New York Labor and Employment Law Report : New York Employment Lawyer & Attorney : Bond Schoeneck & King Law Firm : NY Labor Relations, Employee Benefits

Section 2715 of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (“PPACA”), mandates that group health plans provide a summary of benefits and coverage (“SBC”) to all participants and beneficiaries. The SBC is a brief description intended to provide a consistent and accurate description of benefits and coverage so that participants can easily compare different plans. On August 22, 2011, the Departments of Labor (“DOL”), Health and Human Services (“HHS”), and Treasury (“IRS”) (collectively, the “Departments”) issued proposed regulations to implement the SBC requirement, along with a proposed SBC template, instructions, and a uniform glossary of key terms.

The PPACA states that plans will be required to furnish SBCs beginning March 23, 2012. However, the Departments stated in their seventh set of PPACA frequently asked questions (“FAQs”) that plans are not required to comply with the SBC requirement until final regulations are issued. The FAQs also provided assurances that the effective date of the final regulations will afford sufficient time to comply with the SBC requirements.

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On October 20, 2011, the Internal Revenue Service announced the dollar limitations for pension plans and other items beginning January 1, 2012. Some of the limits, which had been largely unchanged since 2009, are listed below.

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As described in a September 2010 post, the Patient Protection and Affordable Care Act of 2010 (the "Act") generally prohibits all group health plans and health insurance issuers (including grandfathered plans) from imposing annual or lifetime dollar limits with respect to certain "essential health benefits" (as defined in Section 1302(b) of the Act) for plan years beginning on or after September 23, 2010. For plan years beginning prior to January 1, 2014, however, plan sponsors may apply certain "restricted annual limits" ("RAL") in accordance with the interim final regulations, issued jointly by the Internal Revenue Service, the Department of Labor, and the Department of Health and Human Services ("HHS") on June 28, 2010.

The RALs are intended to provide transitional relief to certain group health plans and health insurance issuers that currently impose annual limits on essential health benefits. However, in recognition of the difficulties that the annual limit requirements would create for existing limited benefit plans, or "mini-med" plans (e.g., a temporary health insurance plan with a $10,000 annual limit on essential health benefits), the Act authorized HHS to establish an annual limit waiver program for eligible plans or policy issuers. The waiver program is described in the June 28, 2010 interim final regulations ("IFR").

On September 3, November 5, and December 9, 2010, HHS's Center for Consumer Information and Insurance Oversight ("CCIIO") issued guidance, which explains the requirements for the annual limit waiver application process. Waivers previously granted in accordance with that guidance are valid for one year.
 

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In yesterday’s post, we began a discussion of how New York’s Marriage Equality Act may impact employee benefit plans. We continue the discussion here with Part II.

How Does the Legislation Affect Self-Insured Health Plans and Other Self-Insured Welfare Benefit Plans?

Self-insured health plans and other self-insured welfare benefit plans that are subject to ERISA will not be subject to the new requirements imposed by the Legislation. ERISA preempts the Legislation insofar as it applies to self-insured ERISA plans (ERISA’s preemption provisions, however, generally do not apply to insured plans, which is why the Legislation will affect insured plans differently than self-insured ERISA plans). If no changes are desired in how a self-insured ERISA plan operates, an employer should still review any definition of spouse that appears in that plan in order to make sure it does not need to be revised. ERISA plans are required to be administered in accordance with their written terms, and employers will want to make sure any definition of spouse conforms to how each such plan is operated.

Even though a self-insured ERISA plan is not subject to the requirements of the Legislation, an employer with such a plan can voluntarily decide to provide comparable benefits to same-sex spouses. The tax status of such benefits generally will not be identical to the tax status of the benefits provided to opposite-sex spouses under such a plan, because the Code provides favorable tax treatment for eligible opposite-sex spouses but not for same-sex spouses (an exception applies if the same-sex spouse satisfies the Code requirements for being a dependent of the participating employee, but that exception can be difficult to satisfy). If an employer does decide to provide comparable benefits to same-sex spouses, the language of the applicable plan should be revised accordingly.

Certain governmental and church self-insured plans are exempt from ERISA. Such plans will not be covered by ERISA’s preemption provisions and, therefore, will have to comply with the Legislation (subject to a possible exception for plans maintained by Religious Organizations). Such plans should, therefore, be reviewed to determine whether the definition of spouse may need to be amended to include same-sex spouses who are married in New York State.
 

