Life Insurance – Portability & Conversion

life insurance

When an employee goes out on a leave of absence or terminates employment, it is important for employers to have a dedicated process for notifying employees of critical changes to their benefits and what is required of an employee to continue their benefits.

Often employers remember to advise about COBRA eligible benefits but forget they are also responsible for providing information about life insurance, including portability or conversion information to employees who are losing benefit eligibility.

Background: Both the portability and conversion provisions allow the employee to continue life coverage that is lost due to an employment status change.  Policies may vary, so one needs to refer to their specific policy for clarification.

  • Portability –  When an employee ports coverage, they keep the group term life coverage offered by their employer along with some, but not all of the optional benefits that were included.
  • Conversion – When an employee converts coverage, they are converting to an individual whole life (or permanent life) insurance policy. The converted policy only provides life insurance and does not include the optional benefits such as Waiver of Premium, Accidental Death and Dismemberment.

In the case of, Erwood v. Life Insurance Company of North America and WellStar Health System, Inc., a federal district court awarded $750,000 in damages to Patricia Erwood, the wife of a deceased former employee of WellStar Health System whose life insurance lapsed while he was out on disability, and the employer failed to notify him of his conversion rights.

Even though the employer had sent the employee an FMLA leave packet that included information about it being possible to continue his life insurance benefits, the court noted that the FMLA packet did not include the materials necessary to convert, where to find the materials nor when the materials would be due if he was interested in continuing his coverage. 

This is just one of several cases which demonstrates relying on the benefit plan documents or a generalized communication may not be sufficient. Employers need to be mindful they have an ERISA fiduciary duty to adequately inform participants of their benefits and provide complete information regarding the steps necessary to keep their insurance benefits, including portability and conversion.

 

 

What about the baby?

baby

Coverage of a newborn may be regulated by a combination of state, federal and carrier level regulations and rules.  Generally, in most states the state insurance law requires group health insurance policies (including HMOs) that provide maternity benefits to cover newborn children automatically for 30 or 31 days from birth.

For instance under Texas Insurance Code Sec. 1501.607 Coverage for Newborn Children:

(a) A large employer health benefit plan may not limit or exclude initial coverage of a newborn child of a covered employee.

(b) Coverage of a newborn child of a covered employee under this section ends on the 32nd day after the date of the child’s birth unless:

(1) children are eligible for coverage under the large employer health benefit plan; and
(2) not later than the 31st day after the date of birth, the large employer health benefit plan issuer receives:

(A) notice of the birth; and
(B) any required additional premium.

Added by Acts 2003, 78th Leg., ch. 1274, Sec. 3, eff. April 1, 2005.

(The same is true for a small employer, see Sec. 1501.157 Coverage for Newborn Children)

When a group policy includes automatic newborn coverage in their plan design, if the parent is enrolled for his or her own coverage at the time of the birth, the newborn is automatically covered for the first month. (If both parents have group coverage that includes automatic newborn coverage, the two plans coordinate benefits for the baby based on the birthday rule; i.e., the plan of the parent whose month and day of birth comes earlier in the year covers the baby first, then the other parent’s plan pays remaining expenses, if any, as secondary coverage.)

To continue the child’s coverage beyond the first 30 or 31 days, the Health Insurance Portability and Accountability Act of 1996 (HIPAA)  special enrollment rules requires that the “plan must allow an individual a period of at least 30 days after the date of the” birth to enroll the child and coverage “must begin on the date of birth.”

When in doubt on how the rules work or apply specifically to a fully-insured plan, confirming with a carrier is the best place to start. If self-insured, checking one’s plan documents in the eligibility section under “dependent insurance”,  in my experience are where the rules for newborn coverage are located.

e.g.  newborn exception2

Making the switch between State Continuation & COBRA

switch

The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a federal law allowing employees, spouses and dependents in certain situations to temporarily continue their health coverage at group rates. In general, COBRA will apply to employers that have 20 or more employees on more than 50 percent of their “typical business days” in the preceding calendar year.

