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March 15, 2011

In This Compliance Corner Issue:

NAIC Attempting to Exclude Broker Commissions From MLR Calculation
Eleventh Circuit Grants DOJ’s Request for Expedited Appeal of Florida Health Reform Decision
CLASS Program FAQs Released
States Can Apply for Nearly $200 Million to Help Offset Health Premium Increases
Two Recent HIPAA Privacy Rule Violations Highlight Increased Enforcement Action
IRS Issues Guidance on 403(b) Plan Terminations
IRS Announces Replacement of Schedule SSA with Form 8955-SSA
Voluntary Correction Program Discounted Fee Applies only if Filing Occurs Before May 20, 2011
Employer Satisfied COBRA’s Small Employer Exception Even When Combined with Related Employer
Schedule of Benefits Properly Described a Plan’s Out-of-Pocket Maximum
State Updates: AZ, MN, WY

HEALTH REFORM UPDATES

NAIC ATTEMPTING TO EXCLUDE BROKER COMMISSIONS FROM MLR CALCULATION
In anticipation of the potential impact that the Patient Protection and Affordable Care Act’s (PPACA) medical loss ratio (MLR) standard will have on agents and brokers, on March 3, 2011, the National Association of Insurance Commissioners (NAIC) released for comment draft federal legislation that would exclude agent and broker compensation from the MLR calculation. The NAIC plans to hold a public hearing on the draft legislation during its spring meeting held at the end of March, and public comments are requested by March 14, 2011. The draft legislation responds to interim final rules on the MLR calculation released by the U.S. Department of Health and Human Services (HHS) on Nov. 22, 2010, and effective as of Jan. 1, 2011.

As background, PPACA requires health insurers to have a minimum MLR of 80 percent for insurance sold in the individual and small-group markets and 85 percent in the large-group market. The current rule includes agent and broker commissions as part of the “non-claims costs” in the MLR calculation, meaning that the rule does not allow any portion of the commissions to be considered a pass-through expense excluded from the MLR calculation. The new proposed legislation would essentially exclude remuneration paid to independent insurance producers from the MLR calculation.

It has also been reported that Rep. Mike Rogers, R-Mich., is expected to introduce a bill exempting commissions from MLR calculations. We will continue to monitor the situation.

ELEVENTH CIRCUIT GRANTS DOJ’S REQUEST FOR EXPEDITED APPEAL OF FLORIDA HEALTH REFORM DECISION
PPACA is currently the subject of numerous legal challenges across the country. Of the major federal cases challenging PPACA, three federal district courts have upheld the legislation. Two federal district courts have specifically struck the individual mandate down, including the U.S. District Court for the Northern District of Florida, which struck down the legislation in its entirety.

As background, on March 3, 2011, the U.S. District Court for the Northern District of Florida issued an order addressing a motion filed by the U.S. Department of Justice (DOJ) seeking clarification of the court’s ruling on the constitutionality of the health reform legislation. The court construed the motion to clarify as a motion to stay, and the court stayed, pending appeal, its ruling declaring the health care reform legislation unconstitutional. But the court conditioned the stay on the DOJ pursuing an expedited appeal to the U.S. Court of Appeals for the Eleventh Circuit or the U.S. Supreme Court within seven days.

On March 8, 2011, the DOJ filed its notice of appeal in the case with the U.S. Court of Appeals for the Eleventh Circuit, seeking reversal of the district court’s ruling that Congress exceeded its authority under the Commerce Clause by requiring that certain Americans over the age of 18 obtain health insurance or pay a monetary penalty. Shortly after filing its notice of appeal, the DOJ also filed a motion with the Eleventh Circuit requesting expedited review of the appeal. Of importance, now that the DOJ has filed a notice of appeal and sought expedited treatment of the appeal, the federal government may continue implementing the legislation during the pendency of the appeal.