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On June 24, 2011, Governor Cuomo signed the Marriage Equality Act  which will allow same-sex couples to be married in New York and to have, with certain exceptions, the same legal protections available to opposite-sex couples married in New York. The effective date of the Legislation is July 24, 2011, giving New York employers only a month to comply. For that reason, New York employers should immediately take the following steps to ensure their employee benefit plans, programs and policies (collectively, “Benefit Plans”) will comply with the Legislation:

• review the requirements imposed by the Legislation to determine how they will affect your existing Benefit Plans;
• determine what, if any, changes must be made to your Benefit Plans
• Begin implementation of necessary changes by preparing any necessary amendments to the affected Benefit Plans, coordinating with any applicable insurer or third party administrator about the changes being made, obtaining any necessary approval from the applicable Board of Directors or Board of Trustees, and preparing any necessary summary of material modification(s) or revised summary plan description(s);
• continue implementation by revising all other materials describing employee benefits (benefit summaries, benefit web pages, benefit forms, employee handbooks, etc.); and
• review any domestic partner policy, and any other employer policy that might be affected by the Legislation, (including an analysis of whether any changes are needed to help address potential discrimination claims, such as those that might be brought by opposite-sex domestic partners in certain circumstances).

What Are the Major Changes Made By the Legislation?

The major changes made by the Legislation include the following:

• no application for a marriage license in New York State will be denied on the ground that the parties are of the same sex;
• a marriage that is otherwise valid will be valid regardless of whether the parties to the marriage are of the same sex or different sex; and
• no government treatment or legal status, effect, right, benefit, privilege, protection or responsibility relating to marriage in New York State will differ based on the parties to the marriage being or having been of the same sex rather than a different sex.

The law contains special compliance exceptions for religious entities, benevolent organizations, and not-for-profit corporations that are operated, supervised or controlled by religious entities as defined in the Legislation
 

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Effective for plan years beginning on or after November 1, 2011, fiduciaries of participant-directed individual account based retirement plans will be required to provide plan participants and beneficiaries with certain fee, expense and investment-related information. These rules are part of a final regulation issued by the United States Department of Labor ("DOL") on October 20, 2010. In a proposed regulation issued on June 1, 2011, the DOL proposed a 60-day extension of the time period that a plan administrator has to provide certain initial disclosures, once the final regulation becomes applicable to the plan. Given the limited duration of the delay, however, plan administrators should begin or continue to take steps to comply with the requirements of the final regulations.

Background

To the extent that a plan assigns investment responsibilities to participants and beneficiaries, the DOL takes the position that pursuant to ERISA’s fiduciary obligations such individuals should be provided with sufficient information regarding plan fees, expenses and designated investment alternatives so that they can make informed investment decisions. Participant-directed individual account plans that elect to comply with ERISA Section 404(c) in order to protect plan fiduciaries from liability based on the investment choices made by participants are currently required to disclose certain investment-related information. The final regulation expands on the current disclosure requirements in the current ERISA Section 404(c) regulation. Significantly, the new disclosure rules apply to all individual account participant-directed plans covered by the final regulation, regardless of whether such plan is intended to comply with ERISA Section 404(c).
 

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The Departments of Health and Human Services (“HHS”), Labor (“DOL”), and Treasury (“IRS”) recently issued additional guidance regarding the implementation of certain Patient Protection and Affordable Care Act of 2010 (“PPACA”) requirements, including: the rapidly approaching deadline for employers planning to apply for early-retiree funding from HHS; additional details on implementing the grandfathered plan rules; and the procedures for reporting the cost of employer-provided health coverage to employees. The DOL has also provided updated information on the status of the automatic enrollment requirement for large employers.

Deadline For Early-Retiree Health Insurance Funding
Pursuant to the PPACA, $5 billion was appropriated to establish a temporary program for partial reimbursement of the cost of providing health coverage to early retirees (including the spouses, dependents, and surviving spouses of early retirees). The program, which was implemented on June 1, 2010, began accepting applications on June 29, 2010. On March 31, 2011, HHS announced that it will stop accepting applications as of May 5, 2011, based on the amount of remaining program funds and the rate at which the funding is being disbursed. A copy of the application and instructions can be found at http://www.errp.gov. All applications must be physically received by HHS (i.e., not postmarked) on or before May 5, 2011.
 

