if she is eligible.

Finally, the employee can use her HSA funds to reimburse the qualified medical expenses of herself, her spouse and any tax dependents on a tax-free basis. Her spouse can be enrolled in Medicare (or other disqualifying coverage) at the time the distribution is made. The HSA funds can be used to reimburse the spouse’s Medicare deductibles, coinsurance and copays, unreimbursed dental and vision expenses, over-the-counter drugs, medicine, equipment and other qualifying expenses.

However, the spouse’s Medicare premiums could only be reimbursed when the employee turns 65 and then, only prospectively. But Medicare supplemental policies cannot be reimbursed from the HSA on a tax-advantaged basis even after the employee reaches age 65.

To summarize, the spouse’s Medicare enrollment does not impact the employee’s eligibility to contribute to an HSA based upon the applicable HDHP coverage tier(s). Additionally, the employee’s HSA funds can continue to be used to pay the spouse’s qualified medical expenses after the spouse’s Medicare enrollment.

January 04, 2022

FAQ: We are a small group with age-banded rates imposed by our insurance carrier. Can we create and utilize a composite rate for our employees?

Expand/collapse »

We do not recommend that employers create composite rates where the carrier is billing on an age-banded basis. This is because it can result in issues under ERISA and the Age in Employment Discrimination Act (ADEA).

Specifically, it is a violation of ERISA if the employer rate for some employees is higher than the insurer rate for those employees. Additionally, if the employer calculates its own composite rates, it becomes unworkable if new employees are hired or if employees present when the rates were set to terminate or retire. Essentially, if the client hires a new employee (or an employee is dropped from coverage), the average rate per employee would be affected (i.e., the employer will have to calculate a new composite rate based on the newly hired or fired employee). In other words, the insurer would be billing for a higher or lower total premium, and the employer’s calculated composite rate may not match the premium charged by the insurer.

This scenario is further augmented by the dependent tiers since even though an insurer could calculate composite rates for dependents, the employer composite rate for dependents may not accurately reflect the actual amount charged by the insurer. With or without the dependent tier structure, this would cause the employer to over or undercharge plan participants and would be viewed as a violation of their ERISA fiduciary duty. Conversely, where the insurer creates a composite rate, they are required to maintain that composite rate throughout the year regardless of the change in the employer’s employee demographic changes.

The other possible issue with an employer setting their own composite rates is the ADEA, which prohibits employers from discriminating against employees aged 40 and older. For a plan that is community rated with individual rates, the employer has two choices if they want to stay in compliance with the ADEA:

  1. Contribute a percentage of the premium charged by the insurer (i.e., a percentage based on the individual rates received from the insurer); or
  2. Implement a fixed dollar contribution amount for employees’ payroll deduction (and the employer would absorb the rest).

If the employer structures the employee contribution in any other way, including a set employer contribution, the result will violate the ADEA.

So, setting composite rates when the insurance carrier passes on age-banded rates could cause employers to violate both ERISA and the ADEA. Employers should consult with legal counsel if this is an issue they need to remedy.