State continuation (often referred to as mini-COBRA) varies by state. While the majority of states have passed their own laws that require smaller employers to provide COBRA-like continuation of benefits for certain employees and their families, not all states offer a continuation program.  In some states, state continuation coverage rules also apply to larger group insurance policies and add to COBRA protections.  (Note: State continuation coverage requirements generally apply to insured plans only.)

When a small business grows above 20 employees* or an employer’s work force falls below 20 employees during the year, its plans will continue to be subject to whichever option (state continuation or COBRA) was applicable at the beginning of the calendar year until a new calendar year begins. 

i.e.  If an employer exceeds 20 employees during a calendar year, then the group health plan may become subject to COBRA on the following first day of January.

If an employer drops below 20 employees during a calendar year, the employer’s group health plan remains subject to COBRA through the end of that calendar year.

On the first day of January, (regardless of policy renewal date) is when the employer should look at whether it’s still considered a small employer (i.e. fewer than 20 employees on at least 50% of the employer’s “typical business days” during the preceding calendar year) or whether it is subject to COBRA compliance.  It will only be exempt from COBRA compliance if during the preceding calendar year, it normally had fewer than 20 employees. However, despite being exempt, an employer cannot terminate existing COBRA coverage even after the end of the calendar year.

*There is an exception to this rule when a small employer’s growth is due to a stock acquisition.

 

 

 

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There are 2 Federal Poverty Level Safe Harbor Amounts Each Year

scale

In 2019, the Federal Poverty Level (FPL) affordability safe harbor employee contribution amount is $99.75/mo and $102.63/month.

Background: 

Applicable Large Employers (ALE’s) with 50 or more employees are subject to the Affordable Care Act’s (ACA) provisions that require employers provide affordable coverage to employees working 30 or more hours per week. If an ALE does not offer affordable coverage, they may be subject to an employer shared responsibility payment.

Currently, coverage is considered affordable if the employee’s required contribution for employee only coverage on the employer’s lowest-cost plan that offers minimum essential coverage and minimum value, as defined by the ACA does not exceed 9.86% of the employee’s household income. In 2020, the affordability percentage decreases slightly to 9.78%.

If certain conditions are satisfied, an ALE may use one or more of the three affordability safe harbors to determine if it’s offering affordable coverage under the ACA: W-2, Rate of Pay, and Federal Poverty Level (FPL).

An ALE may choose to use one safe harbor for all of its employees or to use different safe harbors for employees in different categories, provided that the categories used are reasonable and the employer uses one safe harbor on a uniform and consistent basis for all employees in a particular category.

Federal Poverty Level:

The federal poverty level safe harbor requires just one calculation. Under this safe harbor, coverage is affordable if the employee’s monthly cost for self-only coverage under the plan does not exceed the federal poverty level for a single individual.  The employer can ignore the employee’s actual hours and wages, which is very helpful when calculating premiums for a workforce with fluctuating schedules and compensation.  But, the federal poverty level safe harbor often results in high cost sharing by the employer and relatively low premiums for employees.

In 2019, the FPL affordability safe harbor employee contribution amount for calendar year plans that an employer can use is $12,140 x 9.86% = $1,197/12 =$99.75/mo.

However, the FPL for 2019 non-calendar year plans may be different.

HHS posts the FPL compensation amount annually by February, so the FPL amount used to calculate the safe harbor in December 2018 for a calendar (1/1/2019) plan year, $12,140 was the only FPL compensation level amount available. Whereas, in February 2019, the FPL compensation level changed to $12,490. 9.86%($12,490)=$1,231.51/12 =$102.63/month.

The IRS recognizes ALE’s need to know well in advance of open enrollment how to set rates, therefore per the final regulations employers are:

“permitted to use the guidelines in effect six months prior to the beginning of the plan year, so as to provide employers with adequate time to establish premium amounts in advance of the plan’s open enrollment period.”

If that six month look-back period reaches into a prior calendar year and two different FPL compensation amounts (and corresponding FPL affordability safe harbor contribution amounts) are available (one from the prior year and the other from the current year), the employer can choose between the two calculations in applying the FPL affordability safe harbor.