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The U.S. Department of Labor ("DOL") has proposed regulations that more broadly define the circumstances under which a person or entity will be considered to be a plan "fiduciary" by reason of giving investment advice to an employee benefit plan or to a plan's participants or beneficiaries. If the proposed regulations are made final in their current form, the number of plan service providers that will be considered plan "fiduciaries" will increase significantly. Plan sponsors need not take any current action with respect to the proposed regulations, but should be aware that agreements with service providers may need to be reviewed and modified to conform to the regulations.

Background

Under the Employee Retirement Income Security Act ("ERISA"), a person is a fiduciary with respect to an employee benefit plan to the extent that the person: (i) exercises any discretionary authority or discretionary control respecting the management or disposition of the plan's assets; (ii) renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of the plan, or has any authority or responsibility to do so; or (iii) has any discretionary authority or discretionary responsibility in the administration of the plan.
Individuals and entities, including plan service providers, who are considered plan "fiduciaries" are subject to a number of strict duties and responsibilities and are prohibited from engaging in a number of specific acts with respect to the applicable plan. Among other consequences, fiduciaries who fail to satisfy their plan-related duties, or who engage in plan-related prohibited transactions, can be subject to personal liability for losses suffered by the plan.
 

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On December 22, 2010, the Departments of Labor, Health and Human Services, and Treasury (collectively, the "Departments") issued their fifth set of answers to several frequently asked questions ("FAQs") about the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act ("PPACA"). The FAQs also address the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 ("MHPAEA") and the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") nondiscrimination rules for wellness programs. The FAQs are described below.

The Patient Protection and Affordable Care Act

The PPACA encompasses many different approaches to reducing the number of Americans with little or no health insurance coverage. The legislation includes mandates on employers, individuals, and providers, amendments to the Internal Revenue Code, and many other changes.

Cost Control for Preventive Care Benefits

The PPACA generally requires that group health plans cover recommended, in-network preventive services without any employee cost sharing. The Departments issued interim final regulations on July 14, 2010 addressing the requirement, but there have been lingering issues about a plan's ability to control costs. The FAQs confirm that the PPACA allows plans to steer enrollees toward more cost-efficient service providers through value-based insurance designs ("VBID"). The FAQs provide an example of a permissible VBID. The PPACA would allow a group health plan to have no copayment for preventive services performed at an in-network ambulatory surgery center, but have a $250 copayment for the same services performed at an in-network outpatient hospital, because the outpatient hospital is a higher-value setting. The Departments add that further guidance is forthcoming.
 

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On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“Tax Relief Act”), which generally extended the Bush-era tax reductions through December 31, 2012. The Tax Relief Act also includes several employee benefits-related extensions of interest to employers.

Educational Assistance Programs

Section 127 of the Internal Revenue Code (“Code”) permits an employer to maintain a program to provide tax-free educational assistance to its employees, provided that certain eligibility and nondiscrimination requirements are satisfied. A qualified educational assistance program may provide up to $5,250 in tax-free educational assistance for the payment of tuition and related expenses for undergraduate and graduate level coursework. Code Section 127 was scheduled to expire on December 31, 2010. The Tax Relief Act extends the application of Code Section 127 through December 31, 2012, allowing employers to continue to provide tax-free educational assistance to their qualifying employees for an additional two years.

Adoption Assistance Programs

Code Section 137 permits an employer to provide tax-free adoption assistance benefits (up to $13,360 per eligible child for 2011) to its employees, subject to the satisfaction of certain eligibility and nondiscrimination rules. Code Section 137 was scheduled to expire on December 31, 2011. However, the Tax Relief Act extends the application of Code Section 137 through December 31, 2012.

Mass Transit and Vanpool Benefits

Under current law, an employee may exclude from income up to $230 per month in qualified employer-provided mass transit and vanpool benefits (along with employer-provided parking benefits), provided that the program satisfies the requirements of Code Section 132(f). However, the permitted exclusion amount for mass transit and vanpool benefits was scheduled to be reduced to $120 per month after December 31, 2010. The Tax Relief Act extends the $230 monthly exclusion amount for employer-provided mass transit and vanpool benefits through December 31, 2011. The exclusion for employer-provided parking benefits is not subject to this sunset provision.
 

