PPACA: Employer and Group Health Plan Requirements

Overview

The federal Patient Protection and Affordable Care Act, Pub. L. No. 111-148 (2010), amends the federal Public Health Service Act and certain other laws to revise and expand the manner in which health care services are provided by employers. For example, PPACA imposes penalties on certain employers that do not provide minimum essential health care coverage. PPACA also modifies how health insurance issuers can offer insured group health plans to employers.

This chapter discusses the provisions of Title I of PPACA, as amended by the federal Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152 (2010), that cover employer and group health plan requirements. .For information about PPACA's provisions that apply to individuals and health benefit exchanges, see chapter PPACA: Individual Responsibilities and Health Benefit Exchanges. For information about other requirements applicable to group health plans, see chapter Health Insurance Portability and Accountability Act and for information about health care continuation coverage, see chapter COBRA Continuation Coverage.

Additional information about PPACA is available on the federal Department of Health and Human Services' website at http://www.healthcare.gov (in Spanish at http://www.cuidadodesalud.gov/enes/) and on the federal Department of Labor's Employee Benefit Security Administration website at http://www.dol.gov/ebsa/healthreform/.

[Note: Lawsuits have been filed in several federal district courts claiming that some provisions of PPACA violate the U.S. Constitution. Most of these lawsuits have been dismissed or district court judges have ruled that PPACA is constitutional; however, in some cases, judges have ruled that portions of PPACA or the entire statute is unconstitutional. Typically, cases alleging that laws are unconstitutional are decided ultimately by the U.S. Supreme Court.]

Coverage

The federal Patient Protection and Affordable Care Act, Pub. L. No. 111-148 (2010), as amended by the federal Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152 (2010), applies to group health plans maintained or sponsored by employers and employee organizations, such as unions. Group health plans are arrangements, policies, or practices that provide medical care to:
• employees,

• former employees,

• employers, or

• persons associated or formerly associated with employers through business relationships.

Group health plans also include arrangements, policies, or practices that provide medical care to employees’ family members, such as employees’ current and former spouses and children (Treas. Reg. § 54.9831-1(a)).

Medical care means that plans provide payment or reimbursement for:
• diagnosis, cure, mitigation, prevention, or treatment of diseases;

• any purposes affecting bodily structures or functions;

• transportation primarily used for and essential to medical care; or

• insurance covering medical care (29 U.S.C. § 1191b(a)(2)).

PPACA modifies the federal Employee Retirement Income Security Act and the federal Internal Revenue Code to make certain provisions of the federal Public Health Service Act, which regulates state and local government group health plans, applicable to private employer group health plans. ERISA governs employee benefit plans, including group health plans, and several sections of the federal tax code regulate the tax treatment of group health plans. For more information about employee benefit plans, see chapter Employee Benefit Plan Fundamentals.

PPACA's requirements affect individuals who are eligible to and enroll in group health plans, such as employees, their spouses, and employees' dependents, typically referred to as plan enrollees. Employees, their spouses, and employees' dependents who enroll in plans and are entitled to receive plan benefits are typically referred to as plan participants.

PPACA also applies to health insurance issuers, such as insurance companies and health maintenance organizations, that also are subject to state insurance laws and regulations. Typically, health insurance issuers offer and sell health plans to employers and other organizations, in the group market, as well as to individuals in the individual market. If state insurance laws and regulations impose stricter requirements on health insurance issuers than PPACA, issuers must comply with stricter state requirements (Interim Final Rules Relating to Pre-existing Condition Exclusions, Lifetime and Annual Limits, Rescissions, and Patient Protections, 75 Fed. Reg. 37,188 to 37,241 (June 28, 2010)).

PPACA does not require employers to have or maintain group health plans; however certain employers that do not provide health care benefits or do not provide affordable health care coverage to their employees must pay penalties. For information about employer penalties, see “Penalties.”

Under PPACA, group health plans include both insured and self-funded or self-insured plans. Insured group health plans are plans that employers purchase from health insurance issuers in the group market and typically consist of one or more policies that provide coverage for certain types of health care benefits, such as medical, dental, vision, and prescription drug coverage. In contrast to insured group health plans, self-funded or self-insured health plans are plans in which employers set aside money from their cash flow or revenue to provide health care coverage to plan participants and pay their benefit claims. Many of PPACA's provisions apply only to insured group health plans; however, some of PPACA's provisions also apply to self-funded or self-insured group health plans.

Grandfathered Group Health Plans

Insured and self-funded/self-insured group health plans that existed before March 23, 2010, the day that PPACA became law, are grandfathered plans. Some of PPACA's provisions do not apply to grandfathered plans or the date that grandfathered plans must comply with PPACA's provisions is delayed.

Plans that existed before March 23, 2010, lose their status as grandfathered plans if employers or health insurance issuers make changes or revisions to group health plans on or after March 23, 2010, that:
• substitute insured plans for self-funded/self-insured plans or self-funded/self-insured plans for insured plans;

• eliminate all or substantially all plan benefits to diagnose or treat particular health conditions;

• increase coinsurance levels;

• increase cost-sharing requirements, including deductibles and out-of-pocket limits, by more than the maximum percentage increase, which is the increase since March 2010 of the overall medical care component of the federal Department of Labor's consumer price index for all urban consumers, unadjusted, plus 15 percent (does not apply to copayments);

• increase copayments by more than the maximum percentage increase or $5, whichever is greater;

• decrease employer contributions toward plan coverage costs by more than five percent below employer contributions in effect on March 23, 2010; or

• impose new annual or lifetime limits on the dollar value of plan benefits, decrease annual limits, or adopt annual limits that are lower than lifetime limits in effect on March 23, 2010. For information about annual and lifetime limit prohibitions, see “Coverage Limitations.”

EXAMPLE: Employer has a calendar year insured group health plan in effect on March 23, 2010, that includes an out-of-pocket cost-sharing requirement based on a formula which is 1 percent (a fixed percentage) of each participating employee's compensation in the prior year. In 2009, employee earns $30,000 and has an out-of-pocket limit in the 2010 plan year of $300 ($30,000 x .01 = $300). In 2010, employee's earnings increase to $55,000. In calculating the maximum percentage increase for 2011, employer adds the increase in the overall medical care component of the unadjusted consumer price index plus 15 percent and applies the result to employee's 2010 out-of-pocket limit of $300. If the CPI-U is 3.5 percent, the maximum percentage increase is $55.50(3.5 percent + 15 percent = 18.5 percent; 18.5 percent x $300 = $55.50). However, the employee's out-of-pocket limit for 2011 is $550 based on the plan's fixed percentage formula ($55,000 x .01 = $550). Because the increase in employee's cost-sharing limit is due to an increase in the employee's compensation, and not because of a change in the plan's formula, employer's group health plan remains grandfathered.

In addition, group health plans lose grandfathered status if employers:
• restructure their organizations, such as through purchases or mergers with other employers, if the principle reason for restructuring is to add new individuals to group health plans; or

• transfer employees previously covered under grandfathered group health plans to other group health plans if there is no valid employment-based reason for the transfer (Interim Final Rules Relating to Status as a Grandfathered Health Plan Under PPACA, 75 Fed. Reg. 34,538 to 34,570 (June 17, 2010)).

Plans do not lose their status as grandfathered plans if employers permit newly-hired employees or other employees who qualify for coverage to enroll in plans or employees add new dependents to plans on or after March 23, 2010 (PPACA, § 1251). In addition, plans do not lose grandfathered plan status if employers:
• change plan premiums,

• improve or increase plan benefits,

• adopt changes to plans in order to comply with federal or state laws,

• revise plans to comply voluntarily with PPACA's requirements, or

• change third-party plan administrators (Interim Final Rules Relating to Status as a Grandfathered Health Plan Under PPACA, 75 Fed. Reg. 34,538 to 34,570 (June 17, 2010)).

Change of group health plan issuer. Employers can change group health plan issuers or enter into new policies, certificates, or contracts of insurance with the same or different issuers on or after March 23, 2010, and new plans do not lose grandfathered status so long as new plans:
• retain former plans' structure and do not contain changes or revisions that cause loss of grandfathered plan status, such as significant cost increases or reductions in plan benefits; and

• are effective for plan years beginning on or after Nov. 15, 2010 (Amendment to Interim Final Rules for Group Health Plans and Health Insurance Coverage Relating to Status as a Grandfathered Health Plan Under PPACA, 75 Fed. Reg. 70,114 to 70,122 (Nov. 17, 2010)).

Employers that change group health plan issuers must provide documentation about former plans' terms to new issuers and new issuers must require employers to provide documentation about former plans' terms in order to determine whether new plans qualify for grandfathered plan status. Documentation about former plans' terms includes information about:
• annual limits,

• benefits,

• cost-sharing, and

• employer contributions (Amendment to Interim Final Rules for Group Health Plans and Health Insurance Coverage Relating to Status as a Grandfathered Health Plan Under PPACA, 75 Fed. Reg. 70,114 to 70,122 (Nov. 17, 2010)).

EXAMPLE: Employer has an insured group health plan as of March 23, 2010, which is in effect for the calendar year Jan. 1, 2010, to Dec. 31, 2010. In July 2010, employer negotiates a new calendar year group health plan to be effective Jan. 1, 2011, with a different insurance issuer. Employer and issuer review documentation regarding employer's former plan terms and the new plan has the same benefits, coverage, and other conditions as the former plan issued by the prior issuer. Employer's new plan is a grandfathered plan under PPACA.

Disclosure statement. In order to maintain grandfathered group health plan status, employers and health insurance issuers must provide disclosure statements to plan participants that:
• confirm that plans are grandfathered group health plans under PPACA, and

• provide contact information that plan participants can use to obtain answers to questions and make complaints.

Employers and health insurance issuers must include grandfathered group health plan disclosure statements with any materials provided to plan participants that describe plan benefits. Employers and health insurance issuers can develop their own disclosure statements or use the federal Department of Labor's model language to comply with PPACA's disclosure requirements for grandfathered group health plans. To review the model notice, see “Notice of Grandfathered Group Health Plan.”

In order to confirm that group health plans are grandfathered under PPACA, employers and health insurance issuers must maintain documents and records that reflect what their plan terms and conditions are as of March 23, 2010. Documents and records that should be maintained include:
• plan documents,

• employee contribution rates,

• health insurance policies,

• insurance certificates or contracts,

• materials reflecting plan premiums or coverage costs, and

• summary plan descriptions.

Employers and health insurance issuers must make grandfathered group health plan documents and records available for inspection and review by plan participants, and federal and state representatives. Documents and records relating to grandfathered plans must be kept for as long as employers and health insurance issuers believe that their group health plans are grandfathered plans under PPACA (Interim Final Rules Relating to Status as a Grandfathered Health Plan Under PPACA, 75 Fed. Reg. 34,538 to 34,570 (June 17, 2010)).

If group health plans lose grandfathered status, plans must comply immediately with PPACA's requirements that apply to non-grandfathered plans. For more information, employers can review a chart prepared by DOL that summarizes which provisions of PPACA apply to grandfathered plans, available at http://www.dol.gov/ebsa/pdf/grandfatherregtable.pdf.

Employer Health Care Coverage Requirements

Minimum Essential Coverage

Although PPACA does not require employers to have group health plans or provide health care coverage, certain employers must pay penalties if they do not offer minimum essential health care coverage or offer coverage that employees cannot afford. In order to avoid PPACA's penalty provisions, certain employers must provide health care through an eligible employer-sponsored plan that covers all full-time employees, their spouses, and employees' dependents and coverage must be affordable (PPACA, § 1501; HCERA, § 1003).

Under PPACA, minimum essential coverage includes health care coverage provided or sponsored by:
• federal government programs such as Medicare, Medicaid, the Children's Health Insurance Program, TRICARE for Life, veteran's health care programs, and programs for Peace Corps volunteers;

• eligible employer-sponsored plans;

• individual health plans;

• certain grandfathered health plans; and

• other health benefit coverage authorized by the federal Secretary of Health and Human Services, such as coverage provided by state health benefit risk pools (PPACA, § 1501).

Eligible employer-sponsored plans include group health plans or group health insurance coverage offered by employers through exchanges, group market health plans, or other health insurance coverage provided by employers to employees. Eligible employer-sponsored plans does not include plans that offer excepted benefits, such as vision-only, dental-only, disability income, long-term care, and nursing home care (PPACA, § 1513).

