EXTENDED BENEFITS

This simplified list of Questions/Answers is for information purposes ONLY, and is not intended to be legal advice.

EXTENDED BENEFITS FAQS

  • IS IT POSSIBLE TO OFFER BENEFITS TO A TERMINATED/LAID OFF EMPLOYEE?
    • Yes, an employer may extend benefits to employees that are terminated or laid off, frequently at the cost of the former employee.

  • DOES AN EXTENSION OF BENEFITS AFFECT CONTINUATION OF COVERAGE THROUGH COBRA?
    • Employers may extend benefits to terminated employees by having said employees pay the premium, or no premium. Commonly, employers do this when the termination results from layoffs or reasons beyond the terminated employee’s control. Other times, the extended coverage is due to a contractual agreement between employer and employee. The cost of coverage is up to the discretion of the employer, and can range from full premium to no cost.

      Some companies that voluntarily extend coverage apply the period of extension to the max COBRA continuation period. For example, if an employer permits 3 months coverage at the employees cost (instead of COBRA premium of up to 102%) those three months are included as part of the COBRA period, therefore not altering the 18 or 36 month period. The SPD and Cobra notification should clearly indicate that any extension runs concurrently with COBRA and not in addition to.

  • WHO IS CLASSIFIED AS A DEPENDENT?
    • Dependents are typically an employee’s spouse, domestic partner or children. It is important to confirm the definition of who is classified as a dependent in the plan design, because only dependents permitted by the plan are covered, and those dependents are usually defined under the current tax code.

  • ARE THERE DIFFERENT DEFINITIONS OF “DEPENDENTS” WITH FULLY INSURED PLANS?
    • Generally, no. There are however some states that extended the age 26 limit for children to a higher age, as to have dependents remain covered under the employees coverage. If you reside in a state that requires carriers to insure dependents beyond the age 26 limit, you must comply with the revised limit.

  • ARE THERE ANY IMPLICATIONS FOR COVERING DOMESTIC PARTNERS?
    • The Internal Revenue Code does not usually classify domestic partners as dependents; an employee is required to be taxed on health benefits provided to a domestic partner that does not fit the definition of a dependent according to §152(d) of the IRC. Due to this requirement, the value of the coverage is taxable to the employee and is considered “imputed income”. Full value of coverage is included in the employees’ pay as taxable wages, meaning Federal income tax, FICA, State and other payroll taxes are withheld, and reported to the employees W-2. The same is applicable to children of domestic partners, unless they are considered the employee’s dependents in accordance to §152 of the IRC.

  • IS IT NECESSARY TO SHOW PREMIUMS IN THE SPD?
    • No it is not necessary to indicate premiums on the SPD, however there should be a reference made as to where they are available.

  • WILL THERE BE SURCHARGES APPLIED TO PREMIUMS FOR TOBACCO USAGE OR OTHER RELATED BEHAVIOR?
    • Yes, an employer has the option of imposing surcharges for behavioral patterns. If the surcharge is contingent upon the employee completing a behavior or wellness program, an alternative method must also be made available to any employee unable to meet the requirements provided.

  • WILL THERE BE SURCHARGES APPLIED TO PREMIUMS FOR A WORKING SPOUSE WHO DECLINES COVERAGE UNDER THEIR EMPLOYER’S PLAN?
    • Yes, an employer has the option of imposing surcharges if an employee’s spouse is eligible for another employer’s coverage, yet declines said coverage in order to enroll with spouse. The employer may impose an additional surcharge for having to cover that spouse.

  • WHEN IS AN EMPLOYEE ELIGIBLE TO PARTICIPATE IN A PLAN?
    • PHS, or Public Health Service Act, Section 2708, provides that starting in 2014, a group health plan will not apply a waiting period in excess of 90 days for the employee to become eligible for coverage. However, the act does not distinguish between full time and part time employees, but does indicate that a full time employee works a minimum of 30 hours a week.

