Limited Wraparound Coverage is an interesting new concept brought mainstream by the Departments in proposed rules that were published just before the New Year. In the few weeks since, lawyers and consultants have weighed in with summaries of the proposed rules. The question remains, however, just who is this excepted benefit designed to benefit?
On December 24, 2013, the Department of the Treasury, the Department of Labor, and the Department of Health and Human Services (together, the Departments) jointly published “Amendments to Excepted Benefits,” a proposed rule. With this publication, the Departments propose amending the excepted benefit regulations under the Employer Retirement Income Security Act of 1974 (ERISA), the Internal Revenue Code, and the Public Health Service Act (PHSA). Excepted benefits are generally exempt from the market reforms added to these laws by the Patient Protection and Affordable Care Act (PPACA or ACA). Although the proposed rule provides some helpful regulations for dental and vision benefits, as well as Employee Assistance Programs (EAPs), the most interesting part was the introduction of a previously unknown benefit, called Limited Wraparound Coverage.
The proposed regulations describing Limited Wraparound Coverage begin with the assumption that employer-sponsored major medical plans are better than any plan an individual can purchase through the Marketplace (aka the Exchange). The regulations then assume that some employees will not be able to afford the employer-sponsored plan, will waive the coverage and instead purchase coverage in the Marketplace that costs less. In such a case, the employer might then be inclined to offer “wraparound coverage” to those employees who purchase coverage in the Marketplace. The wraparound coverage, together with the Marketplace coverage, would be comparable to the employer-sponsored plan. Making all of this possible is the proposed rule that the wraparound coverage, subject to certain requirements, would be considered an excepted benefit and not subject to the market reform requirements of the ACA.
Setting aside the premise for a minute, a closer look at the requirements an employer must meet in order to offer wraparound coverage as an excepted benefit (i.e., limited wraparound coverage) illustrates just how limited this benefit is going to be. In order for wraparound coverage to qualify as an excepted benefit, it must meet 5 conditions:
- It can be combined ONLY with individual coverage purchased in the individual market that does NOT consist solely of excepted benefits.
- It must provided benefits beyond the essential health benefits (EHBs) provided by the individual plan OR reimburse the cost of care from out-of-network providers, or both. The wraparound coverage CANNOT provide only benefits pursuant to a coordination-of-benefits provision (i.e., just pay for benefits when the individual plan does not cover all or part of an expense).
- The employer-sponsor must offer other group coverage that meets minimum value (referred to as the “primary plan”). The primary plan must be affordable for A MAJORITY of the eligible employees. Only employees eligible for the primary plan are eligible for the wraparound plan.
- Total cost of coverage under the wraparound must not exceed 15% of the cost of coverage under the primary plan. (Cost of coverage = employer cost + employee cost = cobra premium.)
- The wraparound coverage must not discriminate as to eligibility, benefits or premiums based on a health factor; it must not contain any preexisting condition exclusions; and neither the wraparound coverage nor the primary coverage can discriminate in favor of highly compensated individuals. (These limitations are intended to prevent employers from using wraparound coverage to send “excessive numbers” of low wage workers to the Marketplace or to shift employees with high medical costs to the Marketplace.)
In addition to these 5 requirements, there are a few more major limitations: (1) The wraparound coverage cannot replace group coverage for employers that drop coverage altogether or offer coverage that is not of minimum value (i.e., a skinny plan); and (2) the wraparound coverage cannot be structured so that low-income workers receive fewer primary benefits than high-income workers. Furthermore, enrolling an employee in limited wraparound coverage does not satisfy the large employer’s obligation to offer minimum essential coverage (MEC) under 4980H that is affordable. Ultimately, a large employer sponsoring limited wraparound coverage will be paying for that coverage AND the tax penalty associated with the employee for whom the primary plan was unaffordable. So why would an employer embrace this new excepted benefit?
The preamble to the proposed regulations say “[s]ome group health plan sponsors have asked whether wraparound coverage could be provided for employees for whom the employer premium is unaffordable and who obtain coverage through [the Marketplace].” Can this really be what those group health plan sponsors were looking for? The Departments claim that the availability of limited wraparound coverage “promot[es] equity in coverage” by allowing a plan sponsor “to maintain a comparable level of benefits for all potential enrollees.” Can the same outcome be achieved by offering MEC that is affordable for all eligible employees? If affordable coverage for all eligible employees is not possible, is the employer really in a position to pay for both the tax penalty and another benefit plan?
One purpose of the limited wraparound coverage is clear: An employee enrolled in limited wraparound coverage would not be disqualified from eligibility for premium tax credits or cost sharing subsidies through the Marketplace. Whether or not employers will implement such a plan remains to be seen.
The proposed regulations are effective for plan years beginning in 2015. The Departments have solicited comments on these proposed regulations will be accepting them until February 25, 2014. The proposed regulations can be found here.