Employers are subject to PPACA's penalty provisions if:
• they employ an average of 50 or more full-time, nonseasonal employees on business days during the preceding calendar year, and

• one or more of such employees enroll in qualified health plans offered through exchanges and receive premium assistance tax credits to purchase health care coverage (PPACA § 1513). For definition and information about exchanges, see “Exchanges” and for information about premium assistance tax credits, see “Premium Assistance Tax Credits” in chapter PPACA: Individual Responsibilities and Health Benefit Exchanges.

For purposes of PPACA's employer penalties, full-time employees means employees who work on average at least 30 hours per week (PPACA § 1513). However, in calculating the number of their full-time employees, employers also must consider hours worked by part-time employees. Employers calculate part-time employees' hours by adding the total number of hours worked by part-time employees per month and dividing that number by 120. For purposes of calculating full-time and part-time employees, employers can exclude seasonal employees who work fewer than 120 days during the year (PPACA § 1513).

If employers misclassify employees as contingent workers, such as leased or temporary workers or independent contractors, employers can be subject to penalties under PPACA for failing to offer minimum essential coverage to such employees or improperly calculating the number of their full-time employees. For example, if employers misclassify full-time employees as independent contractors, do not count them as full-time employees in order to fall below the 50 employee threshold, and independent contractors subsequently are determined to be full-time employees, employers can be subject to PPACA's penalties if such workers are excluded from employers' health care coverage and receive premium assistance tax credits to enroll in other qualified health plans. For information about employee classifications, see “Legal Issues” in chapter Special Recruiting Issues.

EXAMPLE: Employer has 32 employees who work on average more than 30 hours per week during the year. Employer also has 20 employees who work 24 hours per week (24 x 4 weeks per month = 96 hours per month per employee) and eight employees who work 12 hours per week (12 x 4 weeks per month = 48 hours per month per employee). Employer must calculate the hours worked by the 28 part-time employees as the equivalent of 19 full-time employees as follows: 20 employees x 96 hours = 1,920; 1,902 ÷ 120 = 16; eight employees x 48 hours = 384; 384 ÷ 120 = 3; 16 + 3 = 19. Accordingly, although employer only has 32 employees who work more than 30 hours per week, employer has more than 50 full-time equivalent employees (32 + 19= 51).

Employer penalties

Penalties for failure to offer minimum essential coverage. Effective Jan. 1, 2014, employers that are subject to PPACA's penalty provisions and do not offer minimum essential coverage to all full-time employees, their spouses, and employees’ dependents must pay penalties if one or more of such employees enroll in qualified health plans and receive premium assistance tax credits. Employer penalties for failure to offer minimum essential coverage equal $2,000 multiplied by the total number of employers' full-time, nonseasonal employees minus 30 of such employees. Penalties for each month in a year in which employers do not offer minimum essential coverage equal one-twelfth of the annual penalty (I.R.C. § 4980H; HCERA § 1003).

EXAMPLE: Employer has 10,000 full-time employees. Employer does not offer minimum essential health coverage to all full-time employees, their spouses, and employees’ dependents. Employee works full-time and is not offered minimum essential health coverage for the entire year. Employee enrolls in a health plan through employee's state-based exchange and receives premium assistance tax credits because employee's household income is below 400 percent of the federal poverty line. Employer is subject to an annual penalty of $19,940,000 (10,000- 30 = 9,970 employees; 9,970 x $2,000 = $19,940,000).

Penalties for coverage that is not affordable. Effective Jan. 1, 2014, employers that are subject to PPACA's penalty provisions and offer minimum essential coverage to all full-time employees, their spouses, and employees’ dependents can be penalized if minimum essential coverage is not affordable. Under PPACA, coverage is not affordable if employee:
• premium contributions for single coverage exceed 9.5 percent of employee household income, or

• out-of-pocket expenses (copayments, coinsurance, and deductibles) exceed 40 percent of total health care plan expenses(I.R.C. 4980H; HCERA § 1003).

If employers offer minimum essential coverage that is not affordable, employers must pay annual penalties calculated by multiplying $3,000 times every full-time employee who enrolls in a qualified health plan offered through health benefit exchanges and receives premium assistance tax credits; however, the maximum annual penalty cannot be more than$2,000 multiplied by the total number of employers’ full-time employees minus 30 of such employees. Penalties for each month within a year in which employees purchase coverage through exchanges equal one-twelfth of annual penalties. Employer penalties do not apply if employees have health care coverage provided by Medicare, Medicaid, or coverage provided through their spouse, parents, or other employers(I.R.C. 4980H; HCERA § 1003).

EXAMPLE: Employer has 62 employees, offers minimum essential health coverage to all full-time employees, and charges employee annual premiums of $2,500 for single coverage. Seven of employer's employees work full-time and have household annual incomes of $20,000 or less. Employer's group health plan is not affordable because employee premium contributions of $2,500 are more than 9.5 percent of each employee's household annual income ($20,000 x 9.5 percent = $1,900). Five of the seven employees enroll in health plans through their state-based health benefit exchange and receive premium assistance tax credits. Employer must pay an annual penalty of $15,000 ($3,000 x 5 = $15,000).

Excise Tax on High-Cost Coverage

Effective Jan. 1, 2018, if group health plan premiums exceed$10,200 for individuals or $27,500 for family coverage, plans must pay an excise tax of 40 percent on premium amounts that exceed the threshold levels. PPACA's excise tax on high-cost coverage is sometimes referred as the cadillac plan tax. In calculating the value of individual and family premiums, employers can exclude the value of dental and vision coverage (HCERA, § 1401).

Fees to Fund Patient-Centered Outcomes Research Institute

Effective for group health plan years ending after Sept. 30, 2012, and until plan years ending after Sept. 30, 2019, (seven calendar plan years from 2012 through 2018) employers that sponsor self-insured plans and health insurance issuers must pay annual fees to fund the Patient-Centered Outcomes Research Institute, a nonprofit corporation established by PPACA. The Institute compares and evaluates the clinical effectiveness of medical procedures, services, and treatments to help individuals and health care providers make informed health care decisions(PPACA, § 6301).

Fees must be paid by issuers of insured group health plans and by employers that sponsor self-insured plans. Fees do not apply to excepted benefit plans such as vision-only, dental-only, disability income, long-term care, nursing home care, and other limited scope benefit plans.

Annual fees equal $2 ($1 in the case of plan years ending during fiscal year 2013) multiplied by the average number of all individuals covered under plans. Effective for plan years beginning after Sept. 30, 2014, through 2018, fees are adjusted based on information reported in National Health Expenditures as most recently published by the federal Department of Health and Human Services (PPACA, § 6301; I.R.C. § § 4375; 4376; 4377; IRS Notice 2011-35, 11-25 I.R.B. 879).

The federal Secretary of the Treasury and the Internal Revenue Service must issue regulations regarding how employers and issuers can determine the average number of individuals covered under plans, and how fees are to be reported and paid.

W-2 Reporting

Effective for tax years beginning Jan. 1, 2012, employers that issue 250 or more Form W-2s must report the aggregate cost to provide group health plan coverage on each employees' Form W-2, Wage and Tax Statement (box 12, code DD) that employees receive generally by Jan. 31 each year. Employers can, but are not required to, report group health plan coverage costs on Form W-2s issued before Jan. 31, 2013 (I.R.S. Notice 11-28 (March 29, 2011); I.R.S. Notice 10-69, 2010-44 I.R.B. 576).

Effective for tax years beginning Jan. 1, 2013, employers that issue fewer than 250 Form W-2s must report the aggregate cost to provide group health plan coverage on Form W-2, Wage and Tax Statement (box 12, code DD). Such employers can, but are not required to, report group health plan coverage costs on Form W-2s issued before Jan. 31, 2014 (I.R.S. Notice 11-28 (March 29, 2011); I.R.S. Notice 10-69, 2010-44 I.R.B. 576).

Aggregate cost means plans' cost to provide coverage for employees, their spouses, and employees' dependents, including premium amounts paid by employers, employees, or both employers and employees, but does not include:
• Archer medical savings account contributions;

• employees' or employees spouses' health savings account contributions;

• cafeteria plan salary reductions to flexible spending arrangements;

• health reimbursement arrangement contributions;

• long-term care coverage;

• dental-only, vision-only, disease-specific, or hospital indemnity plan benefits provided by policies that are separate from and not integrated into group health plans;

• benefits that are excepted under the federal Health Insurance Portability and Accountability Act, such as accident-only or disability coverage (other than coverage for on-site medical clinics);

• worker's compensation coverage; and

• other coverage for goods and services that are not deductible as medical expenses pursuant to federal income tax rules (I.R.S. Notice 11-28 (March 29, 2011)). For more information about Archer MSAs, HSAs, FSAs, and HRAs, see “Account-Based Health Plans” in chapter Health Care Benefits and for more information about HIPAA, see chapter Health Insurance Portability and Accountability Act.

Although employers must report group health plan coverage cost information on Form W-2s, the federal income tax code permits employers to exclude the value of employer-sponsored coverage from employees' gross income (I.R.C. § 106).

Aggregate reportable cost calculation methods

Employers must adopt one of the following methods to calculate the costs that must be reported on employees' Form W-2s and must use the same method for all employees enrolled in the same group health plan. Reportable cost calculation methods include:
• premiums charged,

• COBRA applicable premium calculation,

• modified COBRA premium calculation, and

• composite benefit structure.

Premiums charged method. Employers that have insured group health plans can report premium amounts charged by health insurance issuers for each employees' plan coverage level; for example, single-only coverage or family coverage. Employers that have self-funded/self-insured plans cannot use the premiums charged method.

EXAMPLE: Employer that has an insured group health plan is charged an annual premium of $750 for employees who elect self-only coverage, $1,000 for employees who elect self plus one coverage, and $1,200 for employees who elect self plus two or more coverage. Employer pays 65 percent of the premiums charged by the insurer and requires employees to pay 35 percent of the premiums charged. Employer must report $750 on Form W-2s for employees who elect self-only coverage, $1,000 on Form W-2s for employees who elect self plus one coverage, and $1,200 on Form W-2s for employees who elect self plus two or more coverage.

COBRA applicable premium calculation method. Employers can report the premium charged to employees who elect continuation coverage under the federal Consolidated Omnibus Budget Reconciliation Act. Employers that have self-funded/self-insured plans calculate reportable costs under this method using reasonable estimates of the costs to provide COBRA coverage; in general, reasonable estimates can be determined either on an actuarial basis or on the basis of costs incurred over a prior, continuous 12-month period. If employers use this method, employers do not include the 2 percent administration charge permitted under COBRA in the amount reported on employees' Form W-2s (I.R.C. § 4980B(f)(4); Treas. Reg. § 4980B-8). For more information about calculating COBRA premiums for insured and self-funded/self-insured plans, see “Setting COBRA Premiums” in chapter COBRA Continuation Coverage.

EXAMPLE: Employer that has a self-funded/self-insured group health plan sets a monthly COBRA premium of $500 for individual coverage using a reasonable estimate based on actuarial calculations and adds the COBRA 2 percent administration charge. Although qualified beneficiaries who elect individual COBRA continuation coverage pay$510 per month ($500 x 1.02 = $510), employer must report $6,000 on Form W-2s for employees who have individual group health plan coverage for the entire year ($500 x 12 months = $6,000).

Modified COBRA premium calculation method. Employers can use a modified COBRA premium calculation method if employers:
• subsidize the cost of employees' COBRA continuation coverage, or

• charge COBRA premiums that are based on premium rates from prior years.

Under these circumstances, for purposes of W-2 reporting, employers can use good faith estimates of the COBRA applicable premium or the prior year's reportable costs despite not calculating a precise COBRA applicable premium annually. Employers' take advantage of this method when actual COBRA recipients pay premiums based on estimated, or approximated costs.

EXAMPLE: Employer makes a good faith estimate of monthly COBRA premiums of $300 for self-only/individual coverage. Employer also pays one-half of the COBRA premium for terminated employees who elect COBRA, charging terminated employees $150 per month. For reporting purposes only, and despite not making a precise COBRA calculation, employer reports $3,600 on Form W-2s for employees who elect self-only coverage for the year ($300 x 12 = $3,600).