  • WHAT DOES PRECERTIFICATION MEAN?
    • Precertification means that the plan approval must be obtained before a procedure can be started. Also known as pre-authorization, a plan has the ability to impose penalties if precertification is not obtained prior to the procedure. Penalties may include denying the claim in its entirety, imposing a financial penalty or paying a reduced amount. When an employee is enrolled in a plan that has both in and out of network benefits, the in network providers are typically the ones that obtain all required authorizations for procedures. When the procedure is done out of network, the responsibility is on the employee to seek the necessary approval.

  • WHAT DOES PRE-EXISTING CONDITION MEAN?
    • A “pre-existing condition” is a health condition that exists before someone applies for or enrolls in a new health insurance policy. Insurers generally define what constitutes a pre-existing condition. Usually, preexisting conditions are any medical conditions for which treatment was received or should have been received. While insurers generally determine the presence of a pre-existing condition based on an applicant’s current health status, sometimes a healthy applicant can be deemed to have a pre-existing condition based on a past health problem or evidence of treatment for a particular condition. Plans are permitted to exclude coverage for employees (over the age of 19) with pre-existing conditions, however this will be eliminated in 2014 due to health care reform.

      A plan with pre-existing exclusionary periods, coverage can be denied to a person with a pre-existing condition. However, if an employee is able to provide a “Notice of Creditable Coverage” it would reduce or eliminate the exclusionary period of coverage. Without the notice, an employer is able to impose an exclusionary period of up to 18 months.

  • WHAT DOES HIPAA MEAN?
    • HIPAA stands for “The Health Insurance Portability and Accountability Act of 1996”, it is a law that impacts all aspects of health care:

      • Provides the ability to transfer and continue health insurance coverage for millions of Americans when they change/lose their jobs;
      • Prevents health care fraud and abuse;
      • Mandates industry-wide standards for health care information
      • Mandates the protection and confidentiality of protected health information

      The two issues that affect group health care plans are, privacy provisions which protect an employee’s personal information, and the requirement to provide certification of creditable coverage when an employee loses coverage. The HIPAA privacy provision requires health care providers, or anyone related to health care, follow procedures that ensure the confidentiality and security of a patient’s protected health information (PHI). Employers must issue a notice to employees regarding how their HIPAA rights are protected.

      This legislation impacts all medical providers, and ensures the information is maintained confidential. The portability provisions require the employers provide a Notice of Creditable Coverage to any employee (and dependent of employee) that loses coverage.

  • WHAT DOES COBRA DO?
    • COBRA is the Consolidated Omnibus Budget Reconciliation Act of 1985; this law allows former employees to remain on an employer’s insurance plan for a limited amount of time. The coverage offered to them must be identical as the coverage offered to active employees, although participants pay the full employer cost, and at times an additional 2% administrative fee.

      COBRA requires letters of notice be sent to employees (and their dependents) when certain events occur. Initial COBRA notices must be provided to employees when coverage first begins (it may be provided in the SPD), or within 90 days of the enrollment.

  • WHAT IS CHIPRA?
    • CHIPRA is the Children’s Health Insurance Program Reauthorization Act (2009), and allows states to subsidize premiums for health insurance coverage provided by employers (both fully insured and self-insured) for eligible children. CHIPRA is a state and federal partnership, associated with Medicaid, that provides affordable health coverage for the children in families that earn too much income to qualify for Medicaid, yet cannot afford to purchase private health insurance.

      Considered a special enrollment right, employees can enroll in an employer’s coverage if the employee becomes eligible for premium assistance or if eligibility for coverage is lost under Medicaid or the Children’s Health Insurance Program (CHIP). The employee must enroll within 60 days of the last day of coverage, or the employee becomes eligible for premium assistance.

