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February 22, 2007

MASSACHUSETTS MOVES FORWARD IN IMPLEMENTING LANDMARK HEALTH CARE REFORM ACT

There has been much activity in recent months concerning the landmark health care reform law that Massachusetts enacted in April 2006, which requires nearly all state residents to have health insurance effective July 1, 2007 and places significant new obligations on employers:¹

• The Massachusetts Division of Health Care Finance and Policy (DHCFP) issued final regulations implementing the Employer Fair Share Contribution.²
• A new requirement for health insurers to extend coverage for certain dependents went into effect on January 1, 2007.
• The State legislature passed a technical corrections bill that made important changes to the law.³
• Another technical corrections bill changed the effective dates of certain provisions of the law.⁴
• Final regulations were issued (and subsequently withdrawn) regarding the Employer Free Rider Surcharge for State Funded Health Costs and the Health Insurance Responsibility Disclosure (HIRD) form.

Plan sponsors have many questions concerning how various aspects of the Massachusetts Health Care Reform Act will be implemented. Insurers will need guidance in many areas, including how the law’s nondiscrimination rules should work. State agencies are in the process of issuing guidance on several issues. There is much work to be done in a short time frame. The Segal Company expects that over the course of this year, there will be new developments to report on a consistent basis.

This Capital Checkup discusses the most recent developments to date:

• The Individual Mandate: Effect on Plan Sponsors?
• Fair Share Contribution Requirement
• Free Rider Surcharge
• Cafeteria Plan Requirement
• Dependent Coverage Extension
• Health Insurance Responsibility Disclosure (HIRD) Form
• Insured Plan Non-Discrimination Requirement
• MA Health Care Reform Act Compliance Chart

The Capital Checkup also raises several pertinent, but as yet unanswered questions regarding how the law’s myriad provisions may affect multiemployer health plans.

The Individual Mandate: Effect on Plan Sponsors?

Beginning on July 1, 2007, all adult residents of Massachusetts age 18 or older are required to have health coverage that qualifies as “creditable coverage,” as long as it is deemed affordable by the Health Insurance Connector Board (a public/private entity that runs the new “Health Insurance Connector” that will provide access to private insurance for individuals and small businesses). “Creditable coverage” is defined to include individual and group health plan coverage that meets the definition of “minimum creditable coverage” as established by the Connector Board. The Board has been discussing, but has not finalized, criteria for minimum creditable coverage. Plan sponsors are not required to provide minimum creditable coverage, but it appears that individuals covered by employer-sponsored plans would need to have minimum creditable coverage in order to meet the individual mandate. Once final criteria is set for what is minimum creditable coverage, plan sponsors may be asked by participants whether the coverage they provide meets the minimum standard. The minimum creditable coverage criteria, and possibly further clarification on how the individual mandate is applied to individuals with existing employer-sponsored coverage, is expected in the next few months. (To return to the list of developments at the top of this Capital Checkup, click here.)

Fair Share Contribution Requirement

Towards a goal of near universal coverage, Massachusetts requires employers with 11 or more full-time employees to pay an annual fee of up to $295.00 (the “fair share contribution”) per employee to the state if they offer no health plan at all, or fail to make a “fair and reasonable premium contribution” to their plan. Full-time employees are employees who work 35 or more hours per week and include all workers employed at Massachusetts locations, regardless of where they may live. The final regulation sets forth two tests (neither of which requires that an employer provide a certain level of coverage). Under the primary test, an employer makes a fair and reasonable contribution if at least 25 percent of its full-time employees are enrolled in the employer’s group health plan. This percentage is determined annually based on the ratio of total payroll hours of enrolled employees over the total payroll hours of all full-time employees (except seasonal and temporary workers). If an employer fails this test, it will still be deemed to have made a fair and reasonable contribution if it offers to pay 33 percent of the cost of any health plan it offers to full time employees employed at least 90 days between October 1, 2006 and September 30, 2007 (the “secondary” test). If both these tests are failed, the employer will be a “non-providing employer” and must pay the fair share contribution.

The DHCFP is expected to issue further information shortly concerning the implementation of this requirement, including reporting forms and payment requirements. According to final regulations, this law became effective October 1, 2006. Compliance for the first year will be measured based on the status of the plan starting on the effective date, through the end of September 2007. (To return to the list of developments at the top of this Capital Checkup, click here.)