Composite benefit structures. Plans that use a composite rate charge the same premium:
• regardless of the number of individuals enrolled by employees in employers' group health plans; or

• regardless of differences in the type of plan coverage, such as self-only coverage and family coverage.

For purposes of W-2 reporting, employers that calculate plan costs using a composite rate benefit structure can use any of the other methods to report plan premiums.

Reportable cost adjustments. If employees begin, change, or terminate group health plan coverage during the year, such as changing from individual to family coverage for which higher premiums apply, terminate employment, or if plan coverage costs increase or decrease, employers must adjust reportable costs. Employers can use any reasonable method to adjust reportable costs as long as employers consistently use the same method, including:
• using reportable costs at the beginning of the change period or at the end of the change period,

• averaging costs, or

• prorating costs (I.R.S. Notice 11-28 (March 29, 2011)).

EXAMPLE: Employer's group health plan year begins on Oct. 1 and covers more than 250 employees who are entitled to receive Form W-2s. Employer determines that the monthly reportable cost for plan coverage for 2011 (the plan year Oct. 1, 2011, through Sept. 31, 2012) is $500 for self-only coverage. Employer determines that the monthly reportable cost for 2012 (the plan year Oct. 1, 2012, through Sept. 31, 2013) is $520 for self-only coverage. For employees that have self-only coverage for the entire 2012 calendar year, employer must report $6,060 on employees' Form W-2s issued on or before Jan. 31, 2013 ($500 x 9 months (January to September) = $4,500; $520 x 3 months (October to December) = $1,560; $4,500 + $1,560 = $6,060).

EXAMPLE: Employer has a calendar year group health plan and determines that the monthly reportable cost for self-only coverage for the 2013 plan is $500. On March 14, 2013, employee becomes covered under employer's plan, elects self-only coverage, and continues employment and plan coverage throughout the year. For reporting purposes, employer prorates the cost of plan coverage for the month of March and adds the costs for the remaining nine months. On employee's 2013 Form W-2, employer must report $4,750 ($500 x 1/2= $250 (month of March); $500 x 9 (months of April to December) =$4,500; $250 + $4,500 = $4,750).

Small Employer Tax Credits

Effective for tax years beginning in 2010, certain employers can receive tax credits to help them provide health care coverage. Employers are eligible to receive tax credits if:
• they have no more than 25 full-time equivalent employees during the tax year,

• their full-time equivalent employees' average annual compensation is less than $50,000 (in tax years 2010 through 2013), and

• they pay at least 50 percent of the total premium costs to provide health care coverage for their employees(PPACA, § § 1421, 10105(e)). Employers that have self-insured health plans are not eligible for tax credits.

Eligible small employers include both for-profit and nonprofit(tax-exempt) entities, including religious institutions (I.R.S. Notice 10-44, 2010-22 I.R.B. 717; I.R.S. Notice 10-82, 2010-51 I.R.B. 857).

For purposes of calculating small employer tax credits, full-time equivalent employees means all employees employed during the year for which employers claim tax credits, including:
• employees covered by collective bargaining agreements,

• employees who are not enrolled in employers' health care plan,

• employees whose employment is terminated during the year, and

• leased employees (I.R.S. Notice 10-82, 2010-51 I.R.B. 857).

Full-time equivalent employees do not include the following individuals and certain of their family members:
• self-employed individuals,

• sole proprietors and their spouses,

• partners in partnerships owning more than 5 percent of partnership interests and their spouses,

• shareholders of businesses organized under subchapter S of the federal Internal Revenue Code who own more than 2 percent of businesses' outstanding stock and their spouses, and

• shareholders of corporations who own 5 percent or more of corporations' outstanding stock or have more than 5 percent of the total combined voting power of all of the corporation's stock and their spouses (PPACA, § § 1421, 10105(e); I.R.S. Notice 10-44, 2010-22 I.R.B. 717; I.R.S. Notice 10-82, 2010-51 I.R.B. 857).

Family members of individuals who are not considered to be full-time equivalent employees include:
• children and children's descendents, such as grandchildren;

• sisters and brothers, including step-sisters and step-brothers;

• parents and step-parents, including parents' ancestors, such as grandparents;

• nieces and nephews;

• aunts and uncles; and

• persons related to individuals by marriage, such as parents-in-law, daughters-in-law, sons-in-law, sisters-in-law, and brothers-in-law (I.R.S. Notice 10-44, 2010-22 I.R.B. 717).

Small employers also can exclude seasonal employees who work fewer than 120 days during the tax year and retail employees working exclusively during holiday seasons from the calculation of full-time equivalent employees (PPACA, § 1421).

EXAMPLE: Employer is a corporation and has 37 employees. Of the 37, six are shareholders who each own more than 5 percent of the corporation's outstanding stock. Of the remaining 31 employees(37 - 6 = 31), seven of them are the sons and daughters of the shareholders, one is a shareholder's uncle, and two are grandchildren of shareholders. For purposes of small employer tax credits, the employer has 21 employees(31 - 7 - 1 - 2 = 21).

Small employers determine the number of their full-time equivalent employees by taking the total number of hours of service for which they pay compensation to employees during the tax year, dividing that number by 2,080, and rounding the resulting number down to the next lowest whole number. Employers are not required to include hours of service performed by any employee that exceed 2,080 hours during the tax year (PPACA, § 1421).

Hours of service includes all hours that employers pay employees to perform their duties and payments for time during which employees perform no duties, such as vacation, holiday, sick time, jury duty, and leaves of absence, except that employers are not required to include payments to employees who perform no work in any single, continuous period of time of more than 160 hours. In calculating hours of service, employers do not count hours of service performed by individuals and their family members who are excluded from the definition of full-time equivalent employees (I.R.S. Notice 10-44, 2010-22 I.R.B. 717; I.R.S. Notice 10-82, 2010-51 I.R.B. 857).

Employers can calculate employees' hours of service using:
• payroll or other records reflecting actual hours of service performed by employees;

• a days-worked equivalency, which means crediting each employee with 8 hours of service for each day employees work at least one hour during the day; or

• a weeks-worked equivalency, which means crediting each employee with 40 hours of service for each week employees work at least one hour during the week (I.R.S. Notice 10-44, 2010-22 I.R.B. 717).

Employers can use different methods for calculating hours of service for different classes of employees, such as using actual hours of service for hourly employees and the days-worked equivalency for salaried employees. Employers also can change the method used to calculate hours of service from year to year (I.R.S. Notice 10-82, 2010-51 I.R.B. 857).

EXAMPLE: Employer has 21 employees after excluding all individuals who are not included in the definition of full-time equivalent employees (see above example). Employer uses its payroll records to calculate the total number of hours of service performed by the 21 employees during the tax year and excludes all hours worked in excess of 2,080 by any employee. The total number of hours worked by the 21 employees is 38,850. Employer has 18 full-time equivalent employees (38,850 ÷ 2,080 = 18.67 rounded down to the next whole number is 18).

After determining the number of full-time equivalent employees, employers calculate employees' average annual compensation, which is the total amount of wages employers pay to all employees during the tax year, excluding wages paid to individuals who are not included in the definition of full-time equivalent employees, divided by the number of employers' full-time equivalent employees, rounded down to the next lowest multiple of $1,000.

EXAMPLE: Employer has 21 employees after excluding all individuals who are not included in the definition of full-time equivalent employees and has determined that those 21 employees equal 18 full-time equivalent employees (see above example). Employer uses its payroll records to calculate the total wages paid to the 21 employees during the tax year which equals $860,000. The employees' average annual compensation is $47,000 ($860,000 ÷ 18 full-time equivalent employees = $47,777, rounded down to the next lowest multiple of $1,000 is $47,000).

If employers have 25 or fewer full-time equivalent employees whose annual compensation is less than $50,000 (in tax years 2010 through 2013), employers are eligible for tax credits if they pay a uniform percentage of at least 50 percent of the premium costs for each employee enrolled in employers' health insurance coverage. Employer contributions to health savings accounts, health reimbursement arrangements, and flexible spending arrangements are not considered to be health insurance coverage for purposes of tax credits. Employer payments to multiemployer welfare arrangements used to purchase health insurance coverage can be considered in determining premium contributions (I.R.S. Notice 10-82, 2010-51 I.R.B. 857).

Employers that offer more than one health insurance plan or have more than one tier of coverage in the same plan, such as self-only, self plus one, and family coverage, must review their contributions on a plan-by-plan basis to determine if they pay at least 50 percent of plan premium costs. Under certain circumstances, employers are eligible for tax credits even if they pay less than 50 percent of plan premiums for some levels of coverage (I.R.S. Notice 10-82, 2010-51 I.R.B. 857).

Tax credits are calculated based on insurance premiums that eligible small employers pay for health insurance coverage. For purposes of small employer tax credits, health insurance coverage means benefits provided by health insurance issuers for:
• medical care;

• limited scope dental or vision care;

• nursing home, home health, or community-based care, or any combination of such care;

• specified disease or illness coverage;

• hospital indemnity or other fixed indemnity insurance; and

• Medicare supplement and similar supplemental coverage (I.R.S. Notice 10-44, 2010-22 I.R.B. 717;I.R.S. Notice 10-82, 2010-51 I.R.B. 857).

For tax years 2010 through 2013, the maximum tax credit is 35 percent of eligible small employers' actual premium costs to provide health insurance coverage (25 percent for tax-exempt employers) or the average premium costs for the small group market in the state in which employers are located, whichever is less. The federal Internal Revenue Service publishes annual guidance listing the average small group market premiums for each state (Rev. Rul. 2010-13 (tax year 2010 premiums)). For information about the small group market, see “Qualified Employers” in chapter PPACA: Individual Responsibilities and Health Benefit Exchanges.

Effective Jan. 1, 2014, when exchanges are established, the maximum small employer tax credit increases to 50 percent (35 percent for tax-exempt employers).

Tax credits for small employers are reduced or phased-out if the number of their full-time equivalent employees is more than 10 and if their full-time equivalent employees' average annual compensation exceeds $25,000 (I.R.S. Notice 10-44, 2010-22 I.R.B. 717).

Very small employers that have fewer than 10 employees whose average annual compensation is less than $25,000 can receive tax credits of 100 percent of employers' total premium costs to provide health care coverage (PPACA, § 1421).

Employers report health insurance premium tax credits using Form 8941, Credit for Small Employer Health Insurance Premiums (instructions) available at www.irs.gov/pub/irs-pdf/f8941.pdf(form); and www.irs.gov/pub/irs.pdf/i8941.pdf (instructions). Employers deduct tax credits on their annual income tax return and can only claim health insurance premium tax credits as offsets from their actual income tax liability. More information about small employer tax credits in the form of frequently asked questions is provided by the IRS available at http://www.irs.gov/newsroom/article/0,,id=220839,00.html.

Early Retiree Reinsurance Program

Effective June 1, 2010, through Jan. 1, 2014, or until allocated funds are exhausted whichever is earlier, employers that provide group health plan coverage to certain retirees can apply to the federal Department of Health and Human Services to receive financial assistance from the Early Retiree Reinsurance Program to help maintain retiree health benefits (75 Fed. Reg. 24,450 to 24,470 (May 5, 2010)).

[Note: HHS has announced that it is no longer accepting applications for the early retiree reinsurance program after May 5, 2011].

Employers that can apply for financial assistance through the early retiree reinsurance program include:
• single employers that have insured or self-insured group health plans;

• trade associations;

• employee organizations, such as unions; and

• state and local governments (PPACA, § 1102; 45 C.F.R. § § 149.2, 149.35).

Employers are eligible for early retiree reinsurance if:
• they provide health benefits to retired employees, retirees' spouses or surviving spouses, or retirees' dependents; and

• their group health plans include procedures designed to reduce retirees' chronic medical condition costs, such as wellness programs, disease management, or large-case management functions (PPACA, § 1102(b)(2)(A); 45 C.F.R. § 149.35).

Employers that are approved by HHS to participate in the early retiree reinsurance program can receive financial assistance to reimburse them for 80 percent of qualifying claims. Qualifying claims are claims:
• submitted by retirees' over age 55 who are not eligible for Medicare;

• equal to or in excess of $15,000 but less than $90,000 per retiree;

• related to health benefits for hospital, medical, surgical, or prescription drug coverage and for diagnosis, cure, mitigation, or prevention of physical or mental conditions or diseases; and

• incurred and paid by employers within the 12 month period designated as the plan year in group health plan documents(for calendar year 2010, claims must be incurred on or after June 1, 2010).

