Key Provisions Already in Effect

The following are provisions that have a more immediate impact on group health plans and may require the city's attention and/or action:

Early Retiree Reinsurance Program
This program provides temporary reimbursements for employers providing health insurance coverage to early retirees age 55 and older who are not eligible for Medicare to help offset the cost of providing this coverage. This program began on June 1, 2010, and ends on Jan. 1, 2014. The deadline for submitting applications was May 5, 2011.

Minnesota Statutes, section 471.61, subdivision 2b requires that early retirees be pooled with active employees for purposes of establishing premium rates. There is an impact on costs for employers and employees due to active employees subsidizing retiree coverage. This temporary program is designed to help offset some of those costs.

The amount available is 80 percent of claim costs for health benefits (e.g., medical, surgical, hospital, prescription drugs, mental health, etc.) between a threshold of $15,000 and $90,000. These limits apply and claims are filed for individual’s costs. Employers cannot add two or more individuals together to attain the threshold. The health reform legislation allocated $5 billion dollars for this program on a first come, first serve basis.

Local government employers are eligible for participation in this program, and it does not appear to be tied to whether an employer actually contributes toward the cost of coverage. Employers can use the savings to either reduce their own health care costs, provide premium relief to employees and families, or a combination of both.

To be eligible for the program, employer plans must have their applications approved, document claims, and implement programs and procedures that have the potential to generate cost savings.

Learn more about the Early Retiree Reinsurance Program

Employers will need to provide the following information as part of the application process:

  • Estimate of how much the employer expects to receive in reimbursement during a two years period.
  • Programs that the employer has in place to reduce the cost of chronic and high-cost conditions.
  • Information on how they plan to use the reimbursement.

Actions to be taken:

  • Check to verify whether you have early retirees (between 55 and 65 who are not Medicare eligible) on your plan.
  • Check with your insurance company to see if you can get individual retiree claims data. This may be difficult for fully insured plans—small cities especially—due to HIPAA privacy concerns. The health insurance company may require the city to sign a confidentiality agreement for this purpose.
  • Check with your insurance company about programs available to help reduce the cost of chronic and high-cost conditions. Cities with wellness programs should also check to see what programming they may offer to address high-cost conditions.
  • Establish a process or program for how reimbursements will be handled—plans may be audited for fiscal integrity.
  • Sign up for updates on the HealthCare.gov website.

Dependent coverage expanded to age 26
The health reform legislation deals with two aspects of covering “adult children”—expanded coverage and federal tax consequences.

Expanded coverage: Effective for plan years beginning after Sept. 23, 2010, dependent coverage is expanded to age 26 for those adult children regardless of financial dependency, full-time student status, or marital status. This applies to all group health plans, including medical, dental, health flexible spending accounts (health FSAs), health reimbursement arrangements (HRAs and VEBAs), etc. However, this expanded definition of dependent coverage does not include health savings accounts (HSAs). Minnesota law currently expands dependent coverage to age 25.

Many of the health plans are offering their groups the option to implement the change early. However, until the federal law goes into effect (after Sept. 23, 2010), cities may not technically be able to offer the expanded coverage early due to the definition of dependent under Minnesota Statutes, section 471.61, which is generally the authority for cities to cover dependents. As a practical matter, there may be reasons why cities want to consider early implementation. If your city is considering early implementation, the following are some issues to think about:

  • Fairness of the availability of coverage among employees for the calendar/plan year.
  • Size of the employee group (how many potential employees affected).
  • Administration of this benefit (e.g., terminating coverage and re-enrolling them at a later date).
  • Budget concerns.

Union contracts currently in place may also impact when cities can make this change. If you implement before the federal law goes into effect and prior to the end of the contract, then you may need to negotiate this change and get a Memorandum of Understanding (MOU) with the union before implementing for union employees.

Cities considering early implementation should consult with their city attorney to go over the legal implications of such a decision.

Tax consequences: Effective March 31, 2010, group health plan coverage (including health flexible spending accounts and health reimbursement arrangements) provided to the employee’s “adult child” is now excluded from the employee’s income for federal income tax purposes. The tax benefit is available until the end of the calendar year in which the adult child turns age 26.

Note: On March 21, 2011, Governor Dayton signed into law Chapter 8 which excludes from state income tax the value of health insurance for adult children to age 26 for the 2010 tax year. Employers were not required to issue new W-2 forms if they had already issued W-2s showing the value of health insurance coverage provided to these adult children. Tax Committees are working on a conformity bill that would fix this issue for tax years after 2010.

Learn more about this issue from the DOR website

Actions to be taken:

  • Consider whether the city will impute income and withhold state income tax on behalf of the employee for the 2011 tax year and communicate the decision to employees. If not withholding, then the city may need to:
    • Include the imputed income on W-2s at the end of the year.
    • Be prepared to make adjustments to the employees’ state income tax withholding if requested by the employee.
  • Check your plan documents (cafeteria plan, FSA, HRA/VEBA, etc.) to see if any changes need to be made in the definition of dependent to allow for reimbursements for “adult children.”
  • If reimbursement will be made for adult children to age 26 under the city’s HRA/VEBA or FSA, you will also need to impute income for Minnesota state income tax purposes.

Reimbursement for over-the-counter medication
Health reform imposes new restrictions on reimbursements for over-the-counter medications from a health flexible spending account (health FSA), health reimbursement arrangement (HRA/VEBA), or a health savings account (HSA). Contributions and expenses reimbursed to participants under these plans are generally non-taxable if used for eligible medical expenses.

Effective Jan. 1, 2011, these plans can only reimburse for prescribed medications. Over-the-counter medications will no longer be eligible for reimbursement on a tax-favored basis unless an actual prescription is issued for the medication.