Free Rider Surcharge

Employers of more than 10 employees are subject to a “free rider surcharge” of between 10 percent and 55 percent of claim costs if more than five uninsured employees (or dependents) use free public health care or if one uninsured employee (or dependent) uses free state-provided care more than three times a year. The first $50,000 of care is not considered. However, employers that adopt an IRC §125 cafeteria plan (another requirement of this legislation) or are subject to a collective bargaining agreement are exempt from the surcharge. Although a recent final regulation on the surcharge was withdrawn, the DHCFP said that it would hold hearings and reissue the regulations before its July 1, 2007 effective date. (To return to the list of developments at the top of this Capital Checkup, click here.)

Cafeteria Plan Requirement

As noted above, the Massachusetts Health Care Reform Act requires that all employers with more than 10 employees in the state adopt and maintain a cafeteria plan that satisfies the requirements of Section 125 of the Internal Revenue Code (IRC). A technical corrections bill made July 1, 2007 the effective date for this requirement. The bill also clarified that the cafeteria plan requirement is limited to premium-only arrangements, specifically, a payroll deduction program to facilitate the pre-tax payment of health benefit plan premiums by employees. This will enable employees to save money by paying for their health coverage with pre-tax dollars. The Health Insurance Connector Board is expected to issue regulations on this requirement in the next couple of months. It is unclear at this point how employers are expected to specifically structure the cafeteria plan, and whether all employees (including part-time employees) must be allowed to participate. (To return to the list of developments at the top of this Capital Checkup, click here.)

Dependent Coverage Extension

Under Massachusetts health care reform, the age at which dependents must be covered under their parents’ insured group health plans is extended. The (initial) technical corrections bill clarified that dependent coverage must be extended to the earlier of two years following a child’s loss of dependent status under the IRC or through age 25. This extension does not apply to stand-alone dental plans. According to recent guidance from the Massachusetts Division of Insurance (DOI), to determine the date a person experiences a “loss of dependent status” under the IRC, the DOI will follow the Code’s calendar year designation (i.e., January 1 through December 31). Under the DOI’s interpretation, the date on which a person loses dependent status is December 31 of the last federal tax year for which the person was claimed as a dependent on the insured employee’s federal income tax return (or the tax return of the employee’s spouse or former spouse). Thus, the DOI will require insured plans to continue dependent coverage until the December 31 two years after the date of the “loss of dependent status” for those persons under 26 years of age. If the person reaches age 26 during this two-year period of extended coverage, the coverage would end when he or she turns 26. This also means that employees (and their employers) will owe payroll taxes on the value of health coverage provided to individuals who qualify for the Massachusetts dependent coverage extension, but who no longer qualify as the employees’ IRS tax dependents. (To return to the list of developments at the top of this Capital Checkup, click here.)

Health Insurance Responsibility Disclosure (HIRD) Form

As part of health care reform, Massachusetts employers of more than 10 employees must file information with the state about the health insurance they offer to their employees. A technical corrections bill changed the effective date of this requirement from January 1, 2007 to July 1, 2007. The DHCFP final regulation on this topic was recently issued and withdrawn. When finally issued, the regulation is expected to reduce the amount of required information (e.g., whether the employer offers subsidized health insurance; offers a §125 cafeteria plan, etc.) that employers must report on their Employer HIRD forms. Under the withdrawn final rule, employers were to submit an HIRD form every November 15 (delayed from May 15 under an earlier proposed rule) based on information as of the preceding September 30. The DHCFP is expected to issue a new proposed regulation and schedule public hearings so that a final rule can be issued before the July 1, 2007 effective date.

Massachusetts also requires certain employees to disclose information about their health coverage to the state (using an Employee HIRD form). Under the withdrawn final rule, only those workers who reject an employer’s offer of health insurance or offer to arrange for the purchase of health insurance would be required to submit the form. (An earlier proposed rule had extended this requirement to employees who were not offered coverage.) A model Employee HIRD form was included in the withdrawn final regulations. Under that rule, employers covered by the law would have been required to provide employees with the form, collect the form from employees within a specific time period based on the close of open enrollment, and retain the forms for a certain time. It is not clear whether these standards will be retained when this rule is issued again later this year.

Plan sponsors should note that a technical corrections bill recently established a penalty for employers that falsify or fail to file any required information of “no less than $1,000 or more than $5,000.”

