February 2008

The Consolidated Omnibus Budget Reconciliation Act (COBRA) was passed in 1986 to provide opportunity for continuation of group health coverage that would otherwise be terminated when a worker loses their job. The law covers group health plans maintained by employers with 20 or more employees. It applies to private sector plans as well as those sponsored by state and local governments. The only organizations with 20 or more employees whose plans aren’t covered by this law are those sponsored by the Federal government and certain church-related organizations.

The law provides for six types of continuation coverage notices that employers must comply with:

1. General COBRA Notice — A general written notice of COBRA rights and responsibilities must be given to each covered employee and spouse, if applicable, within 90 days of the date the individual first becomes eligible for coverage. It must contain the name of the plan and the name, address, and telephone number of the person who can provide more information about the plan. It must explain the plan’s requirements regarding the responsibility to notify the plan administrator of certain qualifying events and the necessity for keeping the administrator informed of address changes for participants and beneficiaries. It should also contain a statement that the general notice does not provide a full coverage description and that more information is available from the plan administrator and in the Summary Plan Description.
2. Employer’s Notice of Qualifying Event to Plan Administrator — The employer must notify the plan administrator in the event of qualifying events such as a covered employee’s death, termination of employment for any reason other than gross misconduct, reduction in hours, Medicare entitlement, or Chapter 11 bankruptcy proceeding. If loss of coverage occurs on the date the qualifying event occurs, the notice must be given within 30 days of the qualifying event. If loss of coverage occurs after the qualifying event, the notice must be given within 30 days after the loss of coverage.
3. Qualified Beneficiaries Notice of Qualifying Event — A covered employee/qualified beneficiary may be required to notify the plan administrator about certain qualifying events such as a divorce or legal separation that results in a loss of coverage, a child’s loss of dependent status, a second qualifying event, or Social Security Administration determination of disability. In general, such notice should be provided within 60 days of the later of the qualifying event date or the loss of coverage due to the qualifying event. Plans must establish reasonable procedures for the furnishing of the listed notices to the plan administrator.
4. Election Notice — The plan administrator must provide a written election notice to each qualified beneficiary within 14 days of receipt of a qualifying event notice or 44 days of the qualifying event if the employer is also the plan administrator. This notice must outline specific information as demonstrated by the Department of Labor’s model election notice.
5. Unavailability Notice — If the plan administrator receives a notice of a qualifying event, second qualifying event or Social Security disability determination, and determines that the individual is not entitled to continuation coverage, the administrator must give the individual written notice that continuation coverage is unavailable. This notice must explain why the individual is not entitled to continuation coverage. The deadline for this notice is the same as the deadline for sending an election notice.
6. Early Termination Notice — A written notice to the individual that continuation coverage will end earlier than the end of the applicable maximum period of continuation coverage. It must explain why coverage is being terminated early, the date of termination, and any rights the individual may have to elect alternative group or individual coverage.

Employers increasingly are looking to promote lifestyles that can help employees avoid higher health care costs, reduce absenteeism, and raise productivity in the workplace. Wellness programs can be part of this strategy. To encourage participation in wellness initiatives, an employer might consider offering an incentive, such as a premium reduction. In offering incentives, however, an employer must remain cognizant of the nondiscrimination rules under the Health Insurance Portability and Accountability Act (HIPAA), which prohibit health plans from charging similarly situated individuals different premiums or contributions or imposing different deductibles, copayments, or other cost-sharing requirements based on a health factor.

HIPAA carves out an exception that allows plans to offer wellness programs. Previously, the exception was for “bona fide” wellness programs. Recent final regulations issued by the federal agencies responsible for HIPAA oversight abandon this term, and instead spell out five requirements that wellness programs must follow. These requirements are:

The total reward for all of the plan’s wellness programs that require satisfaction of a standard related to health must be limited to no more than 20% of the cost of employee-only coverage under the plan (cost encompasses both employer and employee contributions). If dependents may participate in the program, the reward cannot exceed 20% of the cost of the coverage in which the employee and dependents are enrolled. The reward can be in the form of a discount or rebate of a premium or contribution, a waiver of all or part of a copayment, deductible or coinsurance, the absence of a surcharge, or the value of a benefit that would otherwise not be provided under the plan.

The program must be reasonably designed to promote health and prevent disease. The agencies state that they intend for this requirement to be an easy standard to satisfy, but do clarify that the program cannot be overly burdensome or a subterfuge for health-based discrimination.

The program must give individuals eligible to participate the opportunity to qualify for the reward at least once per year.

The program must include a reasonable alternative standard for obtaining the reward for individuals for whom it is medically unadvisable or unreasonably difficult to meet the regular requirement of the program. The plan may seek verification (for example, from the employee’s physician) that is it unreasonably difficult or medically unadvisable for the employee to satisfy the plan’s regular requirement.

