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Compliance NewsSummer 2012

Issued by Lockton Benefit Group

INSIDE THIS ISSUE

LET THE GAMES BEGIN: DOL INCLUDES HEALTH REFORM COMPLIANCE IN ITS HEALTH PLAN AUDITS

Pages 1-3

HEALTH REFORM’S HIDDEN DANGERS: LIMITS ON DEDUCTIBLES AND OUT-OF-POCKET MAXIMUMS

Pages 4-5

PLAN DOCUMENT ISSUES: WHAT’S WHAT AND WHAT PLAN SPONSORS NEED AT THE END OF THE DAY

Pages 6-8

HSAs: WHO MAY ESTABLISH THEM AND WHO MAY RECEIVE DISTRIBUTIONS?

Page 9-10

“THAT’S NOT FAIR!” WINS THE DAY IN SUBROGATION CASE

1

ADDITIONAL TAX WITHHOLDINGS APPLY IN 2013 FOR HIGH WAGE EARNERS

Pages 12-13

STATE ROUNDUPPages 14-18

IRS RELEASES AUDIT GUIDELINES FOR COBRA COMPLIANCE

Pages 19-20

REMINDERSPage 21

L O C K T O N C O M P A N I E S

Let the Games Begin: DOL Includes Health Reform Compliance in its Health Plan Audits

The U.S. Department of Labor (DOL) now includes

compliance with the health reform law in its

examinations of employer health plans. The agency

trained its field enforcement staff earlier this

year, and each field office has a target number of

examinations it must conduct by Sept. 30, 2012.

Thus far, the investigations largely focus on documentation of grandfathered status, reporting and disclosure, as well as benefit mandates. With respect to grandfathered plans, investigators are asking for disclosure statements that have been sent to participants and plan records that would substantiate the health plan’s grandfathered status.

continued on page 2

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All health plans, whether grandfathered or not, are asked to demonstrate compliance with the law’s insurance reforms, including the extension of coverage to adult children through age 26 and limits on the imposition of lifetime and annual dollar maximums for “essential health benefits.”

The requested documents include:

� For plans with dependent coverage, a sample of the notice describing enrollment opportunities relating to coverage of children up to age 26.

� If the plan imposes or has imposed a lifetime dollar limit since Sept. 23, 2010, documents relating to that limit for each plan year.

� If the plan has imposed an annual dollar limit since Sept. 23, 2010, documents relating to that limit.

� A list of any participants who had coverage retroactively rescinded and the reason for such rescission.

Document requests from nongrandfathered plans are aimed at substantiating that the plan in question complies with certain coverage mandates that apply only to nongrandfathered health plans. The items requested include:

� The plan’s “choice of provider” disclosure notice, along with a list of participants who received that notice (i.e., network-based plans, such as PPOs that require designation of a primary care physician, must allow the enrollee to designate a participating primary care physician who is available within the network).

One of the biggest U.S. Department of Labor (DOL) enforcement initiatives in years is here and it is targeting

employer health plans. The agency will

be conducting thousands of health plan

investigations in the next year to ensure

plans are in compliance with ERISA and

health reform. These investigations can

be burdensome and costly.

Lockton now offers a DOL Examination

Service, allowing clients to undergo a

thorough compliance review utilizing

the same procedures used by the DOL.

Using former DOL investigators, Lockton

can conduct full ERISA reviews that can

identify areas of potential risk. At the

conclusion of thet examination, Lockton

will provide a customized consultation

detailing the findings of the examination,

identifying areas of risk and providing a

plan of action.

Because of the extraordinary nature

of these services, clients who take

advantage of this service are often

charged a modest fee.

LOCKTON DOL EXAMINATION

SERVICES

continued from page 1

Summer 2012 • Compliance News

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� Documents relating to the plan’s covered emergency services.

� Documents relating to the plan’s preventive services for each plan year beginning on or after Sept. 23, 2010.

� The plan’s internal claims and appeals procedures, if any.

� Notices relating to adverse benefit determinations, the plan’s final internal adverse determination notice, and the plan’s final external review determination notice.

� Contracts or agreements with independent review organizations providing external review of claim appeals.