Example: A plan that started June 1, 2019 may “look-back” to the FPL safe harbor in effect 6 months prior which was $99.75/mo, or use the FPL safe harbor in effect using the FPL amount released in 2019, $102.63. Whereas a plan starting September 1, 2019, looking back six months would bring up only one possible FPL safe harbor employee contribution amount the employer may use, $102.63.

Note: When applying the look-back approach, the affordability percentage that applies for the year in which the plan year starts must be used. e.g. Any plan starting in 2019, 9.86% is the percentage that applies even when using the FPL amount ($12,140) for 2018 to do the calculation.

So although you will see articles sharing the FPL in 2020 is $101.79/mo ($12,490 x 9.78% = $1,221.52/12), keep in mind this is for calendar year plans and a second FPL amount will be available for non-calendar year plans when the FPL amount is released for 2020.

 

 

Health FSA & HSA in the same year?

puzzle

Q: We just hired a new employee on 7/1 who told us he elected the maximum amount under his previous employer’s health FSA that started in January. We offer a HDHP with an HSA. Is he eligible to participate in an HSA? Or does he need to wait until next year? 

A:  If his health FSA terminated (i.e. he did not elect COBRA), he is eligible to participate in an HSA as of the first of the month after his FSA termination, assuming he’s otherwise eligible for the HSA.

There are 4 basic rules to Qualify for an HSA:

  • Covered under a high deductible health plan (HDHP), on the first day of the month.
  • Have no other health coverage except what is permitted under the regulations
  • Not enrolled in Medicare.
  • Cannot be claimed as a dependent on someone else’s tax return.

So if he meets these 4 requirements, he is eligible to open an HSA on the first of the month following the health FSA termination.

When an employee leaves a job during the course of the year, they are still entitled to the earmarked FSA amount for that year (assuming the eligible expenses incurred prior to termination and claims submitted timely), even if they spend more than has been taken out of their paycheck so far. Furthermore, they could contribute to a new employer’s FSA (or HSA) and have additional pre-tax dollars to spend. (The “FSA loophole” doesn’t work for HSAs because the HSAs are portable and the employee’s account even if they leave.) Likewise, an employee may work for two or more entirely different (i.e. unrelated) entities and contribute the maximum amount to both employer’s FSAs at the same time. The health FSA limit is per employee per employer’s health FSA plan.

So if the health FSA and the HSA don’t overlap, (i.e. the health FSA terminated when the employee left the previous employer) he can contribute to an HSA for the remaining months assuming he’s otherwise eligible (mentioned above). The amount he is eligible to contribute, is calculated in two ways (see Limit On Contributions):

  1. “general monthly contribution rule” – which is one-twelfth of the applicable maximum contribution limit for the year for each month of they year they are HSA eligible. (There are tax implications for “over contributing” when not eligible.)
  2. “last month rule” – which basically states an individual is treated as HSA-eligible for the entire calendar year for purposes of HSA contributions, if they are eligible on the first day of the last month of their tax year (which is Dec. 1 for most). However, to rely on this special rule, the individual must then remain eligible for the HSA through the next 12 months after the last month of their tax year. (i.e. 13 months total).

If he did elect COBRA, assuming no carry-over provision (not common for COBRA participants to be eligible for) or grace period (this is something many COBRA participants are eligible for), or if there is a grace period (or carryover) & he has a zero balance on the last day of the FSA plan year, then he would be eligible for an HSA as of the first day of the month after the health FSA plan year ends (assuming he’s otherwise eligible for the HSA).

Cafeteria Plans Do Not Have to Permit Midyear Election Changes

Changes

Under an Internal Revenue Code Section 125 cafeteria plan, employee’s elections must generally be irrevocable until the beginning of the next plan year. In other words, employees are unable to make a change to their pretax elections made when newly hired or open enrollment unless they experience a permitted election change event (e.g. change in status) allowed under IRS rules (26 CFR § 1.125-4) and the event is recognized by the employers cafeteria plan.