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In a move akin to delaying Christmas after all the hard work of shopping, wrapping and baking is done, the IRS (and the Departments of Labor and Health and Human Services) have delayed compliance with the nondiscrimination requirements of the Affordable Care Act until after regulations or other administrative guidance are issued (IRS Notice 2011-1).  The nondiscrimination rules would otherwise apply to insured, non-grandfathered group health plans for plan years beginning after September 23, 2010. Grandfathered insured plans are required to comply beginning with the first plan year grandfathered status is lost.

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To date, three federal courts have ruled on the constitutionality of the section of the Patient Protection and Affordable Care Act (“PPACA”), which, beginning in 2014, imposes a monetary penalty on individuals who are not covered by adequate health insurance. The coverage requirement is commonly known as the individual mandate.

On December 13, 2010, Judge Henry E. Hudson of the United States District Court for the Eastern District of Virginia ruled that the individual mandate is unconstitutional and not enforceable. This decision conflicts with two prior Federal court decisions, one from the Eastern District of Michigan and one from the Western District of Virginia. In those cases, the courts held that the individual mandate is constitutional.

Most recently, on December 16, 2010, the constitutionality of the individual mandate was argued before Judge Robert Vinson in the Northern District of Florida. The Northern District of Florida case, which has not yet been decided, was brought by twenty states and challenges the PPACA on several grounds, including the constitutionality of the individual mandate. The constitutionality of the individual mandate is likely to be determined eventually by the United States Supreme Court.

Despite the current uncertainty created by the conflicting court decisions, senior White House officials have said that the Obama Administration will continue to work vigorously to implement the PPACA. With respect to those PPACA provisions that become effective before 2014, employers and group health plan sponsors should do the same thing. Even though the individual mandate is not scheduled to become effective until 2014 (and may not become effective at all), employers and group health plan sponsors should continue to implement applicable PPACA requirements that took effect in 2010 or that will take effect beginning in 2011.
 

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The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (“PPACA”), provides that group health plans existing as of March 23, 2010 (grandfathered plans) are not subject to certain provisions of PPACA, including the preventative care mandate, certain nondiscrimination requirements, mandatory internal and external appeal rules, and restrictions on pre-authorizations for OB/GYN, pediatric and emergency care services. On June 17, 2010, the Departments of Labor, Health and Human Services and Treasury (the “Departments”) issued interim final regulations addressing what constitutes a grandfathered plan and what changes to such a plan might result in the loss of grandfathered plan status. The interim final regulations generally provide that grandfathered plan status could be lost by a group health plan if the plan’s insurer is changed, benefits are eliminated, participant cost-sharing requirements are increased, participant co-payments and contribution requirements are increased by more than a permissible level, or annual limits are imposed on the dollar value of all benefits below specified amounts. Special grandfathering rules apply for collectively bargained plans. In addition to other PPACA mandates, a plan that loses grandfathered status is subject to the preventative care, external appeal and other mandates noted above.

Recently, the Departments amended the interim final regulation to provide that a change in a group health plan’s insurer, in and of itself, will not cause an otherwise grandfathered plan to lose grandfathered status if certain requirements are satisfied. Additionally, the Departments issued answers to frequently asked questions (“FAQs”) that, among other things, clarify the application of the grandfathered plan rules. The amendment to the interim final regulation and the FAQs are described below.
 

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On October 28, 2010, the Internal Revenue Service announced that the dollar limitations for pension plans and other items, beginning January 1, 2011, would remain generally unchanged from the limits in effect in 2010.  Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. These limitations usually are adjusted annually to reflect cost-of-living increases. Many other limitations applicable to retirement plans are adjusted at the same time and in the same manner as the Section 415 limit. Some of the limits to be applied in 2011 are listed below.
 

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The Internal Revenue Service ("IRS") recently issued guidance on the new requirements for over-the-counter medicines and drugs ("OTC Drugs") that will apply generally to employer-provided health plans and certain health accounts on January 1, 2011. Those requirements are summarized below.

