HRB 75 - Final Rules Issued: Nondiscriminatory Wellness Programs and Small Business Health Options Program
Released June 3, 2013I Download as a PDF June 3, 2013 --
Incentives for Nondiscriminatory Wellness Programs in Group Health Plans
Wellness strategy has, and continues to be, a centerpiece of health plan design. The Affordable Care Act (ACA) expands, in some ways, the incentive that can be used to drive wellness. The ACA’s governing Agencies (HHS, DOL and IRS) issued final regulations governing wellness programs on June 3, 2013. These final regulations are quite similar to the proposed regulations issued in November, 2012 (see CBIZ Health Reform Bulletin, Proposed Regulations: Wellness Programs, Essential Health Benefits and Rating Restrictions, Guaranteed Issue and Renewal Rules, 11/28/12).
These final wellness rules are applicable to plan years beginning on or after January 1, 2014. The rules apply to both grandfathered and non-grandfathered group health plans, whether insured or self-funded.
In summary, a wellness program that is part of a health plan can be designed as a participation-only program, or as a contingent program:
A participation-only program is one based strictly on taking part in the program. Examples of such programs include:
- Cost or fees for a fitness center membership.
- A reward for participation in a diagnostic testing program, as long as the reward is not outcome-based.
- A program to encourage preventive care through waiver of deductible or co-pays such as prenatal care or well-baby visits. Note, however, non-grandfathered plans are required to provide certain preventive health services without the imposition of cost sharing.
- A program for reimbursement of a smoking cessation program, as long as it is not outcome-based.
- A reward for attending monthly no-cost health education seminars.
- A reward for completion of a health risk assessment (HRA) without further action (educational or otherwise) required by the employee regarding health issues identified as part of the HRA.
A participation-only program must be made available to all similarly situated individuals and the reward for participation is not limited in any way. Generally, there are very few restrictions on participation only programs.
A contingent program can take one of two forms: it can either be an activity-only program or an outcome-based program.
An activity-only program is one in which individuals are encouraged to participate in a specific activity that may preclude participation by certain individuals with health conditions such as severe asthma, pregnancy or recent surgery; in which case, a reasonable alternative would have to be made available, as more fully described below Examples of activity-only programs include a walking program, a diet program, or an exercise program.
An outcome-based wellness program requires achievement of an outcome based goal. Both types of contingent programs required compliance with five standards: they are:
- The reward, taken together with all rewards from other wellness programs, cannot exceed 30% of the cost of single coverage; or, if the wellness program is made available to the family, then the cost of the relevant coverage (for example, full family, or individual + one). If the program relates to tobacco free standards, the incentive can be as much as 50 percent.
- The program must be reasonably designed to promote health or prevent disease, and cannot be overly burdensome. The program cannot be designed in a way that would cause it to be suspect, or be a subterfuge to evade the purposes of the law.
- The program must give individuals the ability to qualify for the program, at least once annually.
- The program must be available to all individuals and offer reasonable alternative methods of compliance for those who cannot comply because of health reasons. The program may request proof of the inability to comply. Following are examples of reasonable alternative standards:
- Educational programs. If a program requires completion of an educational program, the plan must make the educational program available instead of requiring an individual to find such a program unassisted, and cannot require an individual to pay for the cost of the program.
- The time commitment must be reasonable. For example, requiring attendance nightly at a one-hour class would be unreasonable.
- Diet Programs. If the reasonable alternative standard is a diet program, plans are not required to pay for the cost of food but must pay any membership or participation fee.
- Medically-inappropriate programs. If an alternative is recommended by the employer’s medical adviser, and if the individual’s personal physician attests that the plan’s recommendations are not medically appropriate for that individual, the plan must provide a reasonable alternative standard that accommodates the physician’s recommendations of medical appropriateness. Plans may impose standard cost sharing under the plan or coverage for medical items and services furnished based upon the physician's recommendations. Further, if reasonable under the circumstances, a plan may seek verification, such as a statement from an individual’s personal physician, that a health factor makes it unreasonably difficult or medically inadvisable for the individual to satisfy the standards of an activity-only wellness program.
- In any plan material that describes wellness programs, the availability of alternative standards must be described. The plan must disclose in all plan materials describing the terms of the program the availability of other means of qualifying for the reward or the possibility of waiver of the otherwise applicable standard (see below for model notice). If plan materials merely mention that a program is available, without describing its terms, then this disclosure is not required. Following is some model language that can be used to satisfy the notice requirement:
“Your health plan is committed to helping you achieve your best health. Rewards for participating in a wellness program are available to all employees. If you think you might be unable to meet a standard for a reward under this wellness program, you might qualify for an opportunity to earn the same reward by different means. Contact us at [insert contact information] and we will work with you (and, if you wish, with your doctor) to find a wellness program with the same reward that is right for you in light of your health status.”
The regulations provide additional sample language that could further describe aspects of the program, such as programs aimed at cholesterol reduction, fitness programs, and smoking cessation programs.
With regard to the availability of a reasonable alternative standard, for an activity-based program, a reasonable alternative must be made available if performing the activity is unreasonably difficult due to a medical condition, or is medically inadvisable.
The standard for an outcome-based wellness program is, according to these final regulations, somewhat broader. A reasonable alternative must be made available for all individuals who do not initially meet the outcome-based standard, not just for those for whom it is medically inadvisable.
