Employer health care plans face significant challenges

In recent years, Congress and the Internal Revenue Service have created a dizzying array of employer-sponsored health care arrangements. Archer medical savings accounts (MSAs), health care flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs) each have been touted as a solution to rising health care costs.
Yet costs continue to rise at a pace faster than the general inflation rate. Just when it seemed that the available set of options could not get more bewildering, Congress created the health savings account (HSA) in late 2003. The IRS and U.S. Department of Labor (DOL) have since issued a flurry of rules explaining how HSAs work.
On top of all of this, the DOL recently issued final regulations that drastically alter the timing and required content of group health plan summary plan descriptions (SPDs), as well as COBRA notices and election forms. The new COBRA rules will require many businesses to revamp these documents and their COBRA procedures.
Let’s try to decipher the alphabet soup.
Health savings accounts
An HSA is an account that an eligible individual can set up, without employer involvement, to pay for qualified medical expenses on a tax-favored basis. The individual can take an above-the-line federal income tax deduction for HSA contributions and HSA earnings grow tax-free. HSA distributions are also tax-free, provided they are used to pay for qualified medical expenses.
Unlike HRAs and FSAs, HSAs are portable. Amounts held in HSAs are non-forfeitable and may be carried over from year-to-year, so workers can use HSAs to pay for post-retirement health care. Employers may contribute to employees’ HSAs, subject to certain non-discrimination tests. Employer contributions are excluded from employees’ federal gross income, are not subject to federal employment taxes and are deductible as ordinary business expenses.
HSAs have drawbacks, however. First, an individual may contribute to an HSA only if he or she is covered by a high-deductible health plan (HDHP). For 2004, an HDHP is one with an annual deductible of at least $1,000 and maximum annual out-of-pocket expenses of $5,000 for individual coverage, and an annual deductible of at least $2,000 and maximum out-of-pocket expenses of $10,000 for family coverage. Second, the individual may not be covered under any other health plan that is not an HDHP. An individual may receive first dollar coverage for preventative care, however, and may have separate disability, dental, vision or long-term care insurance.
Generally, an individual who contributes to an HSA may have separate prescription drug coverage only through 2005. Third, annual contributions to an HSA generally are limited to the applicable annual deductible amount. As a result, an individual who switches from a traditional plan to an HDHP might spend more of his or her own money to cover the increased deductible, and then eat up his or her entire HSA contribution for that year just to fund the deductible.
Many observers view HSAs and other "consumer-driven" health care arrangements as a cure for skyrocketing health care costs. They argue that when employees must spend their own dollars on health care, they make more cost-effective health care decisions.
However, others claim that HSAs and HDHPs are simply a means for employers to shift rising health care costs to employees. In any event, the Bush Administration has heavily promoted HSAs, so they are likely to remain on the front burner for the near future.
An employer that would not otherwise provide health coverage to its employees might consider establishing an HDHP, which would allow its employees to establish HSAs. The HDHP probably would be cheaper than a traditional major-medical plan, and the employer could even provide HSAs through its cafeteria plan.
Otherwise, any employer that is considering a shift away from a traditional plan to an HDHP should consider the effect that any change in health plans may have upon employee relations and should clearly communicate any change to its employees.
New COBRA Rules
On May 26, the DOL issued final rules that clarify the required timing and content of group health plan SPDs and COBRA administrative forms.
For calendar year plans, the rules will become effective for COBRA notice obligations that arise after Dec. 31, 2004. For fiscal year plans, the new rules could apply as early as Nov. 26, 2004.
Most employers will need to revamp their current COBRA notices and procedures as well as their health plan SPDs, in response to the new rules. To ease the transition, the DOL provided model notices that an employer can customize to satisfy COBRA’s "general" and "election" notice requirements.
However, the new rules impose two additional COBRA notice obligations. The first arises when a plan receives a notice from an individual who mistakenly thinks he or she has, or is eligible for, COBRA coverage under the employer’s health plan. In that event, the plan must provide a notice to the individual explaining why he or she is not eligible for the COBRA coverage.
The second notice obligation arises when a COBRA recipient’s coverage terminates before the end of the otherwise applicable maximum COBRA coverage period. Here, the plan must notify the individual that his or her COBRA coverage is terminating early and explain any rights he or she may have to elect other group or individual coverage.
The DOL did not provide models for either of these two notices.
Employers that fail to comply with the new DOL rules may be subject to IRS excise taxes and DOL penalties of up to $110 per day and may be liable for medical expenses an individual incurs until a satisfactory notice is provided.
An employer should take steps to ensure that it complies with the new COBRA rules before they become effective. The employer’s first step is to consult with its health insurer or third party administrator to make sure its health plan SPD contains all required information. Next, the employer should contact its COBRA administrator to ensure that its COBRA notices and procedures are being changed to meet the new requirements. If the employer administers its COBRA program in-house, it should update its forms and procedures accordingly. This proactive approach will reduce disputes and expensive litigation that otherwise might arise.
Todd Cleary is an attorney who specializes in labor and employment law with the Milwaukee office of Godfrey & Kahn S.C. He can be contacted at (414) 287-9433 or tcleary@gklaw.com.
August 6, 2004, Small Business Times, Milwaukee, WI