Employers must submit adequate documentation to support qualifying claims including the following information:
• names of retirees, retirees' spouses, or retirees' dependents who incurred claims;

• name of plans and benefit options pursuant to which claims are filed;

• health benefits provided;

• names of providers or benefit suppliers;

• claim dates; and

• dates and amounts of payments.

Documentation submitted by employers in support of qualifying claims must be retained for six years. Employers that submit applications for early retiree reinsurance can be audited (PPACA, § 1102(b)(2); 45 C.F.R. § § 149.2 to 149.350).

Certain benefit claims are excluded from reimbursement under the early retiree reinsurance program including claims for:
• hearing aids and auditory implants;

• orthopedic shoes and routine foot care;

• personal care by non-medically trained personnel or institutional care that does not qualify as skilled nursing facility care under Medicare;

• personal comfort items, such as television reception in hospital rooms;

• prescription drugs not covered by a standard Part D Medicare plan;

• routine dental services; and

• routine vision costs for glasses and contact lenses.

In order to apply for early retiree reinsurance, eligible employers must submit a written application signed by employers' authorized representative. Applications must include estimates of how much reimbursement employers expect to receive under the program over the next two years and how employers expect to use reimbursements. In addition, employers must certify that they have:
• policies and procedures in place to detect abuse, fraud, and waste; and

• written agreements with plans or group health plan issuers/insurers requiring plans or issuers/insurers to disclose protected health information to HHS (PPACA, § 1102(b); 45 C.F.R § § 149.40, 149.100). For definition and information about protected health information, see “Protected Health Information” in chapter Health Information Privacy and Security.

Employers that receive financial assistance through the early retiree reinsurance program must use such assistance to defray anticipated increases in retiree health care costs, including premium increases, and to reimburse retirees' coinsurance, copayments, deductibles, and out-of-pocket costs.

Employers can apply for early retiree reinsurance by using the program application available at http://www.errp.gov/ and more information about the program is available at http://www.hhs.gov/cciio/regulations/errp/.

Medical Loss Ratios

Employers that pay all or a portion of health plan insurance premiums on behalf of employees can receive rebates from health insurance issuers if issuers do not comply with PPACA's medical loss ratio requirements. Under PPACA, medical loss ratios require health insurance issuers to use at least 80 percent of premiums collected from individual and small group plans and 85 percent of premiums collected from large group plans to pay plan participants’ medical claims or make health care quality improvements. Issuers that fail to meet medical loss ratio requirements must provide refunds in the form of rebates to employers and employees in proportion to the amount of premiums paid by each employer and employee (PPACA § 1001; 75 Fed. Reg. 74,864 to 74,934 (Dec. 1, 2010)).

States can establish medical loss ratios that are higher than PPACA's ratios. If a state establishes higher medical loss ratios, the state's higher percentage applies to insurance issuers doing business in that state (75 Fed. Reg. 74,927 (Dec. 1, 2010)).

Until Jan. 1, 2016, issuers can use state law definitions of small and large employers for purposes of applying the 80 or 85 percent medical loss ratio requirement to small and large group health plans. Most states define small group health plans as plans sold by issuers to employers that have up to 50 employees and large group health plans as plans sold by issuers to employers that have 51 or more employees.

Effective Jan. 1, 2016, issuers must use federal law to define small and large employers for purposes of applying medical loss ratios. Under PPACA, small employer group health plans are plans sold by issuers to employers that have 100 or fewer employees and large employer group health plans are plans sold by issuers to employers that have 101 or more employees(PPACA § 1304(b); 75 Fed. Reg. 74,868 to 74,869 (Dec. 1, 2010)).

PPACA's medical loss ratio requirements do not apply to employers that have self-funded/self-insured group health plans because such employers are not considered to be health insurance issuers (75 Fed. Reg. 74,865(Dec. 1, 2010)). In addition, PPACA's medical loss ratio requirements do not apply to:
• health insurance issuers that have 1,000 or fewer total enrollees in all health care plans and policies, and

• new health care plans and policies in effect for one year or less within a particular state insurance market (in which case medical loss ratio requirements are deferred until the next year).

Medical loss ratios are adjusted for health insurance issuers that have at least 1,000 but fewer than 75,000 enrollees in all health care plans and policies within a particular state insurance market. Until 2012, special calculation adjustments are also available for mini med plans that have total annual limits of $250,000 or less, and expatriate plans for enrollees working outside their country of citizenship (75 Fed. Reg. 74,880 to 74,881(Dec. 1, 2010)).

Health insurance issuers must use premiums collected from employers and employees to pay medical claims and make certain quality improvements in health care by applying premiums to certain activities including:
• hospital readmission prevention programs,

• infection and mortality rate reduction programs,

• medical error reduction initiatives,

• patient safety programs,

• programs that improve health outcomes, and

• wellness programs.

EXAMPLE: Commercial insurance company has 100,000 enrollees in various health insurance plans sold to small employers that have 50 or fewer employees. Insurance company collects$2,000 in premiums from each enrollee during a plan year for total annual premium revenue of $200 million ($2,000 x 100,000 = $200 million). Based on total premiums collected, insurance company's medical loss ratio requirement is $160 million ($200 million x 80 percent= $160 million). During the plan year, insurance company uses $150 million to pay plan participants’ health care claims and makes expenditures for certain wellness and patient safety programs. Insurance company has not complied with PPACA's medical loss ratio requirement because the company did not use at least 80 percent of premiums collected to pay claims and make quality health care improvements.

Rebate distributions. Health insurance issuers that do not comply with medical loss ratio requirements must issue rebates by August 1 for the prior calendar year. Rebates can be issued to employers and employees in the form of:
• lump sum payments;

• lump sum reimbursements to credit or debit cards, if employers or employees use such cards to pay insurance premiums; or

• premium credits or premium holidays, which means that issuers cannot collect premiums from employers and employees until rebate amounts are exhausted (75 Fed. Reg. 74,883 to 74,884 (Dec. 1, 2010)).

Employers and issuers can agree that employers will distribute rebates owed by issuers to employees if issuers:
• obtain and retain documents and records sufficient to show that rebates are distributed accurately by employers to employees, and

• issuers remain liable for proper distributions of rebates to employees (75 Fed. Reg. 74,929 (Dec. 1, 2010)).

If employers enter into arrangements with issuers to distribute rebates to employees who paid health plan premiums, medical loss ratio rebates can be considered plan assets (in whole or in part) and are subject to ERISA (ERISA § 403(a); DOL Adv. Op. 2005-08A).

Employers that agree to distribute medical loss ratio rebates to employees must:
• deposit payments from issuers on behalf of employees into segregated trust accounts, or

• provide health plan insurance premium holidays to employees.

If employers and issuers agree that employers will distribute rebates to employees, employers should evaluate how to locate and make distributions to former employees as part of the distribution process.

Notice and reporting requirements. PPACA requires health insurance issuers to:
• provide notice about medical loss ratio rebates to employers and employees that paid group health plan premiums;

• submit a report to the federal Department of Health and Human Services by June 1 of each year concerning the issuers’ revenue and health insurance expense data in certain categories, such as total earned premiums, total reimbursements for clinical services, total spending on activities to improve health care quality, and total spending on non-claim costs; and

• annually report to HHS the total amount of medical loss ratio rebates sent to employers and employees including details about unclaimed rebates and efforts made to locate former employees.

Issuers must submit reports on an aggregate basis by state and segregated by insurance market (large group, small group, and individual) (PPACA § 1001; 75 Fed. Reg. 74,929 (Dec. 1, 2010)).

De minimus rebates. Issuers are not required to provide de minimus rebates, which are rebates totalling less than $5 per plan participant during the year. However, issuers cannot keep de minimus rebate amounts; issuers must aggregate de minimus rebates by market and distribute rebates in equal amounts to all employers and employees who are entitled to rebates of more than $5 even though such amounts are not attributable to their plans or policies (75 Fed. Reg. 74,929 (Dec. 1, 2010)).

Penalties. If health insurance issuers do not accurately account, report, and pay health plan premium rebates to employers and employees, issuers must pay penalties of $100 for each day multiplied by each individual affected by the violation. In addition, if rebates are not paid timely, issuers must pay interest on late payments. HHS can reduce or eliminate issuer penalties for first violations and for issuers that show good faith efforts to comply with PPACA's medical loss ratio requirements(75 Fed. Reg. 74,933 to 74,935 (Dec. 1, 2010)).

Waivers. Until Jan. 1, 2014, state insurance commissioners, superintendents, or similar state insurance officials can apply to HHS for temporary waivers of PPACA's medical loss ratio requirements on behalf of all health insurance issuers doing business in the individual market their state. HHS can approve waiver requests and decrease PPACA's medical loss ratio percentages if HHS determines that medical loss ratio requirements will destabilize the state's insurance market by causing insurance issuers to withdraw from the state (75 Fed. Reg. 74,929 (Dec. 1, 2010)). Some states have applied for and received medical loss ratio waivers from HHS.

Automatic Enrollment

Effective March 1, 2013, employers that have group health plans and more than 200 full-time employees must automatically enroll and continue plan enrollment of all new full-time employees unless such employees opt out of coverage. Full-time employees are employees who provide on average at least 30 hours of service per week. Plan enrollment can be subject to waiting periods (PPACA, § 1511). Waiting periods are any length of time that must pass before plan enrollees become plan participants and are eligible to receive plan benefits (42 U.S.C. § 300gg(b)(4)). For information about plan waiting periods, see “Excessive Waiting Period Prohibition.”

Employers that are subject to PPACA's automatic enrollment requirements must provide notice to current employees and new employees at the time of hire regarding health care coverage options and their rights to opt out of such coverage. For information about employers' notice requirements, see “Automatic Enrollment Notice.”

Group Health Plan Coverage Requirements

Coverage Limitations

Effective for group health plan years beginning on or after Sept. 23, 2010 (Jan. 1, 2011, for calendar year plans), employers that have group health plans, including grandfathered plans, and health insurance issuers:
• cannot impose any lifetime limits on the dollar values of plan participants' essential health benefits, and

• must phase out or eliminate annual limits on the dollar values of plan participants' essential health benefits(PPACA, § § 1001, 10101; Interim Final Rules Relating to Pre-existing Condition Exclusions, Lifetime and Annual Limits, Rescissions, and Patient Protections, 75 Fed. Reg. 37,188 to 37,241 (June 28, 2010)). For information about grandfathered plans, see “Grandfathered Group Health Plans.”

In general, lifetime limits on dollar values of plan participants' essential health benefits are any restrictions on the total amount of benefit coverage provided over the entire course of time that participants are covered under group health plans. In contrast to lifetime limits, annual limits on dollar values of plan participant's essential health benefits are any restrictions on the total amount of benefit coverage provided to plan participants over the course of one plan year.

Under PPACA, essential health benefits are benefits provided by group health plans and health insurance issuers covering:
• ambulatory patient services;

• emergency services;

• hospitalization;

• laboratory services;

• maternity and care for newborns;

• mental health and substance abuse disorder services, including behavioral health treatments;

• pediatric services, including oral and vision care;

• prescription drugs;

• preventive, wellness, and chronic disease management services; and

• rehabilitative and habilitative services and devices (PPACA, § 1302(b)).

The federal Secretary of Health and Human Services can add additional benefits to PPACA's list of essential health benefits (PPACA, § 1302).

Effective for group health plan years beginning before Jan. 1, 2014, group health plans, including grandfathered plans, and health insurance issuers can have restricted annual limits on the dollar values of plan participant's essential health benefits if they set plan limits that are at least:
• $750,000 for plan years beginning on or after Sept. 23, 2010, but before Sept. 23, 2011;

• $1.25 million for plan years beginning on or before Sept. 23, 2011, but before Sept. 23, 2012; and

• $2 million for plan years beginning on or before Sept. 23, 2012, but before Jan. 1, 2014 (Interim Final Rules Relating to Pre-existing Condition Exclusions, Lifetime and Annual Limits, Rescissions, and Patient Protections, 75 Fed. Reg. 37,188 to 37,241 (June 28, 2010)).

