For Your Benefits
July Edition 06/29/10 David P. Olson
This edition contains the following articles:
Welcome to the July 2010 edition of the Quarles & Brady Employee Benefits and Executive Compensation Group's
For Your Benefits, a newsletter dedicated to keeping benefit plan managers and HR and compensation professionals informed of legal changes affecting benefit programs. This edition covers recently released guidance regarding lifetime limits, pre-existing conditions and other provisions under the Patient Protection and Affordable Care Act, recently released final regulations on QDROs, and other recent benefits and compensation-related developments.
The Treasury, Labor and Health and Human Services Departments of the federal government have jointly released interim final rules (the "Regulations") addressing certain employer plan provisions in the recently enacted health reform law (the "Act"). The Regulations cover provisions in the Act regarding pre-existing condition exclusions, lifetime and annual dollar limits on benefits, recissions and patient protections, and will help employers determine what types of changes they need to make to their health plans effective for the upcoming plan year. The federal government has also published a fact sheet on the new Regulations, which dubs the provisions of the Act covered under the Regulations the "Patient's Bill of Rights."
Highlights from the Regulations follow. For ease of reading, the term "Effective Date" as used in this Article means the first day of the plan year beginning on or after September 23, 2010. Note that all of the provisions described below, other than the "Choice of Health Care Professionals" and "Emergency Services" rules, apply to both grandfathered and non-grandfathered plans. Grandfathered plans can escape application of the Choice and Emergency Services requirements.
Pre-existing Condition Exclusions. Under the Act, on and after the Effective Date, group health plans ("plans") are prohibited from applying any pre-existing conditions exclusions for plan enrollees who are under age 19. This prohibition extends to all enrollees beginning in 2014. The Regulations clarify that it is not only impermissible to exclude coverage of a specific condition in connection with a pre-existing condition, but that it is also impermissible to exclude individuals from coverage under the plan if that exclusion is based on a pre-existing condition. However, the Regulations do continue to permit exclusion of benefits for a condition under a plan if the exclusion applies regardless of when the condition arose (but such exclusions could violate other requirements of Federal or State law, such as the Americans with Disabilities Act).
Lifetime and Annual Limits. As described in detail below, the Act limits a plan's ability to apply lifetime or annual limits on "essential health benefits." The relevant agencies have not yet defined this term and until they do so, employers are permitted to apply a "reasonable interpretation" of the term based on the statute, which provides that essential health benefits include at least ambulatory patient services, emergency services, hospitalization, maternity and newborn care, mental health and substance use disorder services, prescription drugs, rehabilitative services and devices, laboratory services, preventive and wellness services and chronic disease management, and pediatric services.
- Lifetime Limits. Under the Act, a plan may not apply lifetime limits on minimum essential benefits on and after the Effective Date. The Regulations clarify that this requirement does not apply with respect to certain account-based plans, such as FSAs and HRAs. Plan sponsors must provide individuals who previously reached lifetime limits under a plan, but who are otherwise eligible to participate in the plan with notice of the removal of the lifetime limits and give such individuals the opportunity to re-enroll in the plan. The Regulations include model language that can be used for this purpose.
- Annual Limits. Under the Act, a plan may place reasonable limits on annual benefits until the year 2014, when annual limits on benefits will no longer be permissible. The regulations provide for a phase-in of the 2014 rule, starting with a minimum annual limit of $750,000 for plan years beginning on or after September 23, 2010 but before September 23, 2011, and then increasing to $1,250,000 and $2,000,000 between 2011 and 2014.
Prohibition on Recissions. Under the Act, a plan may only rescind coverage for fraud or intentional misrepresentation of a material fact. The Regulations clarify that for this purpose, a recission includes a retroactive cancellation of coverage and not a prospective cancellation of coverage. Retroactive termination is only allowed in instances involving fraud, misrepresentation or the failure to timely pay premiums and only with 30 days advance notice of the intent to retroactively terminate coverage.
Choice of Health Care Professionals. The Regulations also provide guidance on the following requirements:
- If a plan requires or allows an enrollee to designate a primary care physician, the enrollee must be permitted to designate any participating primary care provider who is available to accept the enrollee and, for a child, any participating pediatrician who is available to accept the child.
- A plan that requires designation of a primary care physician cannot require authorization or referral for a female enrollee who seek OB/GYN care from an in-network OB/GYN physician.
Plan sponsors must provide notice of the above rights and the issuing agencies have published model language that can be used for this purpose.