• To comply with the new requirements on OTC Drugs, employers should:make sure that any employee who administers the applicable health plan or account is familiar with the new requirements;
• inform participants in the applicable health plans and accounts in 2010 about the new requirements, so they can (1) consider the new requirements for OTC Drugs when making health coverage elections for 2011, and (2) properly administer any tax-favored health accounts they have in 2010 with respect to expenditures for OTC Drugs;
• review whether any amendments are needed to their health plan(s), health accounts, and cafeteria plan(s) to comply with the new requirements; and
• make any necessary changes to applicable summary plan descriptions, web pages, and other materials regarding the new requirements.
   

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Effective for plan years that begin on or after September 23, 2010, annual plan limits are being phased out. The minimum annual limit is $750,000 in the upcoming plan year. The Department of Health and Human Services is taking the position that the restriction on annual limitations applies to Health Reimbursement Arrangements, other than Retiree-only HRAs and HRAs that are integrally tied to another group health plan (e.g., that reimburse only for a deductible, co-payment or other cost sharing in the group health plan, have no carry-over from one year to the next, and do not reimburse for any other, more general, medical expenses).

Because HRAs are not generally designed to reimburse $750,000 in medical expenses per participant, if the HRA is to continue it must apply for a waiver of the annual limit. The waiver application must be filed not less than 30 days before the first day of the year or, for plan years beginning after September 22, 2010 and before November 2, 2010, not less than 10 days before the beginning of the plan year. Therefore, a HRA with an October 1 plan year must file TODAY!

Instructions for the waiver are in the following notice.

http://www.hhs.gov/ociio/regulations/patient/ociio_2010-1_20100903_508.pdf
 

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Pursuant to the Patient Protection and Affordable Care Act ("PPACA"), the Internal Revenue Service, the Department of Labor, and the Department of Health and Human Services (the “agencies") recently issued interim final rules for health plans and insurance issuers relating to: (1) preexisting condition exclusions, lifetime and annual limits, rescissions, and patient protections; and (2) claims, appeals, and review procedures.

Preexisting Condition Exclusions. Under the new rules, no group plan or issuer (except grandfathered plans that are individual insurance coverage) may impose a preexisting condition exclusion (including any exclusionary waiting period) for any enrollee under age 19 in plan years beginning on or after September 23, 2010, and any enrollee (regardless of age) in plan years beginning on or after January 1, 2014. The definition of "preexisting condition" includes any denial of coverage based on a preexisting condition (i.e., not just benefits related to the condition). As of the applicable effective date, plans and issuers must provide coverage on a prospective basis for individuals denied coverage based on a preexisting condition, and for benefits related to preexisting conditions that are currently excluded under a health plan. The rules also prohibit any limitation or exclusion based on information related to an individual's health status (e.g., such as a condition identified as result of a pre-enrollment questionnaire or physical examination).

Lifetime and Annual Limits. Effective for plan years beginning on or after September 23, 2010, all group plans and issuers (with the exception of certain account-based health plans and grandfathered plans that are individual insurance coverage) are prohibited from imposing lifetime or annual limits on the dollar value of "essential health benefits" (including at a minimum those benefits listed in PPACA Section 1302(b)). Until further guidance is issued, the agencies will take into account the consistent application of good faith reasonable interpretations of the term "essential health benefits" as applicable to the lifetime and annual limit prohibitions.

In an effort to provide transitional relief, the rules do permit plans and issuers to impose the following "restricted annual limits" ("RALs") in plan years beginning before January 1, 2014:

For plan years beginning on or after --                                Restricted Annual Limit

September 23, 2010 but before September 23, 2011         $ 750,000
September 23, 2011 but before September 23, 2012         $ 1.25 million
September 23, 2012 but before January 1, 2014                 $ 2 million

The rules clarify that the RALs are minimums for plan years beginning before January 1, 2014, so plans or issuers may impose higher limits or no limits. Generally, grandfathered plans that impose new limits or reduce the amount of an annual limit (in existence as of March 23, 2010) will lose grandfather status. Note, a grandfathered plan with an existing lifetime limit (as of March 23, 2010) and no existing annual limit, may impose a new annual limit (subject to the applicable RAL minimum) and retain grandfather status by eliminating the existing lifetime limit.
 

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Self-insured group health plans are not subject to the New York State Insurance Department's existing external appeals process for claims denied by insurers. However, a new interim enforcement rule issued by the Employee Benefits Security Administration requires that self-insured plans put external review procedures in place by the first day of the first plan year that begins on or after September 23, 2010 -- January 1st, for health plans with a calendar plan year. These rules (EBSA Technical Release 2010-1) require the group health plan to hire at least three independent review organizations (IROs) to make decisions with respect to the claims when an external appeal is requested.