Also emphasized in these regulations is the requirement that the full reward for participation in the wellness program must be available to those pursuing the reasonable alternative. This may mean that the reward be provided retroactively, i.e., the regulations affirm that the reward must be fully available within the plan year. If the reward affects health insurance premium, this can present challenges for compliance with IRC Section 125 cafeteria plans that will have to be addressed in the design of the wellness program. If there is a mid-year premium change, it is important that the cafeteria plan include language providing that if the cost of coverage changes, the salary reduction election can be automatically increased or decreased. The plan should go on to say that if the change in premium is significant that individuals can revoke and make a consistent new election. The law is less clear with regard to flexible medical spending account (FSA plan) incentives. Some wellness plan designs contemplate providing mid-year FSA contributions. It is not clear at this point that such contribution would be permissible. Hopefully, the IRS will provide guidance on this subject.
Integration of Wellness Rules with Other Laws
These regulations only address wellness programs and compliance with the HIPAA rules prohibiting discrimination based on health status, and the wellness rules contained in the ACA. These rules do not address potential discrimination issues that may arise under other laws, such as Title 7 of the Civil Rights Act including, but not limited to, the Americans with Disabilities Act (ADA), the Age Discrimination in Employment Act (ADEA), and the impact of the Genetic Information Nondiscrimination Act of 2008 (GINA) on wellness programs, particularly with regard to the use of health risk assessments.
On May 9, 2013, the Equal Employment Opportunity Commission (EEOC) hosted a meeting to gather information on how to ensure that wellness programs comply with various discrimination laws. One of the outstanding questions has been and remains, what constitutes “voluntary” collection of medical information? As background, the ADA permits the collection of medical information by a bona fide health plan as long as it is voluntary and not a subterfuge or a way to avoid the protections of the ADA. Until guidance is forthcoming, a good faith effort will have to be made to ensure that the wellness program does not run afoul of these rules.
Taxation of Wellness Plan Incentives
One of the linchpins of wellness programs relates to the taxation of wellness plan incentives. Following is a brief primer on this issue.
- If the incentive, in effect, is a health benefit, such as a premium discount, a contribution to a health reimbursement plan, the payment of a deductible or co-pay, among others, the incentive is tax-favored, as long as it complies with any applicable discrimination rules. Of particular note, health reimbursement arrangements are subject to discrimination rules, as are cafeteria plans, and certain of the component plans under a cafeteria plan. Therefore, any incentives offered through these types of plans should be monitored carefully.
- Any incentive that is cash, or cash-equivalent, such as a gift card, is fully taxable. There is no “de minimis” (minimal) exception to this requirement. According to informal, non-binding advice from the IRS, the employer is responsible for reporting the value of the cash or cash-equivalent on the individual’s Form W-2, whether the employer pays the cash directly, or uses an intermediary to pay the cash.
- Generally, incentives, such as gym membership, are fully taxable, as well.
- Incentives such as T-shirts, coffee cups or other similar promotional-type products may fall within the IRC § 132 de minimis fringe benefit exception and may not be subject to tax. But, if the de minimis exception does not apply, the cost equivalent must be included in the individual’s income.
- Employee discounts, generally, are not taxable.
Employers offering wellness incentives should discuss these matters with their tax advisers.
Small Business Health Options Program (SHOP)
On May 31, 2013, the Agencies issued the pre-published version of final regulations relating to the Small Business Health Options Program (SHOP). In general, these final regulations affirm guidance previously issued (see CBIZ Health Reform Bulletin, Overview of Final Exchange Regulations, 3/28/12). Two modifications in the final rules to note are:
- Special enrollment events. Under the proposed SHOP regulations, there were separate triggering events giving rise to special enrollment periods applicable to SHOPs than as permitted through Exchanges or “marketplaces”. The final SHOP regulations align the special enrollment triggering events for SHOPs to those that are currently available through the marketplaces. Thus, 30-day special enrollment periods are available through a SHOP when an individual acquires a new dependent through marriage, or birth or adoption of a child, or loses minimum essential coverage due to certain events such as termination of employment. In addition, the final regulations provide for a 60-day special enrollment period through a SHOP when an individual becomes ineligible for Medicaid or the Children’s Health Insurance Program (CHIP); or when he/she becomes eligible for premium assistance through Medicaid or CHIP.
- Choice of QHP - Transitional Rule. For plan years beginning on or after January 1, 2014 and prior to January 1, 2015, a SHOP has the option of allowing employers to offer a choice of qualified health plans (QHPs) at a single level of coverage to their qualified employees. A federally-facilitated SHOP is only required to offer employers a choice of one QHP from its available options. A state-based marketplace may likewise, for the first year of compliance, provide that employers select one QHP for their employees. Alternatively, a state-based marketplace could forge ahead and allow the small employer to choose a metal tier, making any of the plans in the metal tier available to the employer’s employees.
About the Author: Karen R. McLeese is Vice President of Employee Benefit Regulatory Affairs for CBIZ Benefits & Insurance Services, Inc., a division of CBIZ, Inc. She serves as in-house counsel, with particular emphasis on monitoring and interpreting state and federal employee benefits law. Ms. McLeese is based in the CBIZ Leawood, Kansas office.
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