Plans sponsors should consider whether they have the appropriate documentation to provide to the DOL in the event of an audit. A best practice is to maintain detailed records of the steps taken toward compliance, including copies of participant communications, plan amendments and written policies and procedures.

A best practice

is to maintain

detailed records

of the steps taken

toward compliance,

including copies

of participant

communications,

plan amendments

and written policies

and procedures.

MARK HOLLOWAYSenior Vice PresidentDirector, Compliance ServicesLockton Benefit [email protected]

4

Health Reform’s Hidden Dangers: Limits on Deductibles and Out-of-Pocket Maximums

The federal health reform law poses a number of hidden risks for employers, and one of them may be

a vague provision limiting the size of a plan’s deductibles and out-of-pocket maximums.

The limits appear in section 2707 of the Public Health Service Act (PHSA), which was inserted into the PHSA by section 1201 of the Patient Protection and Affordable Care Act (PPACA). It applies to nongrandfathered plans.

Subsection (b) of section 2707 says, “A group health plan shall ensure that any annual cost-sharing imposed under the plan does not exceed the limitations provided for under paragraphs (1) and (2) of section 1302(c) [of the PPACA].” Group health plans include employer-sponsored plans, whether large- or small-group, and whether insured or self-funded. So what do subsections (1) and (2) of section 1302 say? Here is where the confusion begins.

Section 1302 defines the PPACA’s “essential health benefits” package, that is, the benefits required to be in insurance policies sold to individuals through an insurance exchange, and in policies sold in the small group market. Fully-insured plans in the large group market and self-insured plans are not subject to the “essential health benefits” package rules.

Subsection (1) of section 1302(c) limits cost sharing under a “health plan” to the out-of-pocket limits that apply to qualified high-deductible health plans (HDHPs) coupled with health savings accounts. This rule applies beginning in 2014. For the sake of reference, the out-of-pocket limits for HDHPs for 2013 are $6,250 (single coverage) and $12,500 (family coverage). The PPACA defines a “health plan” to include group health plans.


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ED FENSHOLTSenior Vice PresidentDirector, Compliance ServicesLockton Benefit [email protected]

Subsection (2) of section 1302(c) is titled, “Annual Limitation on Deductibles for Employer-Sponsored Plans,” but goes on to say that “in the case of a health plan offered in the small group market, the deductible … shall not exceed $2,000 [for single coverage] and $4,000 [for family coverage], indexed for inflation. The maximum deductibles may be increased by the amount available to an employee under a health reimbursement arrangement or flexible spending account (but disregarding employee pretax contributions to the account).”

So I’m an Employer: What Does This Mean to My Business?

Well, what are we to make of all this? If we were to look only at section 1302 we would say, “These deductible and out-of-pocket limits don’t apply to any self-insured plan, or to fully insured plans in the large group market.”

But our starting point must be section 2707. It applies to all group health plans. Section 2707 appears to simply bootstrap—that is, incorporate by reference—the same deductible and out-of-pocket limits that section 1302 applies to small group plans and other coverage subject to the “essential health benefits” requirements.

Federal authorities will sort this out, hopefully well in advance of 2014. But for employers casting an eye on imposing very high deductibles and out-of-pocket maximums in 2014, it may be prudent to at least plan on not implementing limits greater than those described in section 1302(c).

6

Plan Document Issues: What’s What and What Plan Sponsors Need at the End of the Day

Plan sponsors are largely overwhelmed with numerous health and welfare document and notice requirements, each subject to specific content and disclosure rules. Where benefits are insured, or even sometimes self-insured, carriers and administrators may take it upon themselves to furnish one or more documents. Common areas of confusion for plan sponsors are deciphering which documents they have, identifying missing content in those documents, and identifying documents they need.

We have compiled a list of questions and answers frequently asked by plan sponsors.

What’s the difference between the formal plan document and a Summary Plan Description (SPD)?

ERISA requires that a plan “be established and maintained pursuant to a written instrument.” Outside of that general description and a handful of content requirements, plan sponsors have full discretion in writing these plans. Content requirements include, but are not limited to: a description of the plan’s benefits, a funding policy, claims procedures and amendment procedures. This document is not required to be distributed to plan participants, but must be adopted by the plan sponsor and maintained going forward.

