In our Q3 Insurance Brief we discuss the following topics:

  • 2019 Limits

  • Association Health Plans

  • Paid Leave Federal Tax Credit

  • New Jersey Individual Mandate

2019 Limits

The IRS has released the 2019 cost-of-living adjustments affecting Health Saving Accounts (HSAs) and high deductible health plans (HDHPs). Rev. Proc. 2018-30 is available here.

Here are the details:

  • HSA Contribution Limits. The 2019 annual HSA contribution limit for individuals with self-only HDHP coverage is $3,500 ($50 increase from 2018), and the limit for individuals with family HDHP coverage is $7,000 ($100 increase from 2018)
  • HDHP Minimum Required Deductibles. The 2019 minimum annual deductible for self-only HDHP coverage is $1,350 (unchanged from 2018) and the minimum annual deductible for family HDHP coverage is $2,700 (unchanged from 2018).
  • HDHP Out-of-Pocket Maximums. The 2019 maximum limit on out-of-pocket expenses (including items such as deductibles, co-payments, and co-insurance, but not premiums) for self-only HDHP coverage is $6,750 ($100 increase from 2018), and the limit for family HDHP coverage is $13,500 ($200 increase from 2018).

Post-55 “Catch-Up” Limit: $1000

Association Health Plans

On June 19th the White House and Department of Labor (DOL) released their final rule and FAQs on association health plans (AHPs). The final regulations provide an additional basis for a group or association of employers to be treated as an “employer” sponsoring a single ERISA-covered multiple employer group health plan (a multiple employer welfare arrangement, or MEWA). This is significant because a MEWA that is treated as a single plan may avoid some Affordable Care Act (ACA) reforms applicable to the individual and small group insurance markets, such as the essential health benefits requirement. Existing guidance treats a MEWA as a single ERISA plan only where it is established by a “bona fide” association of employers that have a genuine organizational relationship and an ability to control the association. While the previous guidance has not been supplanted and may still be relied on, the final regulations provide an additional mechanism for groups or associations to meet the definition of “employer.”

Impact for California:
On this same day, California Insurance Commissioner Dave Jones issued the following press release on the AHP rule:

“Today, the Trump Administration issued its final rule regarding Association Health Plans, described in the rule as a type of MEWA, promoting these plans as a path for groups of businesses or organizations to obtain health insurance coverage. Some MEWAS have had a troubling history in California, including cases of MEWA fiscal insolvency, inability to pay consumer claims, and allegations of fraud, so California law prohibits the formation of any new MEWAS. The final rule recognizes continued state regulation of MEWAS; however, outside California, the Trump Administration’s final rule threatens the continued existence of comprehensive health insurance coverage, as those who are sick may no longer be provided coverage that meets their health care needs or may obtain coverage through an arrangement that may later fail when needed most.”

As long as California law continues to prohibit formation of any new MEWA there cannot be any AHPs either formed in CA or an interstate AHP which includes CA employers.

Key Provisions of the new rules:

  • Existing Laws. AHPs are required to comply with applicable state and federal laws, including ERISA, COBRA and the MHPAEA. The final rule does not change the legal, regulatory or preemptions framework for MEWAs. ERISA does not pre-empt State regulation of MEWAs, therefore State mandates may apply to both fully-insured and self-insured AHPs.
  • Nondiscrimination. Prohibits AHPs from distinguishing between employees of different employer members based on health factor for purposes of eligibility, benefits or premiums. Prohibit a group or association from restricting membership in the association based on any health factor. Distinctions based on a factor other than a health factor (such as industry, occupation, or geography).
  • Commonality of Interest. Employers can band together to offer health coverage if they are either—(1) in the same trade, industry, line of business, or profession; or (2) have a principal place of business within a region that does not exceed the boundaries of the same state or the same metropolitan area (even if the metropolitan area includes more than one state). A group or association of employers must have at least one substantial business purpose unrelated to the provision of health coverage or other employee benefits, even if the primary purpose of the group or association is to offer such coverage to its members.
  • Employer Control. The functions and activities of the group or association must be controlled by its employer members, and the employer members that participate in the group health plan must control the plan. Control must be present in form and in substance under a facts and circumstances test—the preamble identifies relevant factors and clarifies that members are not required to manage the day-to-day affairs of the group, association, or plan. The group or association sponsoring the AHP cannot be a health insurer or owned or controlled by a health insurer.
  • Working Owners. Only employees and former employees of employer members (and their families) are permitted to participate in AHPs. But if certain conditions are met, working owners without common-law employees, such as sole proprietors and other self-employed individuals, can elect to act as employer members of an association and also be treated as employees of their businesses for purposes of being covered by the AHP. Working owners generally must work at least 20 hours per week or 80 hours per month.