The rules contain important requirements governing the selection of an IRO and the way the IRO functions. For example, an IRO cannot be hired or compensated based on the likelihood it will agree with the plan's prior decision. In addition, claims must be rotated among the IROs to ensure independence. The contracts with the IRO must contain specific terms detailing the IRO's responsibilities, such as timing and response criteria with respect to standard and expedited external appeals. In conducting the review, the IRO may not give any deference to the group health plan’s prior determination. The entire process, from the date or the request for external review to the final determination, must take no longer than 45 days. An expedited process must be available for decisions that: can seriously jeopardize the life or health of the claimant; would jeopardize the claimant's ability to regain maximum function; or relate to admission or emergency services and the claimant has not been discharged.

The group health plan has responsibilities, too. For example, the plan must quickly evaluate whether the claim is eligible for external review, and provide the documents and information that form the basis for the original denial.

Group health plans must quickly adopt procedures that are compliant with the EBSA Technical Release. IROs are already soliciting this business from self-funded group health plans. Remember, ERISA compels plan administrators to prudently select and monitor its service providers, including IROs. A group health plan sponsor should evaluate and document the qualifications of any IRO it considers hiring, and enter into fully compliant contracts, including business associate agreements, with such providers.
 

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One consequence of losing grandfathered plan status in an employment-based group health plan is the requirement that specified preventive services must be covered on a "first dollar" basis. This means that the specified preventive care services may not be subject to a deductible, co-payment, or other cost-sharing requirement. The agencies jointly responsible for enforcing the Patient Protection and Affordable Care Act ("Affordable Care Act") -- the Internal Revenue Service, the U.S. Department of Labor Employee Benefit Security Administration, and the Department of Health and Human Services -- jointly published interim final regulations ("Regulations") relating to the coverage of preventive care services on July 19, 2010. The Regulations apply to new plans and to non-grandfathered group health plans for plan years beginning on or after September 23, 2010 (January 1, 2011, for calendar year plans).  Key aspects of the Regulations are explained below.

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The emergency jobless benefits bill that cleared Congress today does not revive the COBRA subsidy for involuntary terminations. The subsidy expired with respect to terminations after May 31st.
 

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During the debate on health care reform, proponents of the legislation stressed that employees who were happy with the health benefits currently provided by their employers would be able to keep them. To that end, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act ("PPACA"), provides that group health plans existing as of March 23, 2010 (the date that PPACA was enacted) are not subject to certain provisions of PPACA. PPACA referred to such plans as "grandfathered plans," and directed that regulations be issued to define what constitutes a grandfathered plan and what changes to such a plan might result in the loss of grandfathered plan status. On June 14, 2010, the Department of the Treasury, the Department of Labor and the Department of Health and Human Services jointly issued interim final regulations regarding grandfathered plan status.  The regulations further define what a grandfathered plan is and what changes to a plan will result in the loss of grandfathered plan status. The regulations are effective for plan years beginning on or after September 23, 2010.

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Effective for plan years that begin after September 23, 2010, the recently-enacted health reform legislation ("Health Reform") generally requires group health plans and health issuers that provide dependent coverage for children to continue to make such coverage available to an adult child until the child reaches age 26. Health Reform also modifies the Internal Revenue Code ("Code") to extend the income exclusion for medical care reimbursements under an employer-provided accident or health plan to an employee's eligible children who have not attained age 27 as of the end of the taxable year. In Notice 2010-38 ("Notice"), the Internal Revenue Service ("IRS") provides employers with helpful guidance regarding the federal income tax issues associated with extending medical coverage to an employee's eligible adult children.

Background

The extension of health coverage to adult children until age 26 is among the first provisions to take effect under Health Reform. Plans that operate on a calendar year basis (including self-insured plans and so-called "grandfathered" plans) will be required to make such coverage available effective January 1, 2011. The coverage must be made available regardless of the child's marital status, but (until 2014) generally need not be provided to an adult child who is eligible to enroll for coverage under a group health plan of the child's employer.