  • WHAT CONSTITUTES A QUALIFYING CHANGE IN STATUS?
    • When a plan allows premiums to be paid on a pre-tax basis, restrictions on when changes can be made usually apply. Commonly, an employee’s election stays in effect for the entire plan year and changes are not permitted, except during annual open enrollment. However there are exceptions, at any time throughout the year, an employee may make changes to coverage within 31 days of a qualified change in status that include (but are not limited to):

      • Change in your legal marital status (e.g. marriage, legal separation, divorce, or death of your spouse)
      • Change in your number of tax dependents
      • Birth of a child or date you adopt a child, or placement for adoption
      • Death of a dependent
      • Change in your dependent’s eligibility (for example, your child reaches age 13 where he/she is no longer eligible under a DCFSA)
      • Change in child care/elder care provider or cost or coverage, such as a significant cost increase charged by your current daycare provider, or a change in your daycare provider. This applies to a DCFSA only. It does NOT apply to a HCFSA or LEX HCFSA.
      • Change in employment status (for employee, spouse, or employee’s dependent) that affects eligibility for health insurance benefits
      • A court order, such as a QMCSO or NMSN, that mandates coverage for an eligible dependent child.

      These changes must coincide with the status changes mentioned above. The Plan document should define what changes in status are recognized, and should reflect any limitations applied.

  • WHAT CONSTITUTES SPECIAL ENROLLMENT RIGHTS?
    • When an employee chooses to not enroll in coverage because she has other coverage, she may once again become eligible to enroll, if she loses her former insurance coverage, or if contributions towards the other coverage cease. The employee has the option to enroll, but must do so within 31 days of loss of coverage, or within 31 days of the other employer no longer contributing.

      Coverage for newly eligible dependents begins on the date they become a dependent (i.e. birth, adoption, marriage) as long as the employee enrolls them within the 31 day limit. This special enrollment right is additional to the qualified status changes listed previously.

  • WHAT DISCRIMINATION RULES APPLY TO WELFARE PLANS?
    • Cafeteria plans and group health plans are not permitted to discriminate in favor of high income employees. Various tests under Section 105 and 125 are used to ensure that plans do not provide favoritism to high income employees in terms of contributions, coverage and eligibility. Some of these tests are easy to perform because they are based on numbers, while others can be more involved because they are based on circumstances and facts relevant to the case. Plan Administrators are encouraged to look at the overall plan design to evaluate and confirm that there is no discrimination. For Example, if a plan allows high income employees to enroll immediately, yet lower income employees need to fulfill a 60 day waiting period, the plan would be deemed discriminatory. Administrators should perform yearly nondiscriminatory tests, as they are subject to review upon audit by both the Department of Labor and/or the IRS.

  • WHAT IS “QMCSO” OR “NMSN”?
    • How is it determined if a benefit(s), like Wellness programs, critical illness plans, hospital indemnity or voluntary insurance plans, are to be included in a Wrap Document? Employers have flexibility in regards to what plans can be included in a wraparound/bundle plan. Usually an employer chooses to include all insured benefits within a single document and all self-insured benefits in a different document. However you do have the option to include them all in the same document, but if you decide to do this, it is necessary to include the claims procedure for both in the document as well. Many employers steer away from this option mostly because it can lead to a confusing document for participants.

      The main differences between self-insured plans and fully insured plans are that fully insured plans use the Insurer’s claims procedures and reference readers to a certificate of coverage; meanwhile a self-insured plan actually describes the benefits in the SPD and uses internal claims and appeals procedure. There is no “wrong” choice, instead the decision is contingent on the benefits being offered. Commonly employers find it easier to keep insured benefits separate, however there is no reason to prohibit them from being combined.

      The advantage of having a single plan as opposed to multiple, is that it creates a single plan year that applies to all benefits, and the administrator need only file one form 5500 (if they have over 100 participants).

      Wellness programs can be considered health plans so long as they include medical services. Critical illness/ hospital indemnity plans are usually not ERISA plans unless the employer or administrator elects to actively sponsor them or to deduct the premiums on a pretax basis.