Employers and health insurance issuers must provide written notice to plan participants that lifetime limits no longer apply to group health plans. Notice also must be provided to individuals who reached lifetime limits and are no longer enrolled in plans that they have 30 days from the date of notice to request re-enrollment. If individuals request re-enrollment, coverage must be effective no later than the first day of the first plan year beginning on or after Sept. 23, 2010 (Jan. 1, 2011, for calendar year plans).

Notice that lifetime limits no longer apply to group health plans must be provided no later than the first day of the first plan year beginning on or after Sept. 23, 2010 (Jan. 1, 2011, for calendar year plans). Notice can be included with other plan enrollment materials so long as the notice that lifetime limits no longer apply is prominent. Employers and health insurance issuers can develop their own notice that lifetime limits no longer apply to plans or use the federal agencies' model language to comply with the notice requirement. To review the model notice, see Model Language for Notice that Lifetime Limits No Longer Apply and Enrollment Opportunity.

Employers and health insurance issuers must treat plan participants who reach lifetime limits and re-enroll in plans as special enrollees under the federal Health Insurance Portability and Accountability Act (Interim Final Rules Relating to Pre-existing Condition Exclusions, Lifetime and Annual Limits, Rescissions, and Patient Protections, 75 Fed. Reg. 37,188 to 37,241 (June 28, 2010)). For more information about special enrollees, see “Special Enrollment Periods” in chapter Health Insurance Portability and Accountability Act.

EXAMPLE: Employer has a group health plan year beginning Nov. 1 and ending Oct. 31. The plan permits employees to elect single, employee plus one, or family coverage, and sets a $500,000 lifetime benefit limit. Employee and employee's spouse enroll in the employer's plan and elect employee plus one coverage. On Feb. 1, 2009, when employee's spouse reaches the plan's lifetime benefit limit, employee drops employee plus one coverage and elects single coverage. In order to comply with PPACA, no later than Nov. 1, 2010, employer must give employee and employee's spouse written notice that lifetime limits no longer apply to employer's group health plan, a 30-day opportunity for employee's spouse to re-enroll in the plan, and the opportunity for employee to switch from single to employee plus one coverage. In addition, employer must raise the plan's dollar value of essential health benefits coverage to at least $750,000 for the plan year beginning Nov. 1, 2010.

PPACA's lifetime and annual limits on the dollar values of essential health benefits do not apply to:
• health flexible spending accounts,

• health savings accounts,

• Archer medical savings accounts, and

• retiree-only health reimbursement accounts(Interim Final Rules Relating to Pre-existing Condition Exclusions, Lifetime and Annual Limits, Rescissions, and Patient Protections, 75 Fed. Reg. 37,188 to 37,241 (June 28, 2010)).

Employers and health insurance issuers can, but are not required to, set annual and lifetime benefit limits with respect to nonessential health benefits as permitted by federal or state law (PPACA, § 1001).

Limited benefit plans

Limited benefit plans, sometimes referred to as mini med plans, are health plans designed to have low annual and lifetime limits on the dollar values of plan participants' benefits coverage. Excepted benefit plans such as vision-only, dental-only, disability income, long-term care, nursing home care, and other restricted scope plans are not considered to be limited benefit plans.

Until Sept. 22, 2011, employers that have limited benefit plans and health insurance issuers can apply to the federal Secretary of Health and Human Services for temporary waivers of PPACA's annual limit requirements and for extensions of previously-issued waivers. Employers and issuers cannot apply for waivers for:
• lifetime dollar limits, or

• plans established on or after Sept. 23, 2010 (Interim Final Rules Relating to Pre-existing Condition Exclusions, Lifetime and Annual Limits, Rescissions, and Patient Protections,75 Fed. Reg. 37,188 to 37,241 (June 28, 2010); HHS Technical Guidance 2011-1D (June 17, 2011); HHS Technical Guidance 2010 - 1 (Sept. 3, 2010)).

HHS can grant waivers for limited benefit plans if compliance with PPACA's annual limit requirements results in considerable increases in premiums or significant decreases in plan participants' access to benefits. If approved by HHS, waivers extend until Dec. 31, 2013, if waiver extension applications are timely filed before Sept. 22, 2011, and employers and issuers provide updates as required by HHS at the end of each calendar year.

Employers that have limited benefit plans in existence before Sept. 23, 2010, can change limited benefit plan issuers and obtain replacement limited benefit plans only if:
• employers had insured limited benefit plans issued before Sept. 23, 2010, and issuers received waivers of PPACA's annual limit requirements from HHS for such plans;

• replacement limited benefit plan issuers received waivers of PPACA's annual limit requirements from HHS for replacement plans; and

• replacement limited benefit plan annual limits are not lower than prior limited benefit plan limits, or, if issuers no longer offer coverage provided by prior limited benefit plans, other comparable coverage with the same level of annual benefits provided by prior plans is not available (HHS Technical Guidance 2011-1D (June 17, 2011); HHS Technical Guidance 2010 - 1C (Dec. 9, 2010)).

Employers must provide replacement plan issuers with copies of prior limited benefit plans and certify that employers received waivers of PPACA's annual limit requirements for prior plans. Issuers must retain copies of prior limited benefit plan terms (HHS Technical Guidance 2010 - 1C (Dec. 9, 2010)).

If HHS grants waivers for limited benefit plans, employers or health insurance issuers must provide notice to current and eligible plan participants that their coverage does not comply with PPACA's annual limit requirements. For limited benefit plans years beginning before Feb. 1, 2011, notice must be provided by Feb. 7, 2011. For limited benefit plan years beginning after Feb. 1, 2011, notice must be provided with any informational or educational materials sent to plan participants and must be included with summary plan descriptions. Notice must conform to HHS' model language, be prominently displayed in conspicuous 14-point bold type, and include dollar amounts of noncomplying annual limits and descriptions of plan benefits to which noncomplying limits apply (HHS Technical Guidance 2011-1D (June 17, 2011)). HHS' model notice and more information about waivers for limited benefit plans are available at http://cciio.cms.gov/programs/marketreforms/annuallimit/index.html.

Preventive Health Care Services' Coverage

Effective for group health plan years beginning on or after Sept. 23, 2010 (Jan. 1, 2011, for calendar year plans), group health plans (except for grandfathered plans) and health insurance issuers must provide coverage for recommended preventive services, which are:
• certain items or services that are rated “A”or “B” by the U.S. Preventive Services Task Force (the list of recommended items and services is available at http://www.healthcare.gov/center/regulations/prevention/recommendations.html);

• routine immunizations recommended for specific individuals by the Advisory Committee on Immunization Practices of the federal Centers for Disease Control and Prevention (the list of recommended immunizations is available at http://www.cdc.gov/vaccines/);and

• preventive care and screenings for infants, children, adolescents, and women as provided in guidelines supported by the federal Health Resources and Services Administration (the guidelines are available at http://www.healthcare.gov/law/about/provisions/services/lists.html)(PPACA, § 1001; Interim Final Rules Relating to Coverage of Preventive Services, 75 Fed. Reg. 41,726 to 41,760 (July 19, 2010)). For information about grandfathered plans, see “Grandfathered Group Health Plans.”

If other preventive services are recommended after Sept. 23, 2010, employers and health insurance issuers must provide group health plan coverage for such services beginning on the first day of the first plan year that is one year after other preventive services are recommended or guidelines are issued (Interim Final Rules Relating to Coverage of Preventive Services, 75 Fed. Reg. 41,726 to 41,760 (July 19, 2010)).

Employers and health insurance issuers can include additional preventive health services or deny coverage in their group health plans for services that are not recommended by the U.S. Preventive Services Task Force (PPACA, § 1001).

Employers and health insurance issuers that operate group health plans through networks of health care providers are not required to cover recommended preventive services performed by out-of-network health care providers and can impose cost-sharing requirements for recommended preventive services performed by out-of-network providers.

Cost-sharing requirements

In general, employers and health insurance issuers must provide recommended preventive services without imposing any cost-sharing requirements, such as coinsurance, copayments, or deductibles. However, employers and issuers can impose cost-sharing requirements on plan participants with respect to the costs of office visits to health care providers if:
• office visits and recommended preventive services are billed separately; or

• office visits are not billed separately and obtaining recommended preventive services is not plan participants'primary purpose for the office visit (Interim Final Rules Relating to Coverage of Preventive Services, 75 Fed. Reg. 41,726 to 41,760 (July 19, 2010)).

EXAMPLE: Employer has a self-insured group health plan that provides coverage for a colonoscopy for plan participants between ages 50 and 75, which is an “A” rated recommended preventive service. Employee age 54 has an office visit with a health care provider who performs a colonoscopy. Employee's health care provider submits a bill to employer that reflects one amount for the office visit and the colonoscopy. Employer cannot impose any cost-sharing requirements on employee because the cost of the colonoscopy is not billed separately from the cost of the office visit.

EXAMPLE: Employer has an insured group health plan that operates with a network of health care providers and imposes a $15 copayment for office visits. Employee who is a plan participant visits a network health care provider for an annual medical examination. During the examination, employee is screened for type 2 diabetes, which is a “B” rated recommended preventive service. Employee's health care provider bills the insurer separately for the office visit and for the laboratory services related to the diabetes screening. Insurer cannot impose any cost-sharing requirements on employee with respect to the separately-billed laboratory services, and can impose the $15 copayment for the office visit because the cost of the office visit is billed separately.

In addition, employers and health insurance issuers can impose cost-sharing requirements on plan participants if group health plans incorporate value-based insurance designs which provide recommended preventive care services to employees at no cost for office visits to approved clinics and other health care venues, but impose cost-sharing requirements for the same procedures performed in other health care settings, such as hospitals. If plans impose value-based insurance designs, cost-sharing requirements for preventive care services performed at unapproved clinics or medical facilities is permitted so long as cost-sharing requirements, including copayments, coinsurance, and deductibles, are waived if it is medically inappropriate to perform preventive care services at unapproved locations as determined by plan participants' health care professional.

EXAMPLE: Employer has a group health plan that operates with a network of health care providers and does not impose copayments or coinsurance for colorectal cancer preventive care services when performed at in-network ambulatory surgery centers. In contrast, employer's plan charges plan participants a $250 copayment for colorectal cancer preventive care services performed at in-network hospitals. Employer's group health plan satisfies PPACA's cost-sharing requirement for preventive care services as long as the plan waives the $250 copayment if a health care provider determines that a plan participant must receive the colorectal cancer preventive care services in a hospital setting because of the participant's poor health.

Choice of health care professional

If group health plans operate with a network of health care professionals (except for grandfathered plans) and permit or require plan participants to designate primary health care providers, plan participants must be permitted to choose any participating health care professionals who are:
• primary care providers if they are available and willing to accept plan participants as their patients;

• pediatricians if they are available and willing to accept plan participants who are children as their patients; and

• specialists in obstetrics or gynecology if they are available and willing to accept female participants as their patients; female participants are not required to obtain advance authorizations or referrals from plans, issuers, or primary care providers before seeking coverage for obstetric or gynecological care (Interim Final Rules Relating to Pre-existing Condition Exclusions, Lifetime and Annual Limits, Rescissions, and Patient Protections, 75 Fed. Reg. 37,188 to 37,241 (June 28, 2010)).

EXAMPLE: Employer provides medical care coverage to employees and their family members through an HMO. The HMO designates a primary care provider for each plan participant. Employee, who is a plan participant, requests that a specific pediatrician treat employee's five year old child. The HMO must permit employee's child to be treated by the pediatrician if the pediatrician participates in the HMO's network and is willing to accept employee's child as a patient.

PPACA requires employers and health insurance issuers that have network plans to provide notice to participants enrolled in such plans about their right to choose health care professionals. Notice must be included with summary plan descriptions or similar descriptions of plan benefits. Employers and health insurance issuers can develop their own notice or use the federal agencies' model notice to comply with PPACA's requirement regarding participants' rights to designate a primary care health care professional. To review the model notice, see “Patient Protection Model Disclosure of Right to Designate Primary Care Provider.”

Hospital emergency services

If employers or health insurance issuers provide coverage for hospital emergency services, plan participants must be permitted to receive emergency services without obtaining advance authorizations and regardless of whether emergency services are received from in-network or out-of-network health care providers. If network plan participants receive out-of-network hospital emergency services, any cost-sharing requirements, such as copayments, coinsurance, or deductibles, cannot exceed in-network cost-sharing requirements.