Then, on March 11, 2011, the U.S. Court of Appeals for the Eleventh Circuit granted the DOJ’s request for expedited appeal of the Florida District Court’s decision, setting a faster timetable than even the DOJ had requested. The expedited appeal means that the DOJ must file its first set of court papers on the issues by Apr. 4, 2011, and that the state of Florida has until May 4, 2011, to file its papers. The Eleventh Circuit is also still considering whether to hold the initial review of the case before all 10 federal appellate judges, rather than the customary three judges. Ultimately, the issue is expected to reach the U.S. Supreme Court. Stay tuned for additional updates.

CLASS PROGRAM FAQS RELEASED
HHS’s Administration on Aging recently released Frequently Asked Questions (FAQs) on the Community Living Assistance Services and Supports (CLASS) program. The FAQs confirm that initial guidance on the CLASS program is not due until Oct. 1, 2012, but provide information relating to CLASS program eligibility, benefits, premiums, and enrollment, as well as the interrelation between the CLASS program and Medicaid. The CLASS program is a voluntary insurance program that will give eligible people benefits to buy long-term care services and supports. Employers will have the option to facilitate employee enrollment and premium payments.
Click here to view the CLASS FAQs.
Click here to view the CLASS Act Legislation.

STATES CAN APPLY FOR NEARLY $200 MILLION TO HELP OFFSET HEALTH PREMIUM INCREASES
On Feb. 24, 2011, HHS announced that nearly $200 million in new grant funds are now available to help states develop programs that will make health insurance premiums more transparent. The new funds would also give states the power to stop unreasonable premium increases from taking effect.

As background, PPACA includes a variety of provisions designed to promote accountability, affordability, quality and accessibility in the health care system for all Americans, and to make the health insurance market more consumer-friendly and transparent. The new funding is intended to help states create or enhance their premium rate review programs by ensuring a comprehensive review of proposed rate increases and by bringing greater transparency and openness to the rating process. Of the $200 million in funding, $149 million is available to states for baseline grants to achieve these goals. Approximately $50 million in additional grant funds are available to qualifying states with larger populations and more health insurers and to states that retain the authority to approve or disapprove rate increases.

FEDERAL UPDATES

TWO RECENT HIPAA PRIVACY RULE VIOLATIONS HIGHLIGHT INCREASED ENFORCEMENT ACTION
In a matter of two days, the HHS Office for Civil Rights (OCR) sent a strong message of HIPAA privacy rule enforcements. On Feb. 22, 2011, the OCR announced an unprecedented use of civil monetary penalties on Cignet Health of Prince George’s County, Maryland. The assessment of the $4.3 million civil money penalty was the first time a covered entity has been assessed a civil penalty for HIPAA Privacy Rule violations. The penalty was assessed in accordance with the increased penalty amounts authorized under the Health Information Technology for Economic and Clinical Health Act, or HITECH.

Then, on Feb. 24, 2011, HHS announced that it had settled with Massachusetts General Hospital for $1 million as payment for potential violations of the HIPAA Privacy Rule. In addition to the settlement, the hospital agreed to a corrective action plan, including training and monitoring measures, to ensure the protection of protected health information in the future.

These two announcements provide a clear message that HIPAA-covered entities and business associates need to take HIPAA and HITECH compliance seriously.

IRS ISSUES GUIDANCE ON 403(B) PLAN TERMINATIONS
Through a series of examples, the recently released Revenue Ruling 2011-7 provides an outline of how to complete the distribution of plan assets in a section 403(b) plan termination depending on the type of funding vehicle held under the plan. By way of background, plan termination generally is a distribution event for participants and beneficiaries. However, from a practical standpoint, employers have had difficulty terminating section 403(b) plans without the consent of participants and beneficiaries because of the long history of the plans being funded with individual annuity contracts controlled by participants rather than employers.