      If the administrator or employer makes these plans available to employees, and does not actively endorse them (see next question), and collects post tax premiums, the employer can treat them as voluntary benefit plans and not be considered the plan sponsor. Nevertheless, if the employer wishes to indeed be the sponsor of these plans, there is a section for “other” insured plans where this can be added.

  • IN A SITUATION WHERE THE EMPLOYER PAYS FOR THE BASE BENEFITS OF A LONG TERM CARE PLAN, AND THE EMPLOYEES THEN BUY-UP ADDITIONAL COVERAGE, HOW DO I INCLUDE THAT INTO MY SPD?
    • Long Term Care is not considered a qualified benefit and therefore should not be included in the plan. It is one of the few benefits not permitted to be covered by a cafeteria plan. Unfortunately, regulations have specifically excluded LTC benefits and therefore they are to be handled outside the plan with use of a Benefit summary or booklet from the carrier.

  • HOW SHOULD WE CREATE AN SPD FOR CLIENTS WHO HAVE MEDICAL AND DENTAL PLANS THAT RUN AT DIFFERENT TIMES? FOR EXAMPLE IF THEIR MEDICAL PLAN CONTRACT RUNS FROM 6/1 TO 5/31, THEIR DENTAL PLAN RUNS 4/1 TO 3/31 AND THEIR VISION PLAN RENEWS EVERY TWO YEARS (5/1 TO 4/30). SHOULD THERE BE A SEPARATE SPD FOR EACH PLAN?
    • Two options are available for this situation:
      Option 1 consists of establishing a wrap-around plan with a plan year that correlates with the Company’s fiscal year, such as 1/1 through 12/31 or one of the contract years. Although the insurance contracts can still use different dates, if the plan files a Form 5500 and has 100 participants, the insurance carrier will need to furnish premium information for the plan year instead of the contract year, when filing said Form 5500. You can also ask the carriers to run out the short year and place future years on a plan year basis.

      Option 2 involves creating separate plans/SPDs for every benefit. With this option every benefit would have a separate plan number, for example Medical/Rx-501, Dental-502 etc. The Plan Year for each plan would then coincide with the insurance contract year. Any plans with 100 participants would require filing a Form 5500 based on the plan year but the insurance contract would match the plan year.

      The first option provides some advantages, such as only being requiring one Form 5500 filing, so long as the plan reaches 100 participants and all the information can be in a single document. Another advantage is that the plan year matches the company’s fiscal year, any extension of the corporate tax return automatically applies to the form 5500. The tax deduction would coincide with the company’s fiscal year, if the insurance contracts were to be altered to match the plan year. There is no definitive answer, especially if it’s a small plan that will likely never have 100 participants. It is allowed for the plan year and insurance contract to be different, but if required to file a Form 5500, the insurance information will need to be reported based on the plan year. Basically the plan year determines how and when the Form 5500 is filed and what information is pertinent.

  • ARE EMPLOYEE CONTRIBUTIONS FOR DISABILITY BENEFITS SUPPOSED TO BE MADE ON A PRE-TAX BASIS?
    • The common practice is that when payment is made on a pre-tax basis for any benefit, that benefit becomes taxable to the employee. Benefits that were purchased with after-tax dollars are not taxable to the employee or beneficiary since the premiums have already been taxed.

      If the employer-paid benefits are treated as pre-taxed benefits, the benefit becomes taxable to the employee. Hypothetically, if an employer provides a base LTD benefit to employees and the employee is allowed to purchase a supplemental benefit on an after-tax basis, the employer portion of the LTD benefit paid to the employee will become taxable but the supplemental portion purchased by the employee will not become taxable. However, if the LTD premium is paid on a pre-tax basis, the benefit (which is payable to the employee) will become taxable.

      It is important to note that there is an exception to this rule; if the employer-paid life insurance, where up to $50,000 is allowed to be provided by the employer. Any amounts more than $50,000 are taxed as imputed income to the employee; because of this the benefit is not taxable to the beneficiary.