The plan must disclose, in all materials that describe the program, that there are alternative ways to obtain the program reward. The agency guidance suggests standard language that can be used to meet this requirement.

It is important to note that these requirements are for wellness programs that base a reward on the employee satisfying a standard related to a health factor. If satisfaction of a standard related to a health factor is not required — for example, if employees earn the reward simply by participating in the wellness program — the program is not subject to these five requirements. The guidance gives these examples of specific programs not subject to the five requirements:

1. Reimbursing employees for all or part of the cost of membership in a fitness center.
2. Providing a reward for participation rather than for outcomes.
3. Encouraging preventive care by waiving the copayment or deductible for the cost of services, such as prenatal care or well-baby visits.
4. Reimbursing employees for the cost of a smoking cessation program without regard to whether the employee actually quits smoking.
5. Providing a reward to employees for attending a monthly health education seminar.

These new rules apply to plan years beginning on or after July 1, 2007. In the preamble to the final rules, the agencies note that in the past (before this final guidance was issued) they had not taken enforcement action against plans that simply were acting in good faith in designing their wellness initiatives. Now, with the publication of final guidance, “the nonenforcement policy ends” with the effective date of the final rules. Thus, this is a good time to review any wellness programs for compliance.

While Health Care Flexible Spending Accounts (FSAs) offer tax-saving benefits to employees, they also can provide tremendous advantages to employers that sponsor them. Salary-reduction contributions that employees make to an FSA are not subject to Social Security and Medicare (FICA) taxes. Thus, employers save their 7.65% FICA contribution on the dollars that employees contribute to an FSA. If FSA participation is high, FICA savings can be substantial. Even small amounts of savings are “true” savings, since a health care FSA can be a no-cost benefit for the employer to offer: Typically, an employer makes no contribution to the plan and can pass on any associated administrative costs to employees.

Health care FSAs offer employers strategic advantages, too. With seemingly ever-rising health care costs, implementation of a new health care FSA — or enhanced communication of an existing plan — can be used in tandem with health plan changes that require increased employee cost-sharing. Such communications can help employees see how FSAs can lessen the financial burden of higher premiums, co-payments, or deductibles. Offering a health care FSA also gives an employer a hiring advantage over competitors without one, a fact that will become more important as the economy improves and unemployment rates decrease.

So, from an employer’s perspective, is there any downside in offering a health care FSA? The one financial risk employers face from FSAs is the impact of an IRS regulation known as the “uniform coverage” or “insurance risk” rule. The rule requires that the entire annual election amount (reduced by any reimbursements already made) be available to a health care FSA participant at all times during the plan year. For example, if an FSA participant elects to contribute $600 to the plan, and contributions are made through monthly payroll deduction, in February the participant would have contributed $100. The participant submits a substantiated claim for $500. The claim is paid, and the participant quits. The plan is out $400.

IRS regulations do not permit plans to operate in a way that eliminates or substantially reduces this risk, but there are ways to moderate it, making the plan more effective for employers. First, however, consider how real the risk is for your workplace. Because employees make FSA contributions through payroll deduction, only terminating employees potentially present this type of risk to a plan. How high is your employee turnover? Unless turnover is an issue for an employer, the insurance risk rule is unlikely to present a significant problem.

Also remember that employees face their own risk as FSA participants, that of forfeitures. Amounts employees have elected to contribute to the plan cannot carry over to a subsequent plan year. Even small amounts unclaimed by participants can add up to offset any losses the plan suffers from terminating participants who have been “over-reimbursed.” This (in addition to the FICA savings discussed above) is another reason why it is in the employer’s interest to keep plan participation as high as possible. Briefly, techniques that can enhance participation include maintaining frequent and effective communications that show employees the value of participation; offering easy tools for employees to enroll or obtain information about the plan; and facilitating employees’ claim filing (this could include use of stored-value debit-type cards for employees to use in making their FSA-related purchases or payments).

Beyond these, simple ways to lessen the chances that a plan will suffer a large hit from a terminating employee include setting a maximum amount that an employee can contribute to the health care FSA; limiting reimbursable expenses to exclude some types of big-dollar, elective expenses over which an employee can readily control the timing (such as multiple pairs of prescription eyewear); and requiring a longer period of service for eligibility, since the highest turnover typically occurs among newest employees (note that while the law sets a maximum three-year period of service for eligibility, most plans require far less).

More extreme techniques to control the risk of loss include accelerating the frequency of contributions or requiring full-year participation (and withholding the balance of contributions due for the remainder of the plan year from all terminating participants). Such techniques should be considered more aggressive and fully explored before implementing; they are not necessary for most employers and are considered by some to stretch the legal limits of FSA operation.

Remember that design constraints on the plan might run counter to encouraging employee participation and, for the vast majority of employers, a plan with healthy participation will work effectively, both for the plan sponsor and participants.