Employers do not have to allow any exceptions to the irrevocable rule for pretax elections1.  However, the IRS does allow employers to design their cafeteria plans to permit employees to change their pretax elections prospectively2 when certain conditions are met.

NOTE: Section 125 permitted election changes are regarding pretax deductions to pay for benefits, not the actual enrollment (or disenrollment) in an insurance plan.

But I thought if an employee got married, or had a baby we had to let them enroll in our plan? 

It is true, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) requires group medical plans to permit midyear enrollment due to certain events (marriage, birth, adoption, loss of other group coverage etc.). The HIPAA special enrollment requirement is only for medical, it’s not required for excepted benefits, i.e. stand-alone dental, vision or most FSAs. (29 CFR § 2590.701-6)

NOTE: HIPAA is not a directive regarding how benefits are paid, it only mandates that an employee must be allowed to enroll in the medical plan

HIPAA special enrollment events are a subset of the Section 125 permitted election change events that provide special rights. Therefore, for practical matters, and to avoid requiring the premium to be taken post-tax, at a minimum, employers generally include HIPAA special enrollment events as permissible events allowing for a change to the pretax election, when designing their cafeteria plan3.

Footnotes:

1The irrevocable pretax election rules do not apply to health savings accounts (HSAs). Employees may prospectively change (start/stop, increase/decrease) their HSA contribution election at any time during the plan year. An employer must allow for changes at least monthly.

2Under HIPAA special enrollment (birth, adoption or placement for adoption) a retroactive pretax election change may be made. Likewise, if the plan has no waiting period (e.g. employees are eligible for coverage as of the first day of employment), employers may allow new employees to make a retroactive pretax election within 30 days of employment. However, if an employer has a waiting period (e.g. first of the month following date of hire, 30 days etc.) the new employee may only make a prospective election. (i.e. the effective date must be a date after the enrollment form was signed and submitted.)

3HIPAA requires group health plans, to give special enrollment opportunities for HIPAA specific events. Carriers are not required to incorporate all the election changes an employer may allow as permitted, by Treasury Regulations in Section 1.125. Therefore, employers with fully insured coverage, who recognize changes outside of what is required by HIPAA should confirm with their insurance carrier the group insurance contract and permissible cafeteria plan midyear change events are consistent.

 

“Takes” or “Accepts” Insurance Doesn’t Necessarily Mean In-Network

Although this video is corny, it is spot on and I couldn’t have done a better job writing a blog on a common problem. A provider saying they “take” or “accept” your insurance does not mean they are in-network. Rather it only means they welcome patients with insurance and generally will submit an insurance claim for their services to your health plan but it’s possible they are out-of-network (OON) and are able to balance bill you for the amount insurance doesn’t pay.

Balance billing is when an out-of-network provider attempts to collect the difference between the amount the provider charged for services and the amount the health plan (insurance carrier) was willing to pay.  Whereas when a provider is in-network, they must accept the “contracted rate” agreed upon with the insurance carrier and may not bill you for the difference.  Currently out-of- network providers are not under this same obligation.

The best way to guarantee the provider you are seeing is in-network is to call your health insurance carrier using the number on the back of your insurance card to confirm or most carriers have online tools for you to search for an in-network provider too.

However, in times of an emergency, it’s not realistic for you to previously have researched and figured out if a facility is in-network, nor may you even have the ability to select the emergency room, treating physicians, or ambulance providers.

Likewise, surprise bills can also arise when you receive planned care. For example, if you schedule a surgery at an in-network facility (e.g. a hospital) only to find out later (when the bill arrives) that the anesthesiologist did not not participate in your health plan’s network. (It’s very common for radiologists, anesthesiologists and pathologists to be OON.) In both situations, you were not in a position to choose the provider nor to determine that provider’s insurance network status.

Situations like these are reasons why there is currently a push in Congress to pass “balance billing” laws to alleviate Americans from receiving a surprise bill. Both parties in Congress agree, you should not be surprised by an out-of-network health care bill. There has not however been agreement on the the best approach to address them. It remains to be seen if a bill can still pass before the Senate’s recess in August.

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