Plan sponsors should also note that technical corrections legislation also added an additional disclosure requirement for employers and sponsors of employment-sponsored health coverage. These entities must provide an annual written statement to covered individuals by January 31 of each year concerning their health coverage. In addition, a separate report must be provided to the Commissioner of Revenue that verifies that written statements were provided to covered individuals. The specific content of the written statement and the report will be developed by the Commissioner of Revenue. Failure to provide these Commissioner of Revenue disclosures could result in a penalty of $50 per individual for which the disclosure relates, not to exceed $50,000 per year per violation. (To return to the list of developments at the top of this Capital Checkup, click here.)

Insured Plan Non-Discrimination Requirement

The Massachusetts Health Care Reform Act also sets forth new non-discrimination requirements for health insurance carriers and managed care organizations. As a result, employers with fully-insured plans will be impacted by these requirements.

Specifically, the Act prohibits insurers from contracting with an employer that does not offer their insured health plans to all full-time employees who are Massachusetts residents. Also, an insurer cannot contract with an employer that contributes a smaller health insurance premium percentage amount to any employee than they contribute to other employees at an equal or greater total hourly or annual salary level. In other words, employers will not be able to offer insured health coverage to some full-time employees who are state residents but not to others. In addition, they will not be able to contribute more towards the cost of insured coverage based on an employee’s higher income. A technical corrections bill postponed implementation of the non-discrimination requirement until July 1, 2007. Further guidance from the DOI is expected in the interim. (To return to the list of developments at the top of this Capital Checkup, click here.)

MA Health Care Reform Compliance Chart

The table below depicts the various requirements mandated by the Massachusetts Health Care Reform Act, as amended, including the responsible parties, effective dates and the status of any guidance issued to date:

To return to the list of developments at the top of this Capital Checkup, click here.

Multiemployer Plans: More Unanswered Questions

Conspicuously absent from the original legislation, the technical corrections bills, and DHCFP’s regulations is any mention of how multiemployer group health plans should address the requirements of Massachusetts health care reform. Important questions raised in Segal’s August 2006 Bulletin are still outstanding, such as whether the fair share contribution and HIRD requirements could apply to a multiemployer plan rather than to each contributing employer, as well as how the fair share contribution and the individual mandate should apply to plans in which employees are not yet eligible for coverage because they have not accumulated enough contribution hours to receive benefits.

In addition, the following issues of concern to multiemployer plans need to be addressed:

• Must each employer contributing to a multiemployer fund establish its own cafeteria plan?
• Which employees must be eligible to participate in the new state-mandated employer cafeteria plan (e.g., part-time, seasonal or temporary)?
• How are employees who are not subject to collective bargaining agreements, but who participate in multiemployer plans (e.g., fund administrative employees) to be treated?
• Will employees who are not yet eligible for coverage under their employer’s multiemployer group health plan, but on whose behalf employers are already making contributions to the plan, or employees who lose eligibility for coverage during the year have the right to purchase insurance through the Health Insurance Connector?
• Will employees who are not yet eligible for coverage under their employer’s multiemployer plan due to the fund’s eligibility rules be counted when determining whether the employer complies with the law’s fair share contribution requirement?

        

As with all matters involving the interpretation or application of laws and regulations, clients should rely on their attorneys for authoritative advice regarding Massachusetts Health Care Reform. Segal can be retained to work with plan sponsors and their attorneys on reviewing and editing plan designs, including Summary Plan Descriptions and plan coverage and eligibility rules, to ensure compliance with this comprehensive and dynamic state health care initiative.

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1	For more information about this law, H.B. 4850; Chapter 58 of the Acts of 2006), see The Segal Company’s August 2006 Bulletin, “Massachusetts Health Care Reform Affects Employers” and Segal’s August 2006 Bulletin, “Massachusetts Health Care Reform May Affect Multiemployer Health Plans.” (To return to the Capital Checkup text, click here.)
2	To see these regulations, which replace the proposed regulations that were issued in June 2006, click here. (To return to the Capital Checkup text, click here.)
3	To see the initial technical corrections bill, (Chapter 324 of the Acts of 2006, An Act Relative to Health Care Access), click here. (To return to the Capital Checkup text, click here.)
4	To see the subsequent technical corrections bill, (Chapter 450 of the Acts of 2006, An Act Further Regulating Health Care Access), click here. (To return to the Capital Checkup text, click here.)

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