The SPD merely summarizes the formal plan document in a manner calculated to be understood by the average plan participant. ERISA prescribes additional content requirements for an SPD, such as a participant’s rights statement, plan identifying information (i.e., plan year, plan number), eligibility rules and a laundry list of items for plans that are group health plans. The SPD must be distributed to plan participants pursuant to particular timeframes and distribution methods.

Can I combine the formal plan document with the SPD?

Yes. Frequently the plan sponsor designates that the plan document doubles as the SPD. This reduces the number of documents a plan sponsor needs to maintain and also reduces chances of inconsistency between the plan document and SPD. However, the combined document must include all content under ERISA’s formal plan document requirement and the SPD requirement. Additionally, the document must be easily understandable by the average participant and summarize the benefits provided by the plan.


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Who has the obligation to furnish the SPD?

The plan administrator (generally the employer/plan sponsor) is the entity responsible for producing and distributing the SPD. Carriers or claim payors may agree to prepare and distribute them on behalf of the plan administrator, but the employer/plan sponsor typically has authority over and responsibility for the SPD.

Does the certificate of coverage from my carrier qualify as the SPD?

Not necessarily. The carrier’s primary focus is to comply with state insurance laws, not ERISA disclosure obligations. Many plan sponsors are under the misconception that the coverage certificate is the SPD and that the carrier is fulfilling this obligation for the plan sponsor. However, in many cases coverage certificates often lack sufficient SPD content. Even if a carrier agrees to prepare and distribute a coverage certificate, the plan sponsor still retains the burden of providing an adequate SPD. This is where a wrap plan document is beneficial.

What’s a wrap plan?

A wrap plan is a formal document that incorporates all ERISA-required plan and SPD language as well as bundling multiple lines of coverage together under a single ERISA plan. Therefore, the benefits of a wrap plan are twofold: the plan sponsor has a single ERISA plan with only one Form 5500 filing obligation, and the boilerplate ERISA language most often missing from a carrier’s coverage certificate is included. The wrap plan incorporates, by reference, the already existing benefit-specific coverage certificates and SPDs. That is, it does not take the place of the coverage certificates; it merely “wraps” around them. At the end of the day, participants should receive a coverage certificate or summary for each line of coverage they are enrolled in, plus the wrap plan document/SPD.

continued on page 8

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What is a cafeteria/Section 125 plan?

A cafeteria plan is a document that authorizes pretax contributions for certain health and welfare benefits. Under the Tax Code, employers must have a written plan document in place prior to taking pretax contributions from employees’ wages. The cafeteria plan does not replace underlying benefit documents or the wrap plan document/SPD. Cafeteria plans may include benefits in addition to pretax premium payment, such as a health flexible spending account (FSA), a dependent care FSA and reimbursement of certain adoption expenses. Although there is no IRS requirement to distribute cafeteria plan documents to employees, components of the cafeteria plan that are ERISA benefits (e.g., the health FSA) are still subject to SPD and other ERISA reporting and disclosure obligations.

How do I update a plan document/SPD?

It’s not uncommon for plan sponsors to periodically modify plan benefits. When material changes occur to the plan, the plan sponsor must amend the formal plan document and either update the plan SPD or distribute a notice of the change. Plan sponsors often overlook the obligation to formally amend their plans, when they make changes.

Note that health reform adds a new disclosure obligation. Plans must distribute a “summary of benefits and coverage” (SBC) to enrollees and even those merely eligible for coverage.

If you have further questions, please contact your

Lockton Account Services Team.

SARA ROY, RP, CEBSAssistant Vice PresidentParalegalLockton Benefit [email protected]



9

HSAs: Who May Establish Them and Who May Receive Distributions?

The Eligibility Rules

The rules governing who may establish and contribute to a health savings account (HSA) are much more restrictive than the rules governing who may receive an HSA distribution. Only “eligible individuals” may establish an HSA. An “eligible individual” is a person whose medical coverage is qualifying high-deductible health plan (HDHP) coverage and who does not have any “disqualifying” coverage. (See table below).