For purposes of determining whether out-of-network cost-sharing requirements do not exceed in-network cost-sharing requirements, employers or health insurance issuers must provide benefits equal to whichever of the following amounts results in the lowest cost to plan participants:
• average amount negotiated with in-network providers;

• amount calculated using the method that the group health plan generally uses to determine payments for out-of-network services, such as customary, reasonable, or usual amounts; or

• the Medicare reimbursement amount (Interim Final Rules Relating to Pre-existing Condition Exclusions, Lifetime and Annual Limits, Rescissions, and Patient Protections, 75 Fed. Reg. 37,188 to 37,241 (June 28, 2010)).

EXAMPLE: Employer's group health plan requires plan participants who receive hospital emergency services to pay a 25 percent copayment regardless of whether services are provided by in-network or out-of-network hospitals. If participants notify the plan within 24 hours after receiving hospital emergency services, copayments are reduced to 15 percent. The plan complies with PPACA because the reduction of the copayment is based on a notice requirement not pre-authorization.

Pre-existing Condition Exclusion Prohibition

As defined by the federal Health Insurance Portability and Accountability Act, which became law prior to PPACA, pre-existing conditions are physical and mental medical conditions affecting plan participants that exist prior to their effective date of coverage under group health plans (I.R.C. § 9801(a), I.R.C. § 9801(b); 29 U.S.C. § 1181(a), 29 U.S.C. § 1181(b); Treas. Reg. § 54.9801-3(a), 29 C.F.R. § 2590.701-3(a)). Under HIPAA, employers and health insurance issuers can, but are not required to, impose pre-existing condition exclusions in their group health plans which are denials or limitations of plan benefits or coverage based on information relating to plan participants'pre-existing conditions (I.R.C. § 9801(b); 29 U.S.C. § 1181(b); Treas. Reg. § 54.9801-3(a); 29 C.F.R. § 2590.701-3(a)).

Effective for group health plan years beginning on or after Sept. 23, 2010 (Jan. 1, 2011, for calendar year plans), PPACA prohibits employers that have group health plans, including grandfathered plans, and health insurance issuers from imposing pre-existing condition exclusions for plan participants under age 19 and, effective for group health plan years beginning on or after Jan. 1, 2014, prohibits plans and issuers from imposing pre-existing condition exclusions with respect to all plan participants regardless of age. Until the applicable effective date, if employers and health insurance issuers impose pre-existing condition exclusions, they must continue to comply with HIPAA's rules regarding such exclusions (PPACA, § 1201; Interim Final Rules Relating to Pre-existing Condition Exclusions, Lifetime and Annual Limits, Rescissions, and Patient Protections, 75 Fed. Reg. 37,188 to 37,241 (June 28, 2010)).

EXAMPLE: Employer has a calendar year group health plan that imposes a 12 month pre-existing condition exclusion. Employee, employee's spouse, and employee's three children enroll in the plan and are covered for benefits as of Nov. 8, 2010. Employee's oldest child, age 12, has been treated for asthma within six months before enrollment and has been without creditable coverage under HIPAA for more than 63 days before enrollment in the employer's plan. For the plan year beginning Jan. 1, 2011, the employer cannot impose a pre-existing condition exclusion with respect to the employee's oldest child because the child is under age 19 regardless of the fact that the plan could apply a pre-existing condition exclusion as of Nov. 8, 2010.

For information about grandfathered plans, see “Grandfathered Group Health Plans.” For more information about pre-existing conditions, see “Pre-existing Conditions” in chapter Health Insurance Portability and Accountability Act.

Excessive Waiting Period Prohibition

Effective for group health plan years beginning on or after Sept. 23, 2010 (Jan. 1, 2011, for calendar year plans), employers that have group health plans, including grandfathered plans, and health insurance issuers cannot impose waiting periods longer than 90 days. Waiting periods are any length of time that must pass before health benefit coverage becomes effective for plan participants (PPACA, § 1201). For information about grandfathered plans, see “Grandfathered Group Health Plans.”

Dependent Coverage

Effective for group health plan years beginning on or after Sept. 23, 2010 (Jan. 1, 2011, for calendar year plans), employers that permit employees to enroll their children in group health plans, including grandfathered plans, and health insurance issuers that offer coverage for employees' children must provide coverage for employees'children until they reach age 26. For information about grandfathered plans, see “Grandfathered Group Health Plans.”

Employees and issuers cannot deny or restrict plan enrollment or coverage of children under age 26 on the basis of whether children are:
• married or unmarried;

• do not have or have children of their own;

• live with or do not live with employees;

• are financially dependent on employees or financially independent of employees;

• are students attending school full time, part time, or do not attend school;

• are employed or unemployed; or

• are eligible or not eligible for other health care coverage (PPACA, § 1001; HCERA, § 2301; Interim Final Rules Relating to Dependent Coverage of Children to Age 26 Under PPACA, 75 Fed. Reg. 27,122 to 27,140 (May 13, 2010)).

Effective for group health plan years beginning on or after Sept. 23, 2010 (Jan. 1, 2011, for calendar year plans) and until plan years beginning before Jan. 1, 2014, employers with grandfathered group health plans that permit employees to enroll their children in plans and health insurance issuers can deny or restrict plan enrollment or coverage for employees' children under age 26 if children are eligible to enroll in a health plan offered by the child's employer. For information about grandfathered plans, see “Grandfathered Group Health Plans.”

Employers can, but are not required to, permit employees' children to enroll their own children (employees' grandchildren) and employee's children's spouses (employees' daughters-in-law and sons-in-law) in group health plans. Employers cannot vary group health plan premiums based on the age of employees' children under age 26.

EXAMPLE: Employer permits employees' children up to age 26 to enroll in the employer's group health plan. An employee enrolls an unmarried child age 22 who has two children, lives with the employee, and is unemployed. The employer must provide group health plan coverage for the employee's child and can, but is not required to, permit the employee's grandchildren to enroll in the plan. The employer cannot establish plan premiums for the employee's child that are higher than premiums established for other employees' children under age 26.

EXAMPLE: Employer permits employees to enroll their children in employers' group health plan until children reach age 26. Employer's plan offers coverage in four categories: self-only, self-plus-one, self-plus-two, and self-plus three or more. Employer can set plan premiums that increase for the categories of coverage that include more plan participants so long as increases apply without considering the age of any children who are plan participants.

Although employers cannot vary group health plan premiums based on the age of employees' children under age 26, employers can vary group health plan provisions based on age if adult children are not treated differently than other plan participants, such as employees, their spouses, and employees' children under age 26.

EXAMPLE: Employer's group health plan imposes a $35 copayment for physician visits that are not related to preventive care services. Employer can apply the copayment to plan participants who are age 19 and older, including employees, their spouses, and employees' dependent children, but waive the copayment for plan participants under age 19.

Dependent enrollment and re-enrollment. Employers and health insurance issuers must permit employees' children who are under age 26 and eligible to enroll but who are not enrolled in group health plans and children who lost plan coverage before reaching age 26 to re-enroll in plans, including children who lost plan coverage and elected and have continuation coverage provided under the federal Consolidated Omnibus Budget Reconciliation Act. For more information about COBRA, see chapter COBRA Continuation Coverage.

Employers or group health plan insurers must provide written notice to eligible children of their right to enroll or re-enroll in plans. Notice must inform children that they can enroll or re-enroll in plans for at least 30 days after receiving notice. Notice must be provided no later than the first day of the first plan year beginning after Sept. 23, 2010 (Jan. 1, 2011, for calendar year plans). Employers and insurers can provide notice about dependent enrollment/re-enrollment to employees on behalf of their children and can include the notice with annual open enrollment information. Coverage for employees' children who enroll or re-enroll in plans must be effective not later than the first day of the first plan year beginning on or after Sept. 23, 2010 (Jan. 1, 2011, for calendar year plans) (Interim Final Rules Relating to Dependent Coverage of Children to Age 26 Under PPACA, 75 Fed. Reg. 27,122 to 27,140 (May 13, 2010)).

Employers and health insurance issuers can develop their own notice or use the federal agencies' model language to comply with PPACA's dependent coverage notice requirement. To review the model notice, see “Model Language for Notice of Opportunity to Enroll in Connection with Extension of Dependent Coverage to Age 26.”

Employers and health insurance issuers must treat employees'children under age 26 who enroll or re-enroll in group health plans as special enrollees under the federal Health Insurance Portability and Accountability Act. For more information, see “Special Enrollment Periods” in chapter Health Insurance Portability and Accountability Act.

Note: Some group health plan insurers have agreed to permit employees' children who are under age 26 and no longer attend school full-time to maintain plan coverage or permit such children to enroll or re-enroll in plans prior to the date that plans must provide coverage for employees' children under age 26. For additional information about dependent coverage under PPACA, including a list of insurers that have agreed to maintain coverage for employees' children under age 26 or enroll or re-enroll such children prior to Sept. 23, 2010, see the federal Department of Labor's Employee Benefits Security Administration's Fact Sheet, available at http://www.dol.gov/ebsa/newsroom/fsdependentcoverage.html and Frequently Asked Questions Regarding Young Adults and the Affordable Care Act, available at http://www.dol.gov/ebsa/faqs/faq-dependentcoverage.html.

Tax exclusion

Under the federal Internal Revenue Code, employers are not required to include the costs to provide group health plan coverage for employees, their spouses, and employees' dependent children in employees' gross income (I.R.C. § 106(a)). Beginning March 30, 2010, employers can exclude from employees' gross income the costs to provide group health plan coverage for employees' children until the end of the tax year before children reach age 27 regardless of whether children are employees'dependents for federal income tax purposes. The tax exclusion for dependent coverage permits employers to exclude the costs to provide coverage for employees' children through the end of the tax year in which they turn age 26 (I.R.S. Notice 10-38, 2010-20 I.R.B. 682, available at http://www.irs.gov/pub/irs-drop/n-10-38.pdf).

For purposes of the tax exclusion, children include employees':
• daughters and sons,

• stepdaughters and stepsons,

• legally adopted children and children placed for adoption with employees, and

• foster children placed with employees by authorized placement agencies or court order (I.R.C. § 152(f)(1)).

EXAMPLE: Employer has a grandfathered group health plan that permits employees to enroll their children in employers' group health plan until children reach age 26. An employee who has two children enrolls in the employer's group health plan and the employee's tax year is the calendar year (Jan. 1 to Dec. 31). The employee's older child will reach age 26 on Sept. 20, 2010; the employee's younger child will not reach age 26 during 2010. The employer can exclude from the employee's gross income the costs to provide group health plan coverage for the employee's older child for the period March 30, 2010, to Sept. 20, 2010, when the older child loses coverage under the plan by reaching the limiting age; alternatively, if the employer continues plan coverage for employees' children until the end of the year in which children reach age 26, the employer can exclude from the employees' gross income the costs to provide plan coverage for the employee's older child for the period March 30, 2010, to Dec. 31, 2010. Employer also can exclude from the employee's gross income the costs to provide group health plan coverage for the employee's younger child from March 30, 2010, through Dec. 31, 2010.

Employees who participate in employers' cafeteria plans also can exclude from their gross income their costs to pay for group health plan coverage for their children until the end of the employees' tax year in which children reach age 27. Employers that have cafeteria plans must amend such plans on or before Dec. 31, 2010, to permit employees to choose dependent child coverage as a qualified, nontaxable cafeteria plan benefit (I.R.S. Notice 10-38, 2010-20 I.R.B. 682, available at http://www.irs.gov/pub/irs-drop/n-10-38.pdf).

[Note: Some state laws require health insurance issuers to provide coverage for dependents who are older than age 26. Employers that have insured group health plans should check their state requirements.]

Nondiscrimination

Under PPACA, employers that have insured or self-funded/self-insured group health plans (except grandfathered plans) cannot provide more favorable treatment for highly compensated employees with respect to plan participation and benefits than what is provided to lower wage employees. For information about grandfathered plans, see “Grandfathered Group Health Plans.”

[Note: Employers that have insured group health plans are not required to comply with PPACA's nondiscrimination requirements until additional guidance is issued(expected in 2011) (I.R.S. Notice 11-01, 2011-2 I.R.B. 259).]

Employers that have insured group health plans (except grandfathered plans) and more than 50 employees on the first day of the plan year are subject to excise taxes of $100 for each day if they discriminate in favor of highly compensated employees(I.R.C. § 4980D).