Learn more about this topic from the IRS website

Actions to be taken:

  • Amend plan document to reflect that over-the-counter prescriptions are no longer eligible for reimbursement unless there is an actual prescription for the drug.
  • Speak to your third party administrator, if applicable, to see what actions they are taking to address this change.
  • Communicate change to employees prior to the beginning of the plan year, as this may impact how much they set aside in their health FSA.

Grandfathered plans
Most employers will be impacted in some form by health care reform. The legislation exempts “grandfathered plans” from some of the reform provisions, but not all of them—grandfathered plans will have to comply with some of the requirements such as expanded dependent coverage to age 26, no lifetime limits, and no exclusions for pre-existing conditions, etc.

What constitutes a grandfathered plan? The law defines a grandfathered plan as a group health plan in existence on March 23, 2010. Federal agencies recently released Interim Final Rules on Grandfathered Plans under Health Care Reform.
Learn about the interim rules on the HHS website—see “Grandfathered” Health Plans

Grandfathered health plans will be able to make routine changes to their policies, such as cost adjustments to keep pace with medical inflation, adding new benefits, making modest adjustments to existing benefits, etc., in order to keep their grandfathered status. It also appears grandfathered group plans can add new employees, spouses, and dependents and still be considered grandfathered. Grandfathered plans will lose their status if they:

  • Significantly reduce or eliminate benefits.
  • Increase co-insurance amounts (i.e., the percentage amount that individuals pay for certain benefits).
  • Increase co-pays, deductibles, or out-of-pocket maximums by more than 15 percent plus medical inflation.
  • Reduce the employer contribution by more than 5 percent.
  • Change insurance companies (for fully insured groups).

If a plan loses its grandfathered status, covered employees gain additional benefits, such as 100 percent coverage for preventive services and guaranteed access to OB-GYNs and pediatricians. However, most group health plans in Minnesota already offer these benefits, so losing grandfathered status likely will not result in significant changes in benefits or costs to the plan. As a practical matter, maintaining grandfathered status simply may not be feasible as cities look to making benefit changes to their group health plan to help control premium costs.

Potentially the biggest impact of a plan losing its grandfathered status is the application of the non-discrimination testing requirements for fully insured group health plans, which prevent plans from discriminating in favor of highly compensated individuals. These requirements already apply to self-insured plans. For the city’s non-bargained employee population, the plan (medical, dental, vision, etc.) will need to satisfy both eligibility and benefits testing requirements. In general, cities will meet the non-discrimination requirements if they offer the exact same package of benefits and contributions to all employees—including department heads and city managers/administrators.

Actions to be taken:

  • Evaluate the impact of grandfathered status on the city’s health plan. What value does grandfathered status provide? For how long? What is the cost to maintain grandfathered status?
  • To maintain grandfathered status:
    • Identify and document the coverage in place on March 23, 2010, including contribution amounts and benefits.
    • Provide notice in benefit materials of grandfathered status.
    • Notify insurance company of intent to retain grandfathered status.
    • Small employer groups (2-50 employees) should contact their insurance company to see if they will be retaining grandfathered status for their small group health plans.

    Restrictions on lifetime limits and out-of-pocket maximums
    Insurance companies and employers are prohibited from placing limits on lifetime maximums and “unreasonable” limits on annual out-of-pocket maximums. Employer sponsored health plans—whether fully insured or self-insured—which limit lifetime maximums will need to remove those limits for plan years beginning on or after Sept. 23, 2010.

Actions to be taken:

  • Check with your insurance company to see what changes, if any, need to be made to your plan.
  • If changes are needed, what will the cost implication be on your next renewal?

Pre-existing conditions for children
Pre-existing condition exclusions cannot be imposed for children under age 19. Health insurance companies are awaiting clarification from the federal government, but expect that coverage for children under 19 will be guaranteed issue (i.e., they will not be able to deny coverage for these individuals due to pre-existing conditions). Note: This protection extends to adults in 2014.

This provision is effective for plan years that begin on or after Sept. 23, 2010. Under HIPAA, most group health plans already limit pre-existing condition exclusions and waive the waiting period based on prior coverage.

Actions to be taken:

  • Check with your insurance company to see what changes, if any, need to be made to your plan.
  • If changes are needed, what will the cost implication be on your next renewal?

Tax credit for small employers
Small employers—those with fewer than 25 employees and with average wages of $50,000 or less—that provide health coverage for employees may be eligible for a tax credit beginning in 2010. The employer must contribute at least 50 percent of the total premium cost to be eligible for the credit.

Based on IRS guidance, this tax credit is also available to tax-exempt organizations that are a 501 ( c ) organization. Cities and other government employers generally will not qualify for this tax credit. Special rules apply for calculating the tax credit for tax-exempt employers.

Actions to be taken:

  • None at this time.

Other near-term provisions:

  • Coverage can only be rescinded due to fraud or intentional misrepresentation by an individual. Generally, coverage can only be rescinded prospectively rather than retroactively upon providing the individual with at least 30 days advance notice that coverage will be terminated. Plan sponsors will need to be careful when terminating an employee’s or dependent’s coverage–especially when conducting dependent audits.
    Learn more about rescinding coverage on the HHS web site—see Patient’s Bill of Rights
  • Creation of a federal high-risk pool for individuals.
  • Rebate of $250 for Medicare Part D beneficiaries who hit the coverage gap for prescription drugs in 2010.
  • Grants for businesses with 100 or fewer employees to implement new wellness programs. The grants should be available in 2011, but we are awaiting additional guidance.

—Read about provisions beginning in 2013 and beyond

—Return to main Health Reform page

Read the current issue of the Cities Bulletin