Individuals who may be claimed as tax dependents are not eligible to establish an HSA, but their medical expenses may be reimbursed, tax-free, under a parent’s HSA.

An “eligible individual’s” status is determined every month as of the first day of the month. However, there is a special “deeming rule” for employees who are “eligible individuals” on December 1 of any year. They are deemed to have been eligible for the entire calendar year and, therefore, may make contributions to their HSA for every month of the year. However, there is a catch: they must remain eligible for the entire following year. So, for example, if an employee first becomes an eligible individual on May 1, 2012, and is still an eligible individual on December 1, 2012, he or she accrues the right to make contributions to his or her HSA for every month in 2012. But he or she must remain an “eligible individual” for all of 2013 in order to take advantage of this deeming rule; if the individual ceases to be an eligible individual during 2013 he or she will be taxed on any HSA contributions he or she made for the months of January through April, 2012.

The types of coverage that can disqualify a person from having an HSA include:

� TRICARE (military benefits).

� Veterans Administration benefits if the individual has received care (other than preventive care) in the past three months.

� General-purpose Health Flexible Spending Accounts (FSAs) or Health Reimbursement Accounts—HRAs; limited purpose Health FSAs or HRAs (covering vision, dental and preventive care expenses) will not prevent HSA eligibility.

� Prescription drug coverage (if offered on a first dollar basis).

� Coverage from the Indian Health Service.

� Any non-HDHP coverage, such as HMO, PPO or POS coverage, even if under a spouse’s or parent’s policy.

� Actual coverage under Medicaid or Medicare.

continued on page 10

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JANAE SCHAEFFERERISA Compliance AttorneyLockton Benefit [email protected]

The Distribution Rules

Totally different rules govern the right to pull money out of an HSA. HSA account holders may always take money out of their HSA for any reason or no reason at all—even when they’re not eligible to put new money into their HSA. The distinction is that taking money out of the HSA will only be treated as a tax-free withdrawal if it’s to pay the medical expenses of the account holder or the account holder’s spouse or dependents. If the account holder takes money out of his or her HSA account for any other reason, the distribution will be treated as taxable income.

A participant may withdraw funds from his or her HSA tax-free if the distribution reimburses the participant for unreimbursed medical expenses incurred for the HSA account holder or the account holder’s opposite-sex spouse or dependents. “Unreimbursed” means expenses not covered by insurance, such as deductibles, coinsurance or co-payments.

HSA account holders may always take

money out of their HSA for any reason or

no reason at all.



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“That’s Not Fair!” Wins the Day in Subrogation Case

One of the most vexing aspects of self-insured health plan administration is recouping plan payments under the plan’s subrogation and reimbursement provisions. These provisions are intended to allow a plan to recoup benefit payments made on behalf of an enrollee who recovers medical expenses from a third party, such as another insurance company or from a defendant in a lawsuit.

But the rules governing just how a plan goes about recouping a prior payment are complex. Insured plans, for example, typically are forbidden by state insurance law from subrogating. Self-insured plans traditionally enjoyed an advantage because ERISA preempts state rules—like a state “make whole” doctrine—that would otherwise frustrate a plan’s right to subrogate. But federal courts have increasingly been adopting similar concepts and barriers. A recent federal court case demonstrates just how complicated the world of subrogation has become.

In the case, the plan paid $65,000 in medical expenses on behalf of an enrollee who then recovered $110,000 for his injuries. His lawyer’s share of the settlement reduced the insured’s net recovery to less than $65,000, but the plan demanded the full $65,000, and the plan’s language gave the plan the absolute right to do so. A long line of prior court cases held that if the plan document gave the plan a clear right to “first dollar” recovery—that is, to recover monies before any reduction for attorneys’ fees—the plan’s language controlled.

The appeals court broke from the line of prior decisions and held that, notwithstanding the plan’s clear language, it would be inequitable—unfair, as it were—to permit the plan to grab its reimbursement without any offset for a share of the insured’s attorneys’ fees.

The court’s decision is surprising in the clean break it makes from prior decisions, but not so surprising when one surveys the trend in these subrogation cases. A decision like this was probably only a question of time.