Prior to Health Reform, health coverage generally could be extended tax-free to a child of an employee only if the child was the employee's "dependent," as defined under Section 152 of the Code. In many cases, adult children cannot qualify as a dependent under Code Section 152 because they cannot satisfy applicable age, support, residency or other requirements of Code Section 152. As a result, an employer that provided coverage to an adult child generally was required to include the fair market value of the health coverage provided to the child in the employee's income.

As further explained below, the changes to the Code made by Health Reform and the guidance provided in the Notice clarify the circumstances under which adult children may now be eligible for tax-free health coverage, regardless of whether they are considered a dependent of the employee under Code Section 152.
 

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There is a second bite at the COBRA apple for employees who initially lost group health plan coverage as a result of a reduction in hours of employment during the period beginning September 1, 2008, which is followed by an involuntary termination of employment on or after March 2, 2010. These individuals (and their affected family members) would normally not be eligible for COBRA continuation of coverage because they were not covered by the health plan on the day before the termination of employment. However, the Temporary Extension Act of 2010 extends the availability of COBRA continuation of coverage, and the 65% COBRA subsidy, where there is a reduction in hours (resulting in a loss of coverage) followed by an involuntary termination of employment.

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This morning, President Obama signed the Temporary Extension Act of 2010 (H.R. 4691) after Senator Jim Bunning of Kentucky agreed to end his filibuster and the Senate voted Tuesday night to pass the measure.

The Act, generally referred to as an extension of unemployment benefits, also extends eligibility for the 65% COBRA subsidy to individuals who have involuntary terminations through March 31, 2010. Eligibility had expired for terminations after February 28, 2010. The law is retroactive, so that persons who were involuntarily terminated on March 1st and 2nd are eligible for the subsidy. No other changes in the terms of the COBRA subsidy were made.

Employers and other health plan sponsors should adjust their COBRA notices to reflect the new March 31, 2010 subsidy eligibility expiration date.
 

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A model notice that informs employees of the availability of premium assistance for employer-provided group health plan coverage was published in the Federal Register on February 4, 2010, one year after President Obama signed the Children’s Health Insurance Program Reauthorization Act of 2009 (CHIPRA). Employers who offer group health plan coverage must provide this notice to employees before the beginning of the next plan year, and annually thereafter. CHIPRA’s impact on employer health plans and the notice requirements are described below.

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While there has been significant press coverage of the health care reform bills being considered by Congress, there has not been as much attention given to the impact that this legislation could have on employers. As widely publicized, both the House and Senate passed their own versions of a health care reform bill. The House passed the Affordable Health Care for America Act (H.R. 3962) on November 7, and the Senate passed the Patient Protection and Affordable Care Act (H.R. 3590) on December 24. Both houses promise to act quickly to reconcile these two bills, with the goal of presenting President Obama with a bill for signing early in the year.

The bills differ in many ways, and it is too early to predict which provisions of the bills will survive the conference process, but at this stage, there are a few core concepts employers should understand:
 

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Starting January 1, 2010, employers and certain other entities that administer group health plans will be required, for the first time, to report on an Internal Revenue Service ("IRS") form certain types of group health plan violations and pay the applicable excise taxes. Violations that must be reported include a failure to satisfy health coverage continuation requirements under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), certain requirements under the Health Insurance Portability and Accountability Act ("HIPAA"), certain mental health benefit parity requirements, childbirth hospital stay requirements, and certain health coverage continuation requirements for seriously ill higher education students. Administrators of group health plans were not required to self-report such violations when they were discovered, and the lack of such self-reporting often resulted in any applicable excise taxes not being paid. The IRS has issued regulations that will require such violations to be self-reported, and will require any applicable excise taxes to be paid in a timely manner.

Steps that should be implemented by employers to comply with these new requirements include:

making sure that employees or other persons who are involved in the administration of each applicable group health plan are informed about these new requirements;

implementing procedures that will help ensure the timely discovery of applicable group health plan violations, the timely submission of the IRS form reporting such violations, and the timely payment of all applicable excise taxes; and

to the extent an employer's group health plan is administered by another entity (e.g., a third party administrator, an insurance company or a health maintenance organization), reviewing any agreement with such entity to see if any changes are needed to help ensure compliance with these new requirements.

