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| Eric Schillinger |
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| Anne Hall |
The act also included numerous provisions related to employer-sponsored health and welfare benefits, including optional relief for flexible spending accounts, mandatory expanded reporting and disclosure obligations regarding participants' out-of-pocket health care costs, and other additional patient protections to participants in group health plans.
Given the vast number of other pressing issues that Congress faced at the end of 2020, the scope, nature and number of the act's benefits-related come as a surprise; some of those changes — particularly the flexible spending account-related items — would arguably not be expected to appear on Congress' radar at this time absent lobbying by industry groups and other influential parties.
The changes are likely the product of numerous economic and political factors, such as the pandemic's unprecedented disruption of the U.S. economy, many Americans' higher prioritization of health insurance because of COVID-19 risk factors, and the continuously growing public support for more cost transparency by health plans, insurance carriers and other parties in medical and prescription drug supply chains.
Predicting the Impact on Employers and Other Stakeholders
Although it is difficult to project the extent to which the act's changes will impact employers and group health plans, several factors arguably suggest that the impact will be significant. Such factors might include, among others:
- The continued role of employer-sponsored health insurance as a major source of health care for most Americans — in excess of 150 million individuals, according to some estimates;
- The structure of federal employee benefits law, under which much of the relevant federal rules are set forth not in statues but in the regulatory and subregulatory guidance issued by agencies in the Executive Branch;
- The inauguration of a president who, in contrast to his predecessor, has unequivocally advocated for both robust enforcement of the Affordable Care Act as well as the further expansion of health insurance protections for enrollees; and
- The additional protection of any benefits-related guidance issued by the executive branch against legal challenges via Democrats' control of the Senate (50 seats plus Vice President Kamala Harris as the tiebreaker).
Another factor important to evaluating the act's potential impact is the timing of changes: The flexible spending account-related items are immediately effective, and temporary, whereas most of the other benefits law changes in the act take place in 2022 and are permanent.
Accordingly, employers and other health and welfare plan sponsors should carefully review the act's optional and mandatory changes to determine what actions they must — or should — take, the key dates and deadlines for such actions, the associated cost and administrative implications, and any other important considerations to plan design and administration.
Changes by the Act: Flexible Spending Account Rules
Summary of Changes
Health care and dependent care flexible spending accounts are account-based plans to which employees may contribute from their wages or receive employer contributions on a pretax basis to pay for eligible expenses related to health care (e.g., copayments) and dependent care (e.g., daycare).
Flexible spending accounts are subject to various other restrictions and limitations, such as when annual contribution elections can be changed and the treatment of unused flexible spending account amounts at the end of the year. Unused amounts are generally forfeited, with some exceptions for health flexible spending accounts.
In response to the impact of COVID-19, the act significantly loosens flexible spending account restrictions and expands their availability for a temporary period. The following is a high-level summary of the act's flexible spending account-related changes:
1. Permission of unlimited carryovers of unused health and dependent care flexible spending account funds from plan years ending in 2020 or 2021.
Normally, carryovers are not permitted for dependent care flexible spending accounts and are capped at $550 for health flexible spending accounts.
2. Allowing both health flexible spending accounts that do not permit carryovers and dependent care flexible spending accounts to utilize a grace period, which is a period after a plan year during which participants may seek reimbursement for expenses incurred after the plan year — for a plan year ending in 2020 or 2021 of up to 12 months after the plan year.
Normally, only health flexible spending accounts are permitted to have a grace period, and the grace period is limited to 2.5 months. This change by the act expands upon relief previously provided by the Internal Revenue Service in 2020, which allowed health flexible spending accounts to have a grace period until Dec. 31, 2020.
3. Permitting a health flexible spending accounts to provide reimbursements to a participant after coverage terminates (e.g., after termination of employment) in 2020 or 2021 through the end of the plan year of termination (similar to the rules for dependent care flexible spending accounts).
Under previous rules, a participant in a health flexible spending account would need to elect Consolidated Omnibus Budget Reconciliation Act continuation coverage and continue making health flexible spending account contributions to continue to receive reimbursements.
4. Expansion of the definition of a "qualifying child" for dependent care flexible spending accounts (i.e., a child for whom the dependent care flexible spending account may reimburse expenses) to allow, for a limited period, the flexible spending account's reimbursement of eligible expenses for children who turn age 13 during the middle of the plan year, and who would otherwise be excluded from flexible spending account reimbursements.
Absent this change, dependent care expenses would (with some exceptions) be limited to a child who has not yet attained age 13. It is not entirely clear why Congress chose to include this very specific provision (e.g., if an interested party encountered this aging-out issue and lobbied for the change).
5. Loosening of the election-change rules for health and dependent care flexible spending accounts to permit prospective participant changes of elected flexible spending account amounts for a plan year ending in 2021, regardless of whether the participant experienced a permitted election-change event (e.g., a change in status).
