Final Market Stabilization Rule

The following Update provides an overview of the Centers for Medicare & Medicaid Services (CMS) Market Stabilization regulations.

The Department of Health and Human Services released final regulations on April 13, 2017 to stabilize the federal and state market exchanges for 2018 and calendar years going forward. The regulations intended purpose is to help lower premiums and stabilize individual and small group markets and increase choice for American who are obtaining coverage in the Marketplace created by the Affordable Care Act (ACA.

WHAT IS THE REGULATION?

The final rule made several policy changes to improve to promote stability in the market and is effective June 19, 2017, including:

  • Shortened Individual Annual Open Enrollment Period for 2018 – more closely aligns with Medicare Open Enrollment and the private marketplace. Open Enrollment for 2018 calendar year coverage will start on November 1, 2017 and run through December 15, 2017. This changes from the prior year which allowed an Open Enrollment Period in 2017 from November 1st through January 31st.
  • Reduction of Fraud, Waste, and Abuse – requiring individuals to submit supporting documentation for Special Enrollment Period and ensure that only those who are eligible with Qualifying Events to be able to enroll. In addition, it encourages individuals to stay enrolled in coverage all year, reducing gaps in coverage and resulting in fewer individual mandate penalties to help lower premiums.
  • Promotes Continuous Coverage – allows insurance carriers (insurers) to require individuals to pay back past due premiums before being able to enroll into a plan with the same carrier the following year. This provision is intended to encourage individuals to maintain continuous coverage throughout the year, which is expected to bring a positive impact on the risk pool and discourage gaming of the system.
  • More Choices for Consumers – allowing for insurers additional actuarial value flexibility to develop more choices with lower premium options for individual consumers and to continue offering existing plans.
  • Empower States & Reduce Duplications – returns oversight of network adequacy to states that are best positioned to evaluate network adequacy and reduce waste of taxpayer dollars on duplicative review by the federal government.

A press release that accompanied the final regulations for the Patient Protection and Affordable Care Act Market Stabilization cites the evidence to support the views of the government that federal and state exchanges required intervention to help stabilize the exchanges.

Below is a brief summary of those citations:

  • In 2017, approximately one-third of the counties in the U.S. had only one carrier participating in the 2017 exchange.
  • Five states had only one carrier participating in their state’s exchange for 2017.
  • Premiums for the benchmarked second-lowest cost “Silver Plan” on www.healthcare.gov increased by an average of 25% from 2016-2017.
  • 500,000 fewer Americans selected a plan in the exchange during open enrollment in 2017 compared to 2016.
  • Many states witnessed double digit increases in their insurance premiums including: Arizona – 116%; Oklahoma – 69%; Tennessee – 63%; Alabama – 58%; Pennsylvania – 53%.

OTHER CHANGES OF THE REGULATION

Additional notable changes for the regulations include:

Special Enrollment Periods

  •  Individuals enrolling mid-year as a result of a Qualifying Event (Loss of Job, Loss of Coverage, Death, etc.) will be given 30 days for the date of the insurance application to provide verifying information to substantiate the Qualifying Event. Once approved, the insurance coverage will be retroactive to the initial application date. Should verification take two to three months, the individual will not be required to pay the insurance premium for the first month of coverage.
  • Limits individuals from changing from one metal tier (i.e. the platinum, gold, silver and bronze levels) to another metal level.
  • Individuals will no longer have the option to choose a later effective date if the enrollment is delayed due to verification issues.
  • Imposes additional limitations on eligibility such as if an individual has a special enrollment due to loss of insurance would be ineligible to enroll if the loss is due to non-payment of premiums. That is unless and until the past due premiums are paid in full.

Actuarial Value

Exchange plans must fit into four categories identified by metal tiers – platinum, gold, silver and bronze. The highest level being that the plan covers 90% of the health care expenses:

o   Platinum – 90%

o   Gold – 80%

o   Silver – 70%

o   Bronze – 60%

Recognizing it’s difficult to target an exact actuarial value, the previous regulations established a de minimis variation of +/- 2%.

In 2018 the new regulations increase the allowable de minimis variation to:

o  Bronze: -4 to +5%

o  All others: -4 to +2%

Over the next couple of weeks insurance carriers will be notifying their individual clients via email and standard mailing these new regulations.

Should you, employees or individual CBIS clients have any questions regarding the final Market Stabilization Regulation, please contact your dedicated CBIS Representative.