Employers that have self-insured group health plans that discriminate in favor of highly compensated employees must include the costs of the benefits provided to highly compensated employees in such employees' taxable income. Excise taxes do not apply (I.R.C. § 105(a)).

Under PPACA, highly compensated employees are employees who are:
• one of employers' five highest paid officers,

• shareholders owning more than 10 percent of the value of employers' stock, or

• among the highest paid 25 percent of all employees.

When calculating the highest paid 25 percent of all employees, employers can exclude employees who are not plan participants and:
• have not completed three years of service;

• are under age 25;

• work only part-time or seasonally;

• are covered by collective bargaining agreements, so long as health benefits are subject to good faith bargaining; or

• are nonresident aliens who do not receive earned income from employers (PPACA, § § 1001, 10101).

Coverage Termination

Effective for group health plan years beginning on or after Sept. 23, 2010 (Jan. 1, 2011, for calendar year plans), employers that have insured or self-funded/self-insured group health plans, including grandfathered plans, and health insurance issuers cannot cancel, refuse to renew, rescind, or terminate plan coverage retroactively except if plan participants:
• perform acts, practices, or make omissions that constitute fraud; or

• make intentional misrepresentations of material facts concerning plan terms or coverage (PPACA, § 1001).

Employers and health insurance issuers can cancel, rescind, refuse to renew, or terminate group health plan coverage prospectively or if plan participants fail to pay premiums, move outside HMO service areas, or no longer meet criteria for plan eligibility or coverage. Health insurance issuers also can cancel, rescind, refuse to renew, or terminate plan coverage if they no longer offer group health plans(Interim Final Rules Relating to Pre-existing Condition Exclusions, Lifetime and Annual Limits, Rescissions, and Patient Protections, 75 Fed. Reg. 37,188 to 37,241 (June 28, 2010)).

If employers or health insurance issuers cancel, rescind, refuse to renew, or terminate coverage, they must provide written notice to affected plan participants at least 30 calendar days before coverage is discontinued (Interim Final Rules Relating to Pre-existing Condition Exclusions, Lifetime and Annual Limits, Rescissions, and Patient Protections, 75 Fed. Reg. 37,188 to 37,241 (June 28, 2010)).

EXAMPLE: Employer has an insured group health plan stating that coverage is terminated if plan participants commit fraud or make intentional misrepresentations of material facts concerning plan terms or coverage. In connection with plan enrollment, employee completes a medical history questionnaire and forgets to include the fact that employee was treated by a psychologist 10 years ago. Two years later, when employee is diagnosed with cancer, the health insurance issuer learns about employee's earlier psychological treatments. The plan cannot terminate employee's coverage or deny employee's claim for benefits related to cancer because employee's failure to include the psychological treatments on the questionnaire was not intentional.

Some state insurance laws provide greater protections to plan participants than PPACA for purposes of coverage termination. Employers should check their state requirements.

Claims and Appeal Processes

Effective for group health plan years beginning on or after Sept. 23, 2010 (Jan. 1, 2011, for calendar year plans), group health plans (except grandfathered plans) and health insurance issuers must have effective claims and appeal processes that plan participants can use to challenge coverage determinations and denials of benefit claims. Although plans and issuers must have claims and appeal processes in place by the effective date, certain provisions of PPACA's claims and appeals processes are not applicable until after the effective date. For information about grandfathered plans, see “Grandfathered Group Health Plans.”

Claims and appeal processes must include at a minimum:
• internal claims and appeals processes;

• notice about available internal and external appeal procedures, including any advocate who assists plan participants with their appeals;

• procedures that allow plan participants to review their appeal files, present evidence and testimony during appeals, and maintain plan coverage pending appeal; and

• certain external review processes (PPACA, § 1001).

In general, group health plan claims procedures must:
• be in writing and described in summary plan descriptions;

• explain how preauthorizations or utilization reviews are obtained, if applicable to plans;

• not be designed or administered to discourage plan participants from pursuing claims, such as by requiring payment of a fee in order to file a claim;

• permit plan participants to have an authorized representative, such as a health care provider, pursue claims on their behalf;

• contain safeguards to ensure that benefit claim determinations are made in accordance with plan documents and are applied consistently with respect to similarly situated plan participants;and

• not require plan participants to file more than two appeals before they can file lawsuits against plans or health insurance issuers (Interim Final Rule Relating to Internal Claims and Appeals and External Review Processes, 75 Fed. Reg. 43,330 to 43,364 (July 23, 2010); 29 C.F.R. § 2560.503-1).

Internal claims and appeals processes

PPACA's internal claims and appeals processes apply to employers and health insurance issuers' decisions involving whether:
• individuals are eligible to participate in plans;

• benefits are or are not provided by plans;

• pre-existing condition exclusions or other limitations apply to plans;

• plan benefits are experimental, investigational, or not medically necessary or appropriate; or

• plan coverage should be cancelled, rescinded, or terminated (Interim Final Rule Relating to Internal Claims and Appeals and External Review Processes, 75 Fed. Reg. 43,330 to 43,364 (July 23, 2010); 29 C.F.R. § 2560.503-1). For information about rescissions of group health plan coverage, see “Coverage Termination.” For more information about pre-existing conditions, see “Pre-existing Conditions” in chapter Health Insurance Portability and Accountability Act.

Notice of benefit determination and notice of adverse benefit determination. Employers or health insurance issuers must provide notice of benefit determination to plan participants who file claims for group health plan benefits. If claims are denied in whole or in part, notice is often referred to as notice of adverse benefit determination.

Notice of benefit determination and notice of adverse benefit determination must be provided to plan participants in writing, can be delivered electronically, and must contain:
• specific reasons for benefit determinations;

• reference to specific plan provisions that justify and support adverse benefit determinations;

• descriptions of any information or material that plan participants failed to submit when they filed benefit claims and explanations why such information or material is necessary; and

• summary of available plan appeal or external review procedures and time limits for filing appeals or external reviews(Interim Final Rule Relating to Internal Claims and Appeals and External Review Processes, 75 Fed. Reg. 43,330 to 43,364 (July 23, 2010); 29 C.F.R. § 2560.503-1); DOL Technical Release 2010-02 (Sept. 20, 2010)).

Effective on the first day of the first plan year beginning on or after July 1, 2011 (Jan. 1, 2012, for calendar year plans), notice of benefit determination and notice of adverse benefit determination must:
• include claim identifying information, such as the date of service, name of health care provider, and claim amount (if applicable);

• describe specific reasons for adverse benefit determinations;

• describe internal appeals and external review procedures;

• notify plan participants that they can request diagnosis and treatment codes, including the meaning of codes; and

• include contact information for any applicable state office of health insurance consumer assistance or advocate who can help plan participants comply with internal claims and appeals and external review processes (Amendment to Interim Final Rules Relating to Internal Claims and Appeals and External Review Processes, 76 Fed. Reg. 37,208 to 37,234 (June 24, 2011)); DOL Technical Release 2011-01 (March 18, 2011)).

If plan participants request diagnosis and treatment codes and the meaning of the codes, employers and issuers cannot treat such requests as triggering internal appeals (Amendment to Interim Final Rules Relating to Internal Claims and Appeals and External Review Processes, 76 Fed. Reg. 37,208 to 37,234 (June 24, 2011)).

Employers and issuers can develop their own notice of benefit determination and notice of adverse benefit determination or use the federal Department of Labor's Model Notice of Adverse Benefit Determination (, available at http://www.dol.gov/ebsa. A list of states that have consumer assistance programs to help plan participants with internal claims and appeals and external review processes is available as an appendix to DOL Technical Release 2011-01 (March 18, 2011), available at http://www.dol.gov/ebsa/newsroom/tr11-01.html, and at http://www.dol.gov/ebsa/healthreform/.

Review period. If employers or health insurance issuers require plan participants to file pre-service claims, which are claims for plan benefits that must be approved in advance, plan participants must receive notice of benefit determinations within 15 days after filing pre-service claims. If plan participants do not comply with plan procedures for filing pre-service claims, they must be notified within five days that they failed to comply and employers or issuers must inform plan participants about the proper procedures to follow.

In general, employers and health insurance issuers must notify plan participants about benefit determinations relating to post-service claims, which are claims for plan benefits that do not require advance approval, within 30 days after post-service claims are filed (Interim Final Rule Relating to Internal Claims and Appeals and External Review Processes,75 Fed. Reg. 43,330 to 43,364 (July 23, 2010); 29 C.F.R. § 2560.503-1).

Urgent care claims. Urgent care claims are claims that involve serious threats to plan participants' life, health, ability to regain maximum functioning, or severe pain that cannot be managed adequately without care or treatment. Employers and health insurance issuers must notify plan participants about benefit determinations relating to urgent care claims as soon as possible, taking into account medical exigencies, but no later than 72 hours after plans or health insurance issuers receive urgent care claims, so long as plans and issuers defer to plan participants’health care providers’ decision as to whether claims involve urgent care (Interim Final Rule Relating to Internal Claims and Appeals and External Review Processes,75 Fed. Reg. 43,330 to 43,364 (July 23, 2010); Amendment to Interim Final Rules Relating to Internal Claims and Appeals and External Review Processes, 76 Fed. Reg. 37,208 to 37,234 (June 24, 2011); 29 C.F.R. § 2560.503-1; DOL Technical Release 2011-01 (March 8, 2011)).

Internal appeals. Group health plans and health insurance issuers can require plan participants to file up to two internal appeals of adverse benefit determinations. Plans and issuers cannot require plan participants to agree to mandatory arbitration of adverse benefit determinations unless:
• arbitration is one of the two internal appeals, and

• plan participants are not prohibited from filing lawsuits after pursuing arbitration (Interim Final Rule Relating to Internal Claims and Appeals and External Review Processes, 75 Fed. Reg. 43,330 to 43,364 (July 23, 2010); 29 C.F.R. § 2560.503-1).

Internal appeals of adverse benefit determinations must permit plan participants to:
• file an appeal within 180 days after they receive adverse benefit determinations;

• submit written comments, documents, records, and other information relating to determinations;

• submit evidence and testimony as part of appeal processes; and

• request and obtain copies of all documents, records, and other information relevant to determinations without charge, including any additional or new information considered, obtained, or relied upon in connection with appeals.

Internal claim appeals must be handled by a plan fiduciary who is not the individual who made the adverse benefit determination that is the subject of the appeal. Fiduciaries cannot have a subordinate reporting relationship to the individual who made the adverse benefit determination. If appeals involve adverse benefit determinations concerning whether drugs, medical procedures, or treatments are experimental, investigational, or not medically necessary, fiduciaries must consult with independent health care providers that have appropriate training and experience in the relevant field of medicine. Internal appeals must provide for expedited review of adverse benefit determinations pertaining to urgent care claims (Interim Final Rule Relating to Internal Claims and Appeals and External Review Processes, 75 Fed. Reg. 43,330 to 43,364 (July 23, 2010); 29 C.F.R. § 2560.503-1).

Final internal adverse benefit determination. After internal appeals of adverse benefit determinations are completed, employers and health insurance issuers must provide plan participants with notice of final internal adverse benefit determination. Notice must be in writing, can be delivered electronically, and must contain:
• claim identifying information, including date of benefit service, name of health care provider, and claim amount(if applicable);

• specific reasons for final adverse benefit decisions;

• reference to plan provisions that support adverse benefit decisions, including denial codes and the meaning of the codes;

• opportunity for participants to request diagnosis and treatment codes, including the meaning of codes that pertain to participants' disputed charges;

• statement that plan participants can request and obtain copies of all documents, records, and other information relevant to final decisions without charge; and

• statement describing any additional voluntary appeal procedures provided by plans and plan participants' right to obtain information about such procedures (Amendment to Interim Final Rules Relating to Internal Claims and Appeals and External Review Processes, 76 Fed. Reg. 37,208 to 37,234 (June 24, 2011); DOL Technical Release 2011-01 (March 18, 2011)).

Employers and issuers can develop their own notice of final internal adverse benefit determination or use the federal Department of Labor's Model Notice of Final Internal Adverse Benefit Determination , available at http://www.dol.gov/ebsa.

Employers and health insurance issuers must continue plan participants'benefit coverage for ongoing courses of treatment while participants'internal appeals are pending.