This change is an expansion of relief previously provided by the IRS in 2020, which had allowed such election changes in 2020.
Flexible spending accounts that adopt any of the above changes must be formally amended no later than the last day of the first calendar year that begins after the end of the plan year in which the amendment was effective (e.g., by Dec. 31, 2021, for changes to 2020 calendar year plan provisions).
Impact on Plan Sponsors and Other Key Considerations
These flexible spending account changes by the act should come as welcome relief to employers that sponsor flexible spending account benefits, as well as employees who participate in flexible spending accounts.
Although these changes are optional, employers are likely to adopt at least some if not all the changes, given the impact of COVID-19 on benefit operations. The changes related to grace periods and carryovers should be particularly useful, as in many cases employees put off doctors' visit and other medical procedures.
In some cases employees did so involuntarily, as when some jurisdictions temporarily halted all elective procedures due to the pandemic. The halt limited employees' ability to incur health flexible spending account-eligible expenses.
Similarly, many dependent care flexible spending account participants may have been unable to use their flexible spending accounts for childcare expenses in 2020 (and in 2021 going forward) because of the unavailability of care providers (e.g., closure of day care centers) due to the pandemic or because those employees simply did not incur eligible dependent care flexible spending account expenses (e.g., because they were working remotely at home with their children).
As a more general matter, the disruption of the pandemic likely changed many families' estimated out-of-pocket health and dependent care expenses — that is, many participants found their 2020 (and possibly 2021) elections to be too high or too low.
These changes by the act should provide more flexibility for those individuals to use their elected amounts rather than forfeit them, as well as reduce or increase elections appropriately to reflect out-of-pocket needs.
Changes by the Act: Cost Transparency and Other Items
Summary of Changes
The act also included component provisions that address group health plan price transparency provisions, reporting, disclosure and other patient protections. At a high level, those changes, which generally apply to nonexcepted group health plans (e.g., major medical insurance), include:
1. The prohibition of gag clauses in contracts between the group health and service providers (e.g., third-party administrators) — that is, contract provisions that prevent or impede the plan's access to cost and quality-of-care information (and the provision of such information to participants).
Gag clauses have been routinely criticized by transparency advocates, particularly in the context of prescription drugs (e.g., where a pharmacy benefit manager charges a copayment that is higher than the actual cost of the drug).
2. Amendment of the prohibited transaction exemption rule under the Employee Retirement Income Security Act, which concerns reasonable compensation paid to plan service providers, to (1) require group health plans to disclose compensation in excess of $1,000 paid to any broker or consultant; and (2) require the broker or consultant to disclose certain information to the plan fiduciary, such as a description of all direct and indirect compensation received by the broker or consultant.
Although this prohibited transaction exemption statute applied to both retirement and health and welfare plans, the U.S. Department of Labor to date has only issued regulations for retirement plan contracts.
As explained in our October 2020 Law360 article, the executive branch arguably has some ability to amend these rules through regulatory guidance (i.e., without Congress), but the particular changes made by the act would likely not be achievable without changes to the statute by Congress.
Indirect compensation by brokers and consultants can be significant in some instances because brokers often receive commissions from insurance carriers, which can sometimes be in the hundreds of thousands or millions of dollars annually for a single large plan.
3. Expanding the mental health parity rules, which concern issues such as preauthorization and other treatment limitations of mental health and substance abuse benefits, to require group health plans to analyze and document their compliance, and share certain information with federal agencies.
During his campaign, President Joe Biden advocated for expanding the mental health parity protections, albeit his proposals were not entirely clear about specific changes to be made. Given that the executive branch agencies will issue additional guidance in response to the act's statutory changes, the degree and scope of any such guidance may be indicative of the president's health care policy priorities (e.g., meaningful enforcement, further restrictions on insurance limitations, etc.)
4. Amendment of ERISA, the Internal Revenue Code and the Public Health Services Act to impose additional reporting obligations on group health plans regarding prescription drug benefits, such as the average monthly premiums by employers and participants and the impact on plan premiums by rebates and other fees paid by drug companies to the plan or plan service providers (e.g., pharmacy benefit managers).
Prescription drug price transparency has been a hotly debated topic in recent years, with participant advocates arguing that pharmacy benefit managers are largely unregulated despite being a multi-billion-dollar annual industry, and pharmacy benefit managers arguing that increased transparency would negatively impact competition in the marketplace.
The scope and extent of pharmacy benefit managers' indirect compensation (e.g., spread pricing) has eluded most employers and group health plans because of how pharmacy benefit manager contracts have historically been structured.