ADDITIONAL INFORMATION

Information contained in this Important Updates—In The Know & How It Applies is not intended to render tax or legal advice. Employers should consult with qualified legal and/or tax counsel for guidance with respect to matters of law, tax and related regulations. Creative Benefits & Insurance Solutions provides comprehensive benefits advice and administrative services with respect to all forms of employee benefits, risk management, property & casualty, workers’ compensation, staffing insurance and human resources services. For additional information about our services, please contact us at (586) 992-0404 or email us at service@cbis-lc.com.

karl

Vice President Creative Benefits & Insurance Solutions

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ACA Repeal Bill Fails

The Affordable Care Act Remains

 House Speaker Paul Ryan on Friday, March 24, 2017, cancelled a voted on the GOP bill to replace the current Affordable Care Act due to a lack of votes from Republicans in order to pass the legislation.

The Republican bill would have replaced the Affordable Care Act, known informally as Obamacare, which mandated that almost everyone have health insurance, with a system of age-based tax credits to purchase health insurance plans.

The defeat is a major blow to the campaign promise made by Trump and efforts to show what Republicans can accomplish when they control both Congress and the White House, according to USA Today.

House Speaker Paul D. Ryan conceded, “We’re going to be living with Obamacare for the foreseeable future.”

In the end, Republican leaders doomed the bill by agreeing to eliminate federal standards for the minimum benefits that must be provided by certain health insurance policies.

As it stands right now the current provisions and legislation of the Affordable Care Act stands as is with no changes.

CBIS will keep you posted as the GOP leaders move on from health care to tax reform.

ADDITIONAL INFORMATION

Information contained in this Important Update is not intended to render tax or legal advice. Employers should consult with qualified legal and/or tax counsel for guidance with respect to matters of law, tax and related regulations. Creative Benefits & Insurance Solutions provides comprehensive benefits advice and administrative services with respect to all forms of employee benefits, risk management, property & casualty, workers’ compensation, staffing insurance and human resources services. For additional information about our services, please contact us at (586) 992-0404 or email us at service@cbis-lc.com.

IRS Address Taxation of Fixed Indemnity Benefits

DOL Issues Fixed Indemnity Taxation Memorandum
According to this guidance, if an employee is not taxed on the premiums for fixed indemnity health coverage (the premiums are paid by the employer or by employees on a pre-tax basis through a cafeteria plan), any payments from the coverage must be included in the employee’s gross income and wages. These same rules also apply to wellness programs that provide fixed indemnity benefits for engaging in wellness activities.

ACTION STEPS

The IRS’ memorandum does not address how employers should administer fixed indemnity payments that are taxable to employees. When employees are not taxed on the premiums for fixed indemnity coverage, employers should work with their carriers to implement a process for tax withholding and reporting.

To avoid these tax issues, employers should consider requiring that employees pay for their fixed indemnity coverage on an after-tax basis outside of their cafeteria plans.

Fixed Indemnity Health Coverage

Fixed indemnity health coverage pays a fixed dollar amount for certain health-related events (for example, $100 for each medical office visit and $200 for each day in the hospital), policies pay regardless of the amount of medical expenses that the individual actually incurs. Employers sometimes offer fixed indemnity health coverage to their employees in addition to their group medical plan.

Section 105(b) of the Internal Revenue Code (Code) states that the amounts that an employee receives through employer-provided accident or health insurance are not taxable if the amounts are paid to reimburse medical care expenses that were actually incurred. Because benefits under a fixed indemnity plan are not related to medical expenses that were actually incurred, there has been some confusion regarding the tax treatment of these payments.

According to the IRS’ memorandum, the tax status of the payments under fixed indemnity health coverage depends on how the premiums are paid.

  • The payments are not taxable if the coverage is paid by employees on an after-tax basis. For example, if a fixed indemnity plan with premiums paid on an after-tax basis paid $200 for an office visit and the covered individual’s unreimbursed medical costs for the visit were $30, the $200 would be excluded from income.
  • However, if the coverage is paid by the employer tax-free or if employees pay for the coverage on a pre-tax basis through a cafeteria plan, any payments from the plan are taxable and must be included in employees’ gross income and wages (regardless of the amount of medical expenses actually incurred).
Payment Method Premiums Taxed? Payments Taxed?
Employee paid, after tax (or employer paid and imputed as taxable income to employees) Yes No
Employee paid, pre-tax (through a Section 125 plan) No Yes
Employer paid (without imputing payment as taxable income to employees) No Yes

When payments from fixed indemnity health coverage are taxable, they are subject to income tax and employment tax withholding. This may raise administrative issues for employers because the payments under fixed indemnity coverage are usually controlled by the insurance carrier, not the employer.

