Preserving Executive Insurance Options

Since passage of the Affordable Care Act (ACA), employers have been forced to re-examine how group health benefits are delivered to employees, with renewed focus on the extent to which executive-level tax-advantaged benefit plans remain a viable recruitment and retention tool.

The good news for employers is that the ACA does not prevent them from offering generous benefits as an add-on to their primary major medical health plan on a tax-advantaged basis. The ACA’s reforms generally apply only to “health plans.” That term, as defined, expressly excludes “excepted benefits.” Thus, as long as the add-on offers only those benefits that qualify as “excepted benefits,” the employer may continue to offer it without violating the ACA’s market reform provisions, including the extension of nondiscrimination requirements to fully insured group health plans.

Employers often are aware of this add-on option. However, there remains considerable confusion as to what kinds of products qualify as excepted benefits. That is particularly true when confronted with insurance policies that bundle more than one category of excepted benefits within a single insurance contract.

Four Categories of Excepted Benefits

Excepted benefits are not new. As originally adopted, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) identified the following four categories of excepted benefits, to which certain federal health care reforms did not apply:

• Benefits not subject to requirements: Medical care benefits that are secondary or incidental to other insurance benefits, such as automobile insurance, liability insurance, workers’ compensation, accidental death and dismemberment coverage, disability income insurance, or credit-only insurance.
• Benefits not subject to requirements if offered separately: Benefits that are limited in scope, such as limited-scope vision or dental benefits, and benefits for long-term care, nursing home care, home health care or community-based care.
• Benefits not subject to requirements if offered as independent, noncoordinated benefits: Benefits that cover only a specified disease or illness (such as cancer-only policies), and hospital indemnity or other fixed indemnity insurance.
• Coverage that is supplemental to primary health coverage: Medicare and TRICARE supplemental health insurance and similar supplemental coverage added to coverage under a group health plan.

Parallel provisions defining the categories of excepted benefits can be found at Section 2791 of the Public Health Service Act, Sections 732 and 733 of the Employee Retirement Income Security Act (ERISA), and Sections 9831 and 9832 of the Internal Revenue Code of 1986.

The parallel statutes define “excepted benefits” as “benefits under one or more (or any combination thereof)” of the general listed categories. Thus, an insurer may combine more than one category of excepted benefits in a single insurance contract.

For example, the insurer may include limited-scope vision coverage and similar supplemental coverage in a single insurance policy because each of those coverages represents a different category of excepted benefits. The benefits within each category must meet the specific qualifications applicable to that discrete category, but they do not become subject to the requirements of any other category. In our example, benefits designed as supplemental coverage must meet the requirements applicable to excepted supplemental coverage. One would not, however, consider the limited-scope vision coverage that also is included within the bundled policy when applying the supplemental coverage requirements, as limited-scope vision coverage falls within a separate category.

Purchasing an insurance policy that includes multiple categories of excepted benefits, when offered with a primary major medical plan, provides employers with a viable mechanism through which to reward and incentivize key employees. Bundled policies, particularly those that include additional nonhealth contracted services, can offer a comprehensive, generous, administratively seamless package that, when added to the benefits of the underlying plan, approximates traditional executive health insurance products.

Many executive health plans were withdrawn from the market in the wake of the ACA. While reasons differ from plan to plan, the primary reason such plans were withdrawn is that they were developed decades before the ACA as group health insurance policies. The policies were not ACA-compliant. Some continued as grandfathered plans for a period but ultimately ceased to be offered because continuation would require the plans to be restructured as supplemental and/or limited benefit plans with new policy forms and filings and actuarial projections.

The key to evaluating an insurance policy that includes multiple categories of excepted benefits is to make sure that you accurately allocate benefits among excepted benefit categories and that you apply the right standards to the right benefits.

Safe Harbor Criteria

The excepted benefit category often causing the most confusion is “similar supplemental coverage.”

To date, the only regulation expressly addressing the characteristics of supplemental coverage provides that to be considered supplemental coverage qualifying as an excepted benefit, “the coverage must be specifically designed to fill gaps in primary coverage, such as coinsurance or deductibles.”

Although additional regulations on supplemental coverage have not yet been issued, the departments of the Treasury, Labor, and Health and Human Services have issued guidance identifying what they consider to be the key characteristics of supplemental coverage that qualifies as an excepted benefit. The guidance sets out the following four safe harbor criteria which, if met, will automatically qualify the product as supplemental coverage in the eyes of those agencies:

• The policy, certificate or contract of insurance must be issued by an entity that does not provide the primary coverage under the plan.
• The supplemental policy, certificate or contract of insurance must be specifically designed to fill gaps in primary coverage, such as co-insurance or deductibles.
• The cost of the supplemental coverage may not exceed 15 percent of the cost of primary coverage.
• Supplemental coverage sold in the group insurance market must not differentiate among individuals in eligibility, benefits or premiums based on any health factor of the individual (or any dependents of the individual).

Confusion over bundled excepted benefit policies typically arises when an advisor treats the safe harbor criteria applicable to supplemental coverage as threshold requirements for qualification of the entire bundled product as an excepted benefit, resulting in an unduly restrictive view of the types of benefits and value of coverage that may be offered under the total bundled policy.

While we appreciate that the penalty concern associated with getting it wrong drives a conservative approach, failing to accurately analyze a product ill serves an employer seeking a real solution to real recruitment and retention problems. (The ACA’s penalties are generally $100 per day for each failure and for each covered life under Code Section 4980D.)

Supplemental coverage qualifies as an excepted benefit when it is designed to fill gaps in the coverage provided under the primary plan. Those gaps include both the participant’s cost-sharing obligation and additional services not covered under the primary plan (provided that those services are not essential health benefits). Meeting the safe harbor criteria applicable to supplemental coverage means that supplemental coverage will automatically be considered excepted benefits. However, the safe harbor criteria are not mandates, and the failure to meet them does not disqualify supplemental coverage as excepted benefits.

More significantly, the safe harbor criteria applicable to supplemental coverage do not apply to a bundled insurance product as a whole. The parallel statutes authorize excepted benefits products composed of combinations of benefits, each of which independently satisfies a different category of excepted benefits. The safe harbor criteria applicable to supplemental coverage do not apply to other categories of excepted benefits included in the bundled policy.

While the ACA impacts the structure and the scope of executive health benefit options, it does not prevent employers from continuing to offer mission-critical employee access to generous, tax-advantaged and administratively seamless add-on coverage. Properly structured, bundled excepted benefit insurance policies can allow an employer to preserve executive health benefit options while remaining ACA-compliant.

Kathleen Birrane is an attorney with DLA Piper in its Baltimore office. Kerry Eason is an attorney with DLA Piper in its Chicago office.