Effective for plan years beginning on or after Jan. 1, 2012, if employers or health insurance issuers do not establish or comply with plans' internal claims and appeals processes, plan participants are considered to have completed or exhausted internal appeal procedures and can begin external review processes or file lawsuits without pursuing internal procedures. Employers and issuers are not considered to have failed to comply with internal claims and appeals processes if failures to comply:
• are minor or de minimus violations of claims and appeal processes;

• do not prejudice or harm plan participants;

• result from good cause or are due to matters beyond plans' or issuers' control;

• are made in the context of ongoing, good-faith exchanges of information; and

• are not part of a pattern or practice of non-compliance (Interim Final Rule Relating to Internal Claims and Appeals and External Review Processes, 75 Fed. Reg. 43,330 to 43,364 (July 23, 2010); Amendment to Interim Final Rules Relating to Internal Claims and Appeals and External Review Processes, 76 Fed. Reg. 37,208 to 37,234 (June 24, 2011); 29 C.F.R. § 2560.503-1; DOL Technical Release 2011-01 (March 18, 2011)).

Culturally and linguistically appropriate notices. Employers and health insurance issuers must provide notice of benefit determination, notice of adverse benefit determination, and notice of final internal adverse benefit determination to plan participants in English and, in certain situations, must include a one-sentence statement in a non-English language offering to provide notices in the non-English language.

Effective for plan years beginning on or after Jan. 1, 2012, employers and issuers must provide notices in a non-English language (Spanish, Chinese, Tagalog, or Navajo) if 10 percent or more of the population residing in the plan participant's county are literate only in the same non-English language, as determined by the American Community Survey data published by the U.S. Census Bureau (Amendment to Interim Final Rules Relating to Internal Claims and Appeals and External Review Processes, 76 Fed. Reg. 37,208 to 37,234 (June 24, 2011)). Information about county-level estimates in which 10 percent or more of the population in U.S. counties speak a particular non-English language is available in the Amendment to Interim Final Rules Relating to Internal Claims and Appeals and External Review Processes, 76 Fed. Reg. 37,208 to 37,234 (June 24, 2011); annual updates for county-level estimates are available through HHS bulletins. Information about county-level estimates in which 10 percent or more of the population in U.S. counties speak a particular non-English language is available in the Amendment to Interim Final Rules Relating to Internal Claims and Appeals and External Review Processes, 76 Fed. Reg. 37,208 to 37,234 (June 24, 2011); annual updates for county-level estimates are available through HHS bulletins published at http://cciio.hhs.gov/resources/files/clas_bulletin_06222011.pdf.

If plan participants request employers or issuers to provide notices in a non-English language, all subsequent notices must be provided in the non-English language. In addition, employers and health insurance issuers must have telephone hotlines or other customer assistance services that provide information orally in the non-English language and provide written notices in the non-English language if requested(Interim Final Rule Relating to Internal Claims and Appeals and External Review Processes, 75 Fed. Reg. 43,330 to 43,364 (July 23, 2010); DOL Technical Release 2011-01 (March 18, 2011)).

External review processes

Plan participants can file appeals if they disagree with employers’or health insurance issuers’ claim decisions. PPACA requires employers and health insurance issuers to comply with either a state or the federal external review process for handling appeals filed by plan participants.

Insured group health plans. Until Dec. 31, 2011, employers that have insured group health plans and health insurance issuers that operate in states that have laws governing external review processes that meet certain minimum standards can follow their state external review process. In general, health insurance issuers are responsible for ensuring compliance with external review processes for claims filed by participants who are covered by fully-insured plans.

If insured group health plans or issuers operate in states that do not have laws governing external review processes, plans and issuers must comply with the federal external review process which generally allows plans and issuers to choose between the HHS-administered process or a private accredited independent review organization process (Interim Final Rule Relating to Internal Claims and Appeals and External Review Processes, 75 Fed. Reg. 43,330 to 43,364 (July 23, 2010); Amendment to Interim Final Rules Relating to Internal Claims and Appeals and External Review Processes, 76 Fed. Reg. 37,208 to 37,234 (June 24, 2011)).

From Jan. 1, 2012, until Jan. 1, 2014, fully-insured group health plans can continue to comply with their state's external review processes as long as state processes meet minimum guidelines. Not later than July 31, 2011, HHS will determine whether each states'external review process meets minimum guidelines. If state processes do not meet minimum guidelines, issuers must use the federal external review process for plan participants’ claim appeals (DOL Technical Release 2011-02 (June 22, 2011)).

In general, external review processes under state law meet minimum guidelines and are approved by HHS if states:
• require employers and issuers to provide effective, written notice to plan participants about their rights to external review of adverse benefit determinations and final internal adverse benefit determinations;

• permit plan participants to waive internal claims and appeals processes if employers or issuers fail to comply with internal claims and appeals process requirements;

• permit plan participants to pay only nominal filing fees of no more than $25, cap the annual limit on filing fees at $75, waive filing fees if payment creates undue hardship, and refund fees to plan participants if adverse benefit determinations or final adverse benefit determinations are reversed and decided in favor of plan participants;

• do not impose minimum claim filing amounts;

• allow plan participants to request external review for at least 60 days after receipt of notice of adverse benefit determination or final internal notice of adverse benefit determination;

• maintain a list of accredited independent review organizations to conduct external reviews of adverse benefit determinations and final internal adverse benefit determinations, assign IROs randomly to ensure impartiality, and require employers or issuers to pay the cost of reviews conducted by IROs;

• allow plan participants at least five business days to submit additional information to IROs which must be considered during external reviews;

• provide that external review decisions are binding on employers, issuers, and plan participants;

• require IROs to issue written external review decisions within 60 days after receipt of requests for external review of standard, non-urgent care claims, maintain written records, and make records available for states to review on request;

• provide for expedited external reviews within four business days if benefit determinations concern emergency services provided to plan participants or involve their medical conditions;and

• require employers and issuers to describe external review processes in summary plan descriptions, policies, certificates, or other evidence of plan coverage provided to plan enrollees, participants, and beneficiaries (Interim Final Rule Relating to Internal Claims and Appeals and External Review Processes, 75 Fed. Reg. 43,330 to 43,364 (July 23, 2010); DOL Technical Release 2011-02 (June 22, 2011)).

Self-insured/self-funded group health plans. Effective Sept. 23, 2010, employers that have self-insured group health plans(except grandfathered self-insured plans) must follow external review processes that comply with federal safe harbor guidelines or employers'state laws for external review processes (DOL Technical Release 2010-01 (Aug. 23, 2010)).

With respect to claims for which external reviews have not been initiated on or before Sept. 20, 2011, only claims that involve medical judgment or rescissions of coverage must be subject to federal external review processes. Claims that do not involve medical judgment or involve contractual or legal interpretation of plan documents are not required to be subject to federal external review (Amendment to Interim Final Rules Relating to Internal Claims and Appeals and External Review Processes, 76 Fed. Reg. 37,208 to 37,234 (June 24, 2011)).

EXAMPLE: Employer's group health plan does not provide coverage for medical benefits performed by out-of-network health care providers, unless the benefits cannot be performed effectively by in-network providers. Employee has a surgical procedure performed by an out-of-network provider because employee does not believe that in-network providers can perform the surgical procedure effectively. Employee receives a notice of final internal adverse benefit determination denying the claim because employee's health care provider is out-of-network. The claim denial relates to whether the surgical procedure can be performed effectively by in-network providers and involves medical judgment. Accordingly, the claim is eligible for external review.

Employers that have self-insured/self-funded group health plans can adopt certain federal safe harbor rules for external review of non-urgent claims. Employers that adopt federal safe harbor rules must:
• permit plan participants to file requests for external review for up to four months after the date participants receive notice of adverse benefit determination or notice of final internal adverse benefit determination;

• complete preliminary reviews of external review requests within five business days after receipt of requests for review;

• issue written notice within one business day after completing preliminary reviews informing plan participants whether requests are eligible for external review and, if requests are not eligible, explain why requests are not eligible for external review, or if requests are not complete, identify the documents or information needed to make requests complete and allow participants to submit required documents or information within the four month filing period or 48 hours after receiving notice, whichever is longer;

• have contracts with at least three IROs recognized by national accrediting organizations containing specific provisions and assign plan participants' requests for external review among IROs using independent and unbiased methods, such as random selection;

• submit documents and information to IROs within five business days after external review requests are assigned to IROs;

• require IROs to issue written statements explaining principle reasons for external review decisions within 45 days after receipt of external review requests; and

• if IROs reverse plans' adverse benefit determination or final internal adverse benefit determination, plans must immediately provide coverage for or payment of plan participants' benefit claim(DOL Technical Release 2010-01 (Aug. 23, 2010)).

Self-insured plans also must adopt additional procedures for claim reviews that involve medical conditions for which participants file requests for expedited external review. Plans must immediately complete preliminary reviews after receiving expedited external review requests and assigned IROs must issue decisions within 72 hours after receiving such requests. Plan participants can file requests for expedited external review when adverse benefit determinations or final internal adverse benefit determinations involve:
• serious threats to plan participants' life, health, or ability to regain maximum functioning;

• severe pain that cannot be managed adequately without care or treatment; or

• emergency services (DOL Technical Release 2010-01 (Aug. 23, 2010)).

Employers and issuers can develop their own notice to inform plan participants about final external review decisions or use the federal Department of Labor's Model Notice of Final External Review Decision available at http://www.dol.gov/ebsa.

Notice Requirements

Automatic Enrollment Notice

Effective March 1, 2013, certain employers are required to provide written notice to all new full-time employees about automatic enrollment in group health plans. Such notice must include information about:
• exchanges and how employees can contact exchanges;

• availability of health plan premium tax credits if employees purchase qualified health plans through exchanges; and

• loss of employer contributions, if any, to employer-provided health care coverage if employees purchase qualified health plans through exchanges (PPACA, § 1512).

For information about automatic enrollment, see “Automatic Enrollment.” For definition and information about exchanges, see “Exchanges” in chapter PPACA: Individual Responsibilities and Health Benefit Exchanges.

Uniform Summary and Coverage Explanation

Effective March 23, 2012, group health plans, including grandfathered plans, self-insured group health plan sponsors or administrators, and health insurance issuers must provide a summary of benefits and coverage explanation to employees, their spouses, and employees' dependents who enroll or re-enroll in plans (PPACA, § 1001). For information about grandfathered plans, see “Grandfathered Group Health Plans.”

Summary of benefits and coverage explanation must be:
• provided prior to enrollment or re-enrollment;

• in paper or electronic form;

• presented in a uniform format that is no longer than four pages and printed in at least 12-point font; and

• written in a manner that is understandable by average plan participants.

Summary of benefits and coverage explanation must include:
• uniform definitions of standard insurance and medical terms;

• descriptions of coverage, including any cost sharing for essential health benefits;

• coverage exceptions, reductions, and limitations;

• coinsurance, copayment, and deductible obligations;

• renewability and continuation of coverage provisions;

• a coverage facts label providing examples of common coverage conditions, such as pregnancy and serious or chronic medical conditions;

• statement whether plans provide minimum essential health care coverage;

• statement that participants should review official plan documents; and

• contact information including an internet web address and a telephone number that participants can use to obtain additional information (PPACA, § 1001).

Group health plans and health insurance issuers that make material changes or modifications to plan terms or coverage must provide notice of such change or modification to participants within 60 days before changes or modifications are effective (PPACA, § 1001).

The federal Secretary of Health and Human Services must develop standards for use by group health plans in compiling and providing summary of benefits and coverage explanation, including definitions of standard insurance and medical terms (PPACA, § 1001).

Standard insurance terms must include:
• coinsurance;

• copayment;

• deductible;

• excluded services;

• grievance and appeals;

• out-of-network;

• out-of-pocket limit;

• preferred and non-preferred provider;

• premium; and

• usual, customary, and reasonable fees (PPACA, § 1001).

Standard medical terms must include:
• durable medical equipment;

• emergency medical transportation;

• home health care;

• hospitalization, emergency room, hospital outpatient care, and hospice services;

• physician services and skilled nursing care;

• prescription drug coverage; and

• rehabilitative services (PPACA, § 1001).

Penalties. Employers that willfully do not provide the summary of benefits and coverage explanation can be fined up to $1,000 multiplied by each employee, their spouse, and employees'dependent who should have received the summary (PPACA, § 1001).