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On December 21, 2009, the President signed H.R. 3326, which includes the COBRA subsidy changes discussed in yesterday's blog entry. The enactment of this law means that by February 19, 2009, administrators of group health plans must issue a notice describing the COBRA changes to individuals who were eligible for the subsidy or who experience(d) a COBRA qualifying event at any time on or after October 31, 2009. This notice should describe:

• The extension of the maximum COBRA subsidy period from 9 months to 15 months;
• The extension to February 28, 2010, of the qualifying date for an involuntary termination entitling the COBRA qualified beneficiary to the COBRA subsidy as an "assistance eligible individual";
• The right of qualified beneficiaries whose COBRA terminated after October 31, 2009 (due to failure to pay the higher COBRA premium) to reinstate coverage retroactively by paying the subsidized premium (the 35% amount) by February 19, 2010, or by 30 days after the notice is provided, whichever is later;
• The right of assistance eligible qualified beneficiaries who paid the unsubsidized premium for COBRA for periods after October 31, 2009, to receive a refund or obtain a credit of the overpaid amount. (The administrator can choose the option it prefers: refund or credit).

Watch the U.S. Department of Labor website, www.dol.gov/cobra, for more information and, possibly, a model notice.
 

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On Saturday, the Senate passed the 2010 Defense Appropriations Bill, which contains an extension of the ARRA subsidy for COBRA continuation of health coverage. The Senate Bill is identical to the House Bill, and the President is expected to sign the bill this week. That signature date is important because it is the "enactment date," which drives some of the payment and notice requirements described below.
 

The Appropriations Bill does the following with respect to the 65% COBRA subsidy:

• Individuals who are involuntarily terminated through February 28, 2010, will be eligible for the subsidy (the previous date was December 31, 2009);
• The maximum subsidy period is extended to 15 months from the original 9 months; 
• Individuals whose subsidized COBRA coverage has already ended (some may have ended during November, 2009) have 60 days from the date of enactment (or 30 days after the notice discussed in the next bullet point, if later) to pay the 35% subsidized premium amount and obtain retroactive coverage by the subsidized COBRA. If the full premium was already paid, the "overpayment" amount can be refunded or credited towards future coverage;
• Within 60 days of the enactment of the law, Administrators of group health plans must provide a notice describing the foregoing to individuals who were eligible for the subsidy or who experienced a COBRA qualifying event at any time on or after October 31, 2009;
• The bill also "fixes" a problem recently identified in Department of Labor Q&As: The subsidy will be available to individuals who have a COBRA qualifying event (involuntary termination) through February 28, 2010. The previous law said that a terminated employee had to be eligible for COBRA by the expiration date. This is a subtle difference, but it caused an earlier termination of the subsidy than had been contemplated by Congress.
   

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Among other things, the Health Insurance Portability and Accountability Act (“HIPAA”) requires heath care plans, third party health plan administrators, pharmacy benefit managers, health care providers, and other so-called “covered entities” and “business associates” to maintain the confidentiality and security of an individual’s “protected health information” or “PHI.” The Health Information Technology for Economic and Clinical Health Act (the “Act”), passed earlier this year as part of the economic stimulus package, introduced substantial changes to the HIPAA privacy and security rules, including the addition of new notification requirements that may apply in the event that the privacy or security of PHI is compromised.

Under the Act, if the confidentiality or security of PHI is compromised by a “covered entity,” notification of the “breach” may have to be provided to (i) affected individuals, (ii) the United States Department of Health and Human Services (“HHS”), and (iii) in certain cases, the media. If a “business associate” compromises the confidentiality or security of PHI, the business associate may be required to notify the covered entity of the breach.

On August 24, 2009, HHS issued interim final rules (“Final Rules”) that clarify the breach notification requirements. Although the Final Rules are effective September 23, 2009, and although HHS expects covered entities to comply as of that date, sanctions will not be imposed for noncompliance that occurs prior to February 23, 2010. Until then, HHS has indicated that it will take appropriate corrective action to help covered entities achieve compliance. Covered entities and business associates should not delay implementing appropriate measures to comply with the requirements of the Final Rules, despite the delayed enforcement date. The most significant aspects of the Final Rules are discussed below.

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Governor Paterson recently signed legislation that will affect the administration of insured medical plans in New York State. The legislation generally extends the period that terminated employees may elect continuation coverage under an insured plan from 18 months to 36 months and requires medical insurers to offer continued coverage to employees’ unmarried children through age 29, regardless of financial dependence. Each aspect of the new legislation is explained below.

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