Emergency Services. Under the Act, plans may not limit coverage for emergency services to in-network services or require pre-authorization for emergency services. Plans are also prohibited from applying greater cost sharing to out-of-network emergency services than to in-network emergency services covered under the plan. The Regulations contain examples of these cost sharing restrictions.
Q&B Key: With the recent guidance on grandfathered plans and these new Regulations, employers are now in a better position to evaluate how the Act will impact plan design for the upcoming plan year. In addition to identifying needed plan design changes, such as the elimination of lifetime maximums, employers will need to take the following steps:
- Use model language to provide notice to plan participants and their dependents who have previously hit a plan's lifetime maximum of their right to re-enroll in the plan, assuming they are otherwise still eligible for coverage;
- For plans that require or allow designation of a primary care physician, use model language to provide notice to all plan participants of rights related to that designation; and
- Implement procedures for providing required notice of retroactive termination of coverage.
The Department of Labor ("DOL") recently published a final rule related to the timing of qualified domestic relations orders ("QDROs"). A QDRO is an order submitted to a plan that directs that all or a portion of a participant's plan benefits be given to a spouse, former spouse, child or other dependent. Most often, QDROs are used to allocate a portion of a participant's plan benefits to a former spouse following a divorce. If an order meets certain criteria set by the DOL, the plan administrator must accept the order as qualified.
Generally, determining whether an order can be accepted as qualified is a fairly straightforward process. However, some of the more challenging issues that can arise with respect to these orders relate to the timing of the order. What if the order is not submitted to the plan until after a participant dies? What if the order is not submitted to the plan until after a participant has begun to receive annuity payments?
The DOL clarified the proper handling of these issues in its recently published final rule, which closely tracks the interim final rule that was issued in March of 2007. The final rule is effective August 9, 2010. The DOL has stated that an order will not fail to be a QDRO because:
- It modifies a previous QDRO between a participant and a former spouse;
- It relates to a participant who already has a QDRO in effect, provided that the subsequent QDRO does not relate to assets that were already allocated to another party under the first QDRO;
- The plan administrator does not receive the QDRO until after the participant dies; or
- The plan administrator receives the QDRO after the participant has already begun to receive his or her annuity payments, provided that the QDRO does not require reannuitization of the benefit with a new annuity starting date.
Q&B Key: ERISA requires written QDRO procedures for plans. In addition, summary plan descriptions are required to include either a description of the QDRO procedures or a statement that the QDRO procedures are available, at no cost, from the plan administrator. Plan administrators should review the various plan-related documents that might address QDROs to determine if any of the procedures described therein are inconsistent with this final rule. Although QDRO procedures may not need to be updated to reflect this final rule, plan administrators may want to take this opportunity to confirm that their plan documents and written procedures comply with QDRO requirements.
The House-Senate conferees finalized a bill last Friday that is designed to, among other things, reform the corporate governance and compensation practices of public companies. The 2,000-page legislation includes mandatory advisory votes on executive pay and separate shareholder votes on golden parachute payments. The bill also contains provisions designed to maintain compensation committee independence, a new "pay for performance" disclosure and a requirement that companies adopt "clawback" policies to recover excess incentive-based compensation in the event of an accounting restatement. Congress is expected to vote on the legislation this week, and President Barack Obama hopes to sign it by the July Fourth holiday.
Q&B Key: The legislation contains the most significant changes to corporate governance and compensation practices in decades. If the legislation is passed, most public companies will have to revise their existing practices to comply with the new requirements.
- The Department of Labor has issued a Model Notice of Opportunity to Enroll in Connection with Extension of Dependent Coverage to Age 26 .
- The Internal Revenue Service is encouraging employers that did not recently receive an IRS 401(k) Compliance Check Questionnaire to download the Questionnaire and use it as an internal audit tool. The Questionnaire is available here.
- The U.S. Supreme Court has agreed to hear a case in its next term involving the issue of whether pension plan participants must show that they were "likely harmed" by a deficient summary plan description before they will be entitled to recover plan benefits as set out in the Summary Plan Description.
If you have any questions, please contact one of the of the following members of the Employee Benefits and
Executive Compensation Law Group or your Quarles & Brady attorney: Paul Jacobson at (414) 277-5631 / [email protected], Robert Rothacker at (414) 277-5643 / [email protected], David Olson at
(414) 277-5671 / [email protected], Amy Ciepluch at (414) 277-5585 / [email protected], Sarah Linsley at (312) 715-5075 / [email protected], Marla Anderson at (414) 277-5453 / [email protected] or Kerri Hutchison at (414) 277-5287 / [email protected].