As a result, it has been difficult for plan sponsors to evaluate the extent to which pharmacy benefit managers policies have driven up drug costs for plan participants. A recent U.S. Supreme Court decision, Rutledge v. Pharmaceutical Care Management Association, paved the way for additional state regulation of certain pharmacy benefit managers practices, and the act's changes could shine some light on previously elusive pharmacy benefit manager practices.
5. Additional requirements for plans that cover emergency services, such as the prohibition of prior-authorization requirements regardless of whether the provider is in-network or out-of-network.
6. Further restrictions on plans' payment of nonemergency services (e.g., elective procedures), such as the prohibition of additional cost-sharing requirements for such nonemergency services from an out-of-network provider beyond the cost-sharing requirements that the plan imposes for a similar service from an in-network provider at the facility.
7. For a plan that covers air ambulance services, a prohibition against the plan imposing greater cost-sharing on out-of-network providers compared to network providers of those services.
The ACA already provides limitations on a plan's cost-sharing requirements for network versus out-of-network emergency services, which essentially require partial parity among network and out-of-network benefits. The nature of air ambulance services, however, made it difficult for some plans to determine the appropriate cost-sharing amounts for such services.
The act's further expansion of these rules effectively requires closer parity between network and nonnetwork benefits in the air ambulance context, which could significantly impact some plan's existing reimbursement models.
8. Additional notification and coverage-continuation requirements for plans regarding certain participants who receive out-of-network services from contracted health care providers.
9. A requirement for group health plans to include, on participant health insurance cards, the applicable deductible, out-of-pocket maximum, and a phone number or website for customer assistance.
10. A requirement for group health plans to provide, by phone and on the plan's website, certain price-comparison information related to covered services, helping participants to understand their potential out-of-pocket costs.
These disclosure requirements have been supported for years by price transparency advocates as a mechanism to prevent sticker shock by participants who were unaware of or did not understand their potential out-of-pocket costs.
Although such information is already required to be disclosed in other plan materials (e.g., the summary of benefits and coverage), inclusion of the information in additional resources would seemingly increase participant awareness.
11. Expanded external review claims procedures for group health benefits that are denied, for example, advance estimates of participant costs.
The above provisions generally become effective for plan years beginning on or after Jan. 1, 2022, with some provisions applying to contracts and contract renewals after Dec. 27, 2021.
Note, a high deductible health plan — a group health plan that only pays benefits, with some exceptions, after a certain deductible is met — will not lose its high deductible status (i.e., eligibility for a participant to contribute to a health savings account) for providing any additional coverage required by the act after Jan. 1, 2022.
Impact on Plan Sponsors and Other Key Considerations
The changes by the act appear to be a significant expansion of various group health plan protections that were originally added by the Patient Protection and Affordable Care Act over a decade ago.
For example, the ACA imposed restrictions on the amount that a group health plan could charge a participant out-of-pocket for out-of-network emergency services in comparison to in-network emergency services; the act increases and expands the ACA requirements.
The additional reporting and disclosure requirements appear to be in response to continuous pressure to reduce health care sticker shock — unexpected out-of-pocket costs — to participants, including concerns specific to surgical and prescription drug costs.
The increased coverage, reporting and disclosure obligations will certainly result in cost increases to group health plans and sponsors. The extent of the cost impact, however, will likely vary from plan to plan depending on design, existing procedures, and other external factors, including existing vendor contracts, plan size and geography.
Group health plans will need to prepare to make numerous design changes (e.g., regarding certain out-of-network coverage) for plan years beginning on or after Jan. 1, 2021.
For fully insured plans, the design changes will likely be implemented at renewal through an amendment or restatement of the insurance policy, whereas an employer that sponsors a self-funded group health plan will have to carefully review its plan document to determine the necessary changes.
In addition, group health plans are arguably required to disclose these plan design changes to participants through a summary of material modifications under the Employee Retirement Income Security Act. Although advance notice, prior to the changes taking effect, is generally advisable, the ERISA deadline is generally 210 days after the close of the plan year in which the modification was made.
Importantly, future guidance will certainly be forthcoming from the administrative agencies that enforce these provisions, including the IRS, Department of Labor and U.S. Department of Health and Human Services.
Although it is ultimately difficult to speculate how a Biden presidency will impact such agencies' guidance, the president's positions on health care —and his support for the ACA generally — suggest robust enforcement of these new rules, reflected both in future guidance and actions by the agencies, could be around the corner.
Takeaways
As explained above, the act's changes should have a significant impact on employers, plan sponsors and group health plan participants — in both the immediate future, for the temporary changes to flexible spending account rules, and long-term, for the transparency-related changes generally taking effect in 2022.
Employers should evaluate these changes to determine what action is advisable. Because guidance from the federal enforcement agencies will be forthcoming on these changes, employers and other group health plan sponsors should pay close attention to such guidance as well.
Eric Schillinger is lead ERISA counsel and Anne Tyler Hall is the founder and principal of Hall Benefits Law.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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