The revenue ruling also indicates that delivery in a section 403(b) plan termination of a fully paid individual annuity contract or certificate evidencing fully paid benefits under a group annuity contract is not taxable to the participant until amounts are paid out of the contract, so long as the contract continues to comply with the requirements of Internal Revenue Code Section 403(b) in effect at the time of the plan termination. Therefore, it appears that such contracts will not have to be updated for changes to applicable statutes or regulations following the termination.
Click here to view Revenue Ruling 2011-7.

IRS ANNOUNCES REPLACEMENT OF SCHEDULE SSA WITH FORM 8955-SSA
Plan sponsors filing a Form 5500 using the relatively new electronic filing process may recall that for plan years beginning on or after Jan. 1, 2009, the Schedule SSA was no longer attached to the Form 5500 filing. This is due to the fact that the schedule includes protected social security information of participants and Form 5500s filed online are publically available for review. Thus, Schedule SSA was removed. Plan sponsors have been anticipating the recent Internal Revenue Service (IRS) release of Announcement 2011-21, which designates Form 8955-SSA, Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits, as the new form to be used to satisfy the reporting requirements of §6057(a) of the Code for plan years beginning on or after Jan. 1, 2009, and sets forth the due dates for filing the form for the 2009 plan year and subsequent plan years. While the form is not yet available, this guidance clarifies that when it is made available: it will be filed directly with the
IRS instead of filed as an attachment with the Form 5500.
Click here to view IRS Announcement 2011-21.

VOLUNTARY CORRECTION PROGRAM DISCOUNTED FEE APPLIES ONLY IF FILING OCCURS BEFORE MAY 20, 2011
The IRS recently announced that the fee discount for applying to its Voluntary Correction Program (VCP) for many plan sponsors using pre-approved 401(k), profit-sharing, money purchase or other defined contribution plan documents will end soon. Specifically, retirement plan sponsors who used pre-approved plan documents (i.e., documents that were pre-approved by the IRS and sold to plan sponsors) were generally required to sign new plans, amended to reflect the Economic Growth and Tax Reconciliation Act of 2001, by April 30, 2010. Plan sponsors who missed the deadline can take advantage of a discounted VCP fee of $375 only until April 30, 2011 (note, however, that because this date falls on a Saturday, all submissions must be postmarked on or before May 2, 2011). After this date, the VCP fee for plans will double to $750. Please note that, per the guidelines of the VCP program, the above fees are only available if there are no other plan qualification failures and the plan has 20 or fewer people. Additional fees apply for larger plans. The failure to correct and timely sign an amended version of the retirement plan documents will result in tax consequences, including the loss of tax-deferred status.
Click here to view the IRS Announcement.

Source: Littler Mendelson

EMPLOYER SATISFIED COBRA’S SMALL EMPLOYER EXCEPTION EVEN WHEN COMBINED WITH RELATED EMPLOYER
In Franco-Santos v. Goldstar Transport, Inc., 2011 WL 570280 (D.P.R. 2011), the U.S. District Court for the District of Puerto Rico held that an employer, even when combined with a related employer, qualified for COBRA’s small employer exception, and therefore that the employer was not obligated to provide an employee with a COBRA election notice. Under COBRA’s small employer exception, plans that normally employ fewer than 20 employees on a typical day during the preceding calendar year are not required to comply with COBRA, including providing employees with a COBRA election notice. Under IRS COBRA regulations, when counting employees of an employer maintaining a plan, all employees of all related employers under common control must be included, as outlined in IRC sec. 414. The court assumed the employee’s calculations and held that even when the employer was combined with a related employer, the employer employed only 19.4 employees in the preceding calendar year, and therefore the employer qualified for the COBRA small employer exception.

Although the employer in this case prevailed, an employer with an employee count close to 20 should exercise great care in determining whether to rely on the COBRA small employer exception, particularly if the employer may be related to or under the control of other employers. In addition, employer should be aware that even if an employer qualifies for the COBRA small employer exception, similar state law requirements may still apply.