When asked, we have often urged plan sponsors to negotiate with insureds and their attorneys regarding division of any settlement or judgment pie, and to be willing to consider reducing the subrogation or reimbursement demand by a portion of the attorneys’ fees. Striking an agreement with the insured and his or her lawyers saves the plan the cost of litigation with the insured, and acknowledges that the plan would certainly have incurred legal costs of its own had it alone pursued recovery from the relevant third parties. Now, it appears this approach is becoming the law of the land.

ED FENSHOLTSenior Vice PresidentDirector, Compliance ServicesLockton Benefit [email protected]

Now it

appears this

approach is

becoming

the law of

the land.

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Additional Tax Withholdings Apply in 2013 for High Wage Earners

Employers need to be sure their payroll systems will be ready to withhold new taxes that will apply next year. Beginning in 2013, high wage earners will be paying more in taxes as a result of “revenue raisers” that were included in the 2010 health reform law. Last month, the IRS posted a series of questions and answers on its Web site on the new rules.

Beginning in 2013, an additional 0.9 percent Medicare tax will apply to individuals on their wages in excess of $200,000. The threshold for a married couple filing a joint return is $250,000. The new tax only applies to the employee portion of the Medicare tax, not the employer portion.

The 0.9 percent tax applies in addition to the current 1.45 percent Medicare tax on wages, increasing the rate to 2.35 percent for wages above the threshold. The dollar thresholds for the tax are not indexed for future inflation. An employer must begin withholding the 0.9 percent once an employee’s wages, including taxable fringe benefits, exceed the $200,000 threshold.

example . . . Bob works for Company X and has wages of

$300,000 in 2013. Bob is married to Alice,

and they file joint a tax return. Alice works

for Company Y and earns $70,000.

Company X must withhold an additional 0.9

percent on Bob’s wages above $200,000

($100,000 x .9% = $900). Company Y

does not withhold the 0.9 percent tax

from Alice’s wages because she earns less

than $200,000. When Bob and Alice file

their joint 2013 tax return, the 0.9 percent

tax will apply to their combined wages

($370,000), and they may owe additional

tax when they file their tax return.


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Questions and answers from the IRS address some common issues employers will face in 2013, such as:

Q Third-Party Sick Pay

A Sick pay received by the employee from a third party will need to be aggregated with other wages to determine whether the $200,000 withholding threshold has been mtet. Responsibility for withholding the 0.9 percent tax will depend on who is responsible for reporting and payment of the existing 1.45 percent Medicare tax for the sick pay (i.e., the employer, the employer’s agent or a third party that is not the employer’s agent).

Q Common Paymaster

A If an employer serves as a common paymaster (e.g., when an employee is performing services for multiple subsidiaries of a company), the wages paid on behalf of each subsidiary must be combined for calculating the additional 0.9 percent tax. Otherwise, the wages are not aggregated for purposes of the $200,000 withholding threshold if the payer is not a common paymaster.

Q Expatriates and Aliens

A There is no exemption for nonresident aliens and U.S. citizens living abroad. Wages earned by such individuals are subject to the additional withholding if paid in excess of the $200,000 threshold.

Employers should check with their payroll vendors to ensure withholding procedures are in place for 2013. Although not required, employers may want to alert affected high wage-earning employees to the new withholdings that will apply next year.

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State Roundup

California Senate Introduces Bill Imposing Requirements on Stop-Loss Health Insurance

California Senate Bill 1431 requires a stop-loss carrier to offer insurance coverage to all employees and dependents of a small employer to which it issues a stop-loss insurance policy, and prohibits the carrier from excluding any employee or dependent on the basis of actual or expected health status-related factors. The proposed law also requires stop-loss carriers to renew, at the option of the small employer, all stop-loss insurance policies, and prohibits a stop-loss carrier from providing direct coverage of an employee’s health claims.

The legislation also bans a stop-loss carrier from issuing a stop-loss insurance policy to a small employer that contains an individual attachment point for a policy year that is lower than $60,000 (recently amended from $95,000) or an aggregate attachment point for a policy year that is lower than the greater of the following:

� $19,000 times the total number of covered employees and dependents,

� 135 percent of expected claims, (recently amended from 125 percent), or

� $95,000.