Thus, when fixed indemnity payments are taxable, employers may need to work with the carriers to determine a process for tax withholding.

Wellness Programs

The IRS’ memorandum also addresses wellness programs where employees pay a pre-tax premium to participate. Because this type of wellness program design is uncommon, the IRS’ guidance appears to be targeted at fixed indemnity plans that label themselves as wellness programs. These wellness programs pay fixed indemnity benefits for participating in the program (for example, $100 for completing a health risk assessment), without regard to the amount of medical expenses incurred by the employee. The IRS concluded that these fixed indemnity benefits are taxable and should be included in employees’ gross income and wages.

Guidance: Five Scenarios

To provide guidance on this issue, the Office of Chief Counsel (OCC) considered five different scenarios in which an employee receives cash payout benefits from a fixed-indemnity plan. The Memorandum makes clear that its conclusion in each of the five scenarios derives from the fact that a fixed-indemnity plan, unlike traditional insurance, pays a benefit that bears no relationship to the amount of health care expenditures incurred by the employee. Whether the benefits are taxable ultimately depends on whether or not the premiums were paid from an amount included in the employee’s compensation. If not, then the benefits are taxable.

Scenario One – 1

Under the first scenario proposed by the OCC, an employer gives all employees the opportunity to participate in a fixed-indemnity plan. Employees pay premiums for the plan with after-tax dollars: the employer withholds the premiums from the employee’s salary, but the amount of the premiums are included in the employee’s compensation. The plan pays employees $100 per medical office visit and $200 for each day in the hospital. The OCC concludes that these payments from the plan are excludible from income because the premiums had been included in the employee’s compensation.

Scenario Two – 2

Scenario two is the same as scenario one, except that the employee’s premiums are paid by the employer at no cost to the employee. This factor changes the analysis. Under this scenario, the OCC concludes that any payments from the plan are included in the employee’s gross income.

Scenario Three – 3

Scenario three is also identical to scenario one, except that the premiums are paid through a salary reduction arrangement under a section 125 cafeteria plan (and, as a result, the premiums are excludible from the employee’s income). The OCC concludes that, as is the case with scenario two, any payments from the plan are includible in the employee’s income.

Scenarios Four and Five

Scenarios four and five address employee wellness plans. In both scenarios, as is the case with scenario three, employees who elect to participate in the plans do so by paying premiums through a salary reduction arrangement under a section 125 cafeteria plan. Under scenario four, the employee receives a cash payment of $100 for completing a health risk assessment; $100 for participating in prescribed health screenings; and $100 for participating in prescribed preventative activities. Under scenario five, the employee simply receives a cash payment each pay period for participating in the wellness plan. In both scenarios, the OCC concludes that the payment from the plans is taxable income.

The Memorandum also addresses the treatment of the payments from the indemnity plans for purposes of employment taxes: Social Security (FICA), unemployment and withholding taxes. The IRS concludes that, in scenarios two, three, four, and five, the benefits paid are subject to FICA and unemployment taxes, and are also subject to withholding.

Conclusion

While this guidance coheres with previous analysis on the status of fixed-benefit health plans and does not disturb the larger question of the exclusions from income under sections 104, 105 and 106 of the Internal Revenue Code regarding employer contributions, it is notable because for the first time, the IRS has addressed the tax treatment of payments under an indemnity plan. Employers should review the Memorandum closely as they design their benefit plans for 2018.

ADDITIONAL INFORMATION

Information contained in this Important Updates—Health-Benefits – Fixed Indemnity Benefits is not intended to render tax or legal advice. Employers should consult with qualified legal and/or tax counsel for guidance with respect to matters of law, tax and related regulations. Creative Benefits & Insurance Solutions provides comprehensive benefits advice and administrative services with respect to all forms of employee benefits, risk management, property & casualty, workers’ compensation, staffing insurance and human resources services. For additional information about our services, please contact us at (586) 992-0404 or email us at service@cbis-lc.com.