SCHEDULE OF BENEFITS PROPERLY DESCRIBED A PLAN’S OUT-OF-POCKET MAXIMUM
In Kitterman v. Coventry Health Care of Iowa, Inc., 2011 WL 520840 (8th Cir. 2011), a health plan participant challenged the plan administrator’s determination of benefits for her out-of-network cancer surgery. Specifically, the participant asserted that the plan materials did not adequately advise her that out-of-network charges above the plan’s out-of-network rate would not be counted toward the out-of-pocket maximum, and also asserted that her expenses should be limited to the out-of-pocket maximum. The U.S. Court of Appeals for the Eighth Circuit determined that the plan materials (including a three-page schedule of benefits) alerted participants that capitalized terms had special meanings, specifically defined the terms (“Out-of-Pocket Maximum” and “Out-of-Network Rate”, and clearly stated that out-of-network charges above the plan’s out-of-network rate did not apply to the out-of-pocket maximum. The court held that a reasonable plan participant, reviewing the materials as a whole, would have understood that out-of-network charges above the out-of-network rate would not be applied toward satisfying the out-of-pocket maximum.

For employers, the case illustrates the importance of adequate disclosure of plan terms to plan participants. Specifically, the DOL regulations require an SPD to include, among other things, a description of the plan’s cost-sharing provisions and the circumstances under which coverage is provided for out-of-network services. Employers should also be aware that, beginning in 2012, health care reform’s requirement of a four-page summary of benefits and coverage will add to disclosure requirements of plans. The four-page summary of benefits and coverage requirements may also lead to greater uniformity in terminology, since HHS must develop standards for the definitions of certain insurance-related terms, including “out-of-pocket maximum”.

STATE UPDATES

ARIZONA
On Feb. 14, 2011, Arizona Governor Jan Brewer signed HB 2008 conforming Arizona tax statutes to the Internal Revenue Code (IRC). The Arizona Legislature periodically updates the statutory definition of the IRC to include any federal provisions that became effective in the previous year. As background, there are a number of states that do not automatically adopt the current version of the IRC, and therefore there is a risk in those states that employers will need to impute income to their employees for health insurance benefits provided in accordance with PPACA for state taxation purposes. Specifically of interest to employers sponsoring group health plans is the PPACA requirement to provide coverage for adult children up to age 26 and the potential state tax implications of providing such coverage when the state tax law does not mirror the federal IRC. As a result of HB 2008, 2010 tax returns filed for the state of Arizona will conform to the IRC in effect on Jan. 1, 2011.
Click here to view HB 2008 Legislation.
Click here to view HB 2008 Information.

MINNESOTA
The Minnesota Department of Revenue recently released a statement concerning the state tax treatment of employer-provided health coverage and the dependent coverage requirements of PPACA. According to the statement, the 2010 Minnesota legislature did not enact legislation incorporating into Minnesota law any of the changes to the IRC contained in PPACA. Therefore, Minnesota law generally includes in the definition of “wages” for purposes of insurance benefits provided to nondependent adult children of employees. Thus, employees will be required to include the value of adult dependent coverage as income for now. The statement clarifies, however, that until the Minnesota legislature has had the opportunity to fully address adoption of the PPACA provisions, the Department of Revenue will not require employers to withhold taxes from those federally exempt employer-provided benefits, and so employees concerned about sufficient withholding may consider requesting additional withholding for state income tax purposes on Form W-4MN. The statement also describes the process for reporting in Minnesota.
Click here to learn more.
Click here to view Form W-4MN.

WYOMING
On Feb. 18, 2011, HB 9 was signed into law. The legislation expands the definition of an agent under the chapter governing the qualifications and procedures for the licensing of insurance producers to include those selling accident and health or sickness policies.
Click here to learn more.

On March 2, 2011, HB 73 was signed into law. The legislation is titled the “Dental services freedom bill”, and states that unless certain dental services are considered covered under the contract, policy or certificate, the dentist cannot be required to provide services for non-covered services at a set fee. This is effective for contracts, policies or certificates issued, renewed, delivered or issued for delivery on or after July 1, 2011.
Click here to learn more.