The bill was referred to committee in mid-June.

California Assembly Introduces Bill Allowing Health Savings Accounts to be Free of State Tax

California is one of just a handful of states that tax HSA contributions. That might finally change.

California Assembly Bill 1510 allows a deduction equal to the amount paid in cash during a taxable year by, or on behalf of, an eligible individual to a Health Savings Account (HSA). Rollovers from an Archer Medical Savings Account, a Health FSA or Health Reimbursement Account (HRA) to an HSA would also be tax-free. A second committee hearing has been set for the bill.

Colorado Legislature Rejects Same-Sex Civil Unions

A bill allowing civil unions for same-sex couples in Colorado was defeated in committee during a special legislative session held in May, 2012. The bill had cleared a number of committees and the full state Senate, but was never brought to the House floor for a full vote before the legislative session concluded.

Instead of recognizing domestic partners or same-sex marriages, Colorado allows unmarried persons to register as “designated beneficiaries” to create certain property, benefits and other rights.


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Delaware Enacts State “Mini-COBRA” Law For Small Employer Plans

As many states had done earlier, Delaware recently enacted a COBRA-like coverage continuation law for insured plans covering up to 19 employees. Continuation coverage is available for nine months after coverage under the group plan terminates because of a qualifying event. The coverage is available to any covered employee or eligible dependent who has been continuously insured under the group policy during the three-month period prior to termination. Coverage is not available for any person who is or could be covered by any other insured or uninsured arrangement which provides hospital, surgical or major medical group coverage. The continuation coverage must include all benefits provided under the group policy, and the premium cannot be more than 102 percent of the group rate for the insurance being continued.

Illinois Raises Cigarette Taxes and Approves Major Medicaid Reductions

In May, in an attempt to deal with budget woes, Illinois lawmakers approved major Medicaid reductions which will cause hundreds of thousands of state residents to lose Medicaid benefits. Payment rates for nursing homes and hospitals will be reduced by about $240 million. Supporters of the legislation argued that failure to approve the bill could result in the collapse of the entire state Medicaid system. Approximately a week later, Illinois lawmakers approved a plan to raise taxes on cigarettes and other tobacco products to prevent deeper cuts to the state’s Medicaid program. The $1-a-pack increase more than doubles Illinois’ cigarette tax.


16

Kansas Passes Law Banning Elective Abortions

Kansas recently passed a law requiring group health insurance policies and health maintenance organizations (HMOs) to exclude coverage for elective abortions, unless the procedure is necessary to preserve the life of the mother. Coverage for abortions may be obtained through an optional rider for which an additional premium is paid.

The law also prohibits any health insurance exchange established in Kansas or any health insurance exchange administered by the federal government in the state from providing coverage for elective abortions or from offering coverage for elective abortions through the purchase of an optional rider. Since enactment of the Affordable Care Act, at least 13 states—Arizona, Florida, Idaho, Indiana, Kansas, Louisiana, Mississippi, Missouri, Nebraska, Oklahoma, Tennessee, Utah and Virginia—have enacted legislation to restrict coverage of abortion in their insurance exchanges.

Louisiana Amends State Continuation Coverage Statute

Louisiana legislators passed a bill amending the state’s mini-COBRA statute. The new provision extends the employee election period to not later than the end of the month following the month in which the qualifying event occurred. The proposed law also provides that if the dependent is eligible due to divorce, the event shall be deemed to have occurred on the date of the judgement of divorce. The law does not apply to self-insured ERISA plans.

Maryland Health Services Cost Review Commission Sets New Rates

The Maryland Health Services Cost Review Commission set new inpatient and outpatient services rates for the year starting July 1. The Commission agreed to lower the rates for inpatients by 1 percent but raise the rates for those receiving outpatient services by 2.59 percent, giving hospitals an overall increase of 0.3 percent.

Maryland’s healthcare service rate-setting program, launched in the 1970s, aims to hold down medical costs by spreading the expense of patient care. All insurers pay the same rates, including private companies, the state (through Medicaid), and the federal government (through Medicare).