  • HOW SHOULD I ADD A CARVE-OUT BENEFIT FOR TRANSPLANT SERVICES?
    • We advise selecting one of the first two options.
      Option 1: “Transplant benefits are provided under a separate transplant program and will include the services of a transplant coordinator to assist you. Arrangements will be made at a facility approved by the Plan. Covered transplant services include room and board, physician’s fees, and other related services.”

      Option 2: “Benefits are provided under a separate organ and tissue transplant policy. Potential donors and recipients must meet the terms and conditions outlined in the policy with no pre-existing conditions.” A separate policy/addendum to the SPD must be provided for transplant coverage.

      The two options are available because there are many employers with specific transplant programs and/or policies. The SPD issued would then refer the employee to the separate program/policy. The policy itself can then be duplicated and distributed to employees with a note stating that it should be kept with their SPD. So long as the policy/procedure is made available to employees or upon request, an SPD can reference a separate policy or procedure.

      Also, a plan amendment adopting the new benefit is allowed to be distributed with the SPD so long as it explains the features of the new benefit. The document can be formatted similarly to the SPD as in “Transplant Policy for (Name) Health and Welfare Plan”, the signatures are not necessary.

  • IF A FULLY INSURED PLAN SIMPLY CHANGED MEDICAL CARRIERS, DOES AN AMENDMENT HAVE TO BE ISSUED? OR IS THAT CONSIDERED A SMM?
    • Typically employers state this type of change in their open enrollment materials, and then treat that as a Summary of Material Modification. Technically they should also amend the combined Plan Document/SPD to reflect the change in carriers. The amendment could be a simple single state that explains the change in carrier (i.e. MultiState will now be replaced National). If the open enrollment materials were used to announce the change, the participants are not required to receive the updated plan/SPD.

  • HOW CAN WE TELL IF A BENEFIT SHOULD BE INCLUDED IN THE SPD, FOR EXAMPLE PET INSURANCE OR PRE-PAID LEGAL?
    • The only benefits that are required to be included in the SPD are health and welfare plans, essentially medical, dental, vision, life, disability and AD&D. Any other benefits including Pet insurance or Pre-paid legal can be excluded.

  • SHOULD WE INCLUDE PRE-TAX INDIVIDUAL WORKSITE (VOLUNTARY) BENEFITS THAT ARE AVAILABLE FOR PURCHASE (E.G. DISABILITY) BY OUR EMPLOYEES, IN OUR SPD?
    • Individual voluntary insurance can be treated in to distinct manners. One option is to treat them as an employer-sponsored plan; which would thereby be covered under ERISA and would be subject to all the reporting and disclosure requirements. The other option is to treat them as a non-employer sponsored benefit. To determine if a plan is employer-sponsored, a set of guidelines (which was provided by the DOL) can be used. Essentially all this means is that an employer can choose not to be the sponsor voluntary-type benefits. Currently, courts use a 3-part test to determine whether an employer is a plan sponsor.

      The 3-part test is briefly outlined below:

      1. A safe harbor exemption from ERISA
      2. Requires there be no pre-tax (employer) contributions,
      3. The employer does not receive any compensation for its services other than reasonable compensation for administrative services, and the employer’s role is limited to collecting premiums through payroll deduction and remitting them to the insurer.

      Typically employers do not want to sponsor these plans since they create a liability for administering them. The safe harbor exempts them of ERISA report and disclosure requirements, including plan document, SPD, etc. An employer has the option of sponsoring these plans and can even collect premiums on a pre-tax basis.

  • WHO BECOMES THE SPONSOR OF AN INDIVIDUAL VOLUNTARY BENEFIT IF THE EMPLOYERS DECIDES NOT TO SPONSOR IT?
    • Since it is a purchase of individual insurance, a sponsor is not necessary. The employer would only be allowed to collect premiums, after-tax only, and remit them to the Insurer. The employer is not allowed to receive any compensation for these services other than reasonable compensation for administrative services. Essentially they must take a “hands-off” approach in regards to the voluntary benefits.

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