Massachusetts Enacts Bill to Reduce State Healthcare Costs

On August 6, 2012, Massachusetts Governor Deval Patrick signed a bill to reduce state healthcare costs over the next 15 years by $200 billion. The legislation restricts what health care providers may charge for certain services. The bill:

� Establishes healthcare cost growth benchmarks at levels no higher than the growth in the state’s gross state product.

� Sets up a process to track price variations among different healthcare providers over time.

� Requires a new commission to review providers that fail to meet the spending limits and allows the attorney general to investigate those whose prices are materially higher than others.



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� Dedicates $60 million collected from insurers over the next four years to prevention efforts and encouraging the creation of “accountable care organizations.” These are groups of doctors and hospitals working together to coordinate patients’ care.

� Increases access to essential services by enhancing the role of physician assistants to act as primary care providers.

� Provides a one-time assessment on certain hospitals and private carriers to generate $225 million to support distressed hospitals, support wellness efforts and support the transition to electronic medical records.

� Imposes a 180-day “cooling off ” period after an injured patient signals an intention to sue a healthcare provider.

The Massachusetts House passed a similar bill that establishes a Web site that would provide consumers and physicians with detailed quality and cost-sharing information and improves access to preventive care by establishing patient-centered medical homes. Neither bill has passed both chambers of the legislature.

The legislature also passed an act requiring medical facilities or healthcare providers to provide expectant parents with information concerning a positive test result from Down syndrome testing.

New Michigan Law Requires Insurers to Provide Autism Benefits

New legislation in Michigan requires health insurance plans to provide coverage for the diagnosis and treatment of Autism Spectrum Disorders (ASDs). These

disorders include autism, Asperger’s disorders and other pervasive developmental disorders. The legislation does not require that prescription drug benefits be provided unless the person receiving treatment for ASDs is also covered by a prescription drug plan.

Self-insured ERISA plans are not required to provide coverage for ASDs under the legislation. Related legislation, however, created the Autism Coverage Fund to provide incentives for self-insured plans to cover ASD. The Fund will be financed by the state treasury.

An estimated 15,000 Michigan children have ASDs. Adding coverage for ASDs is expected to cost approximately $17,000 per child per year, increasing total health claim costs by roughly $225 million per year in Michigan.


18

North Carolina Passes Constitutional Amendment Banning Same-Sex Marriage

By a margin of almost 500,000 votes on May 8, North Carolinians passed a constitutional amendment to ban same-sex marriage. State law already banned same-sex marriage, but supporters argued that a constitutional amendment added another layer of protection from activists seeking to legalize same-sex marriage. North Carolina had been the only state in the southeast that had not passed such an amendment.

Rhode Island’s Governor Signs Order Directing State Agencies to Recognize as Legal Marriages Performed Out of State as Legal

In May, Rhode Island Governor Lincoln Chafee declared that the state will recognize same-sex marriages performed elsewhere, giving gay couples the same rights as heterosexual ones when it comes to health insurance subject to Rhode Island law, and other benefits. The law makes same-sex spouses of state employees eligible for health and life insurance. In addition, same-sex couples will be able to list their names as parents on a child’s birth certificate, among other rights.

Texas Supreme Court Holds Sale of Stop-Loss Insurance to Self-Funded Plans is Subject to State Regulation

The Texas Supreme Court ruled that an insurer’s sale of stop-loss insurance to self-insured health plans is subject to the state insurance code’s policy approval requirements, taxes and other assessments. An insurer had argued that stop-loss insurance fell within the insurance code’s exception for reinsurance. The court reasoned that insurance involves the transfer of risk from one insurer to another, requiring the party purchasing the policy to be an insurer. The court found that a self-insured group health plan, although it performs a function similar to insurance, is not engaged in the business of insurance and, as a consequence, a stop-loss policy is not “reinsurance.”

Federal agencies are also interested in health plan purchases of stop-loss insurance. The DOL, HHS and IRS recently issued a joint request for information about the frequency and consequences of stop-loss insurance purchased in connection with self-insured health plans. There is concern that small businesses are attempting to establish self-insured health plans with unreasonably low stop-loss attachment points.

JANAE SCHAEFFERERISA Compliance AttorneyLockton Benefit [email protected]



19

IRS Releases Audit Guidelines for COBRA Compliance

The IRS has released a document entitled, “Audit Techniques and Tax Law to Examine COBRA Cases,” which provides a roadmap for IRS examiners to determine if an employer health plan complies with the COBRA law. Failing to meet the COBRA law’s requirements can result in penalties of up to $100 per day per COBRA beneficiary for each day of noncompliance. The excise tax is self-reported on IRS Form 8923 (see article in Compliance News, Spring 2010).

The manual suggests the IRS auditor request the following materials:

1. A copy of the plan’s COBRA “procedures manual” or policy.

2. Copies of standard COBRA form letters sent to qualified beneficiaries.

3. A copy of the employer’s internal audit procedures, if any, for healthcare continuation coverage.

4. Copies of all group healthcare plans.

5. Details pertaining to any past or pending lawsuits filed against the employer for failing to provide appropriate continuation coverage.


http://www.lockton.com/Resource_/InsightPublication/1684/ComplianceSpring2010.pdf

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Interestingly, the COBRA law and accompanying regulations do not require a plan to maintain a procedures manual or a formal internal audit procedure. Evidently, the IRS views both as a best practice for COBRA compliance.

Based on the procedures in place, the IRS examiner probes specific areas for noncompliance and interviews responsible parties regarding the following:

� The number of COBRA qualifying events occurring in the year under examination.

� The method by which COBRA beneficiaries are notified of their rights to continue healthcare coverage under COBRA.

� The method by which the plan administrator is notified that a qualifying event has occurred.

� The election made by qualified beneficiaries to continue healthcare coverage.

� The premium paid by qualified beneficiaries for continuing coverage under the plan.

IRS examiners are urged to review personnel records to confirm that COBRA beneficiaries were properly notified of their rights to continue healthcare coverage. If COBRA coverage is denied due to the employee’s gross misconduct, the examiner is directed to determine if state unemployment benefits were denied for the same reason. In the absence of formal IRS guidance on what qualifies as gross misconduct, some employers have used the denial of unemployment insurance benefits as the yardstick for whether gross misconduct occurred.

Many employers outsource COBRA administration, due to the law’s complexity. In this regard, plan sponsors may wish to review their contracts with the vendors, to ensure the vendor’s pledge to administer COBRA in accordance with its requirements, and indemnify the plan sponsor for failures that could trigger liability for the sponsor.




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SARA ROY, RP, CEBSAssistant Vice PresidentParalegalLockton Benefit [email protected]

Reminders

First Day of Open Enrollment Period Beginning On or After September 23

� Deadline to distribute Summary of Benefits and Coverage (SBC) for individuals affirmatively enrolling or re-enrolling.

September 30 � Deadline for calendar-year plans to distribute Summary

Annual Reports (SARs) if Form 5500 was filed by July 31.

October 2 � Deadline for calendar-year retiree health plans to apply

for 2012 Part D Retiree Drug Subsidy.

October 15 � Deadline for calendar year plans to file Form 5500,

under extension.

� Deadline for Medicare Part D Notices to Medicare-enrolled participants and beneficiaries if notice not supplied in preceding 12 months.

October 30 � Deadline to submit payments to San Francisco under

the City’s Health Care Security Ordinance, for the third calendar quarter.

November 15 � Massachusetts “Fair Share Contribution” and Employer

HIRD Reports due (if applicable).

Our Mission

To be the worldwide value and service leader in insurance brokerage, employee benefits, and risk management

Our Goal

To be the best place to do business and to work

www.lockton.com

© 2012 Lockton, Inc. All rights reserved. Images © 2012 Thinkstock. All rights reserved.

Lockton Compliance ServicesAt Lockton, our mission is to be the worldwide value and service leader in employee benefits consulting and brokerage. Our goal is to provide uncommon results and service.

Our Compliance Services division helps enhance our service commitment to you. Our in-house attorneys and other professionals keep you up to date and in the know regarding important regulatory developments.

Circular 230 DisclosureAny advice in this document concerning a federal tax issue is not written or intended to be used, and cannot be used, for the purpose of avoiding federal tax penalties or

promoting, marketing or recommending any tax-related matters in this document.

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