Effective Dates: All associations (new or existing) may establish a fully-insured AHP on September 1, 2018. Existing associations that sponsored an AHP on or before the date the Final Rule was published may establish a self-funded AHP on January 1, 2019. All other associations (new or existing) may establish a self-funded AHP on April 1, 2019.

What’s Next: The day after the rule was issued a group of State Attorneys General announced they plan to pursue legal action against the Administration. They stated the rules “would increase the risk of fraud and harm to consumers; would undermine the current small group and individual health insurance markets; and are inconsistent with the text of ERISA and the ACA.”

We will keep you updated on the implementation of this new rule and any court activity.

Paid Leave Federal Tax credit

This update is part of a Brown & Brown series summarizing new guidance issued in connection with the Patient Protection and Affordable Care Act (also known as the ACA or Health Care Reform) and other recent federal laws affecting employee benefits. We are joining forces with our business partner, the law firm of Miller Johnson, to provide these updates to you. For this edition of the Monthly Update, we focus on the new law providing employers with a federal tax credit for certain paid leaves.

The Family and Medical Leave Act (FMLA) already requires covered employers to allow eligible employees to take up to 12 weeks of unpaid leave. But in an effort to encourage employers to offer paid leave, the recent Tax Cuts and Jobs Act of 2018 sweetened the deal by promising a tax credit to employers, starting in 2018, on the wages that they pay to eligible employees during family and medical leave. However, there are certain restrictions in the law which minimize its benefit to employers.

What counts as “family and medical leave” for tax credit purposes?

The types of leave which qualify for the tax credit are taken from the FMLA:

  • Birth of the employee’s child
  • Placement of a child with the employee for adoption or foster care
  • Care of a spouse, child, or parent with a serious health condition
  • A serious health condition which prevents the employee from performing the functions of their position
  • A spouse, child, or parent on covered, active duty in the Armed Forces
  • Care for a service member who is the employee’s spouse, child, or next-of-kin

The paid leave, for tax credit purposes, must be due to taking an FMLA leave. In other words, pay during the leave due to vacation, personal leave, or a medical leave is not considered for credit purposes unless it is specifically for one of above purposes. For example, if an employer provides a self-funded short-term disability benefit (which is typically due to a serious health condition which prevents the employee from performing the functions of his or her job), that wage replacement may be considered. However, any paid leave required under state or local law is disregarded for purposes of the federal tax credit. Another example of paid leave eligible for the credit would be paid parental leave in the event of a new child (as long as the paid leave wasn’t mandated under state or local law).

How an employer qualifies for the tax credit

The following requirements must be satisfied to claim the credit:

  • The employer must have a written policy, allowing for at least two weeks of annual paid family and medical leave for full-time employees, or a prorated amount for part-time employees;
  • The employee must have been employed by the business for at least one year;
  • The employer must pay at least 50% of an employee’s normal wages while the employee is on leave; and
  • For the prior year, the employee must not have earned more than 60% of the dollar threshold for being considered a highly compensated employee for 401(k) purposes (e.g., couldn’t have earned more than $72,000 in 2017 in order for the employer to claim a credit in 2018).

Even employers not subject to FMLA (e.g., have fewer than 50 employees) may still qualify for the tax credit. In order to do so, these employers must provide paid family and medical leave in compliance with a written policy which includes assurances that the employer will not interfere with an employee’s right to claim paid leave under the policy or discriminate against an employee in connection with the employer’s paid leave policy.

How the tax credit works

The tax credit is calculated as a percentage of the wages paid to an employee while on family or medical leave. If the criteria are met, the employer may claim 12.5% of those wages paid as a federal tax credit for up to 12 weeks of paid leave per year. Additionally, for every percentage-point increase in pay rate over 50% of the employee’s normal wages, the tax credit increases by 0.25%, with a maximum credit of 25% of wages paid during the leave. Take a simplified example: say an employee normally earns a wage of $1,000/week and the employer pays the employee $600/week for four weeks while on leave to care for a spouse with a serious health condition: 60% of normal wages would yield a 15% tax credit on those wages (12.5% + 0.25x10% = 15%), which is a $360 credit for $2,400 in wages.
It is worth noting that employers must reduce their deduction for wages by the amount of the credit. And any wages that are used in calculating another business tax credit cannot be used when calculating this credit.

But is it right for my business?

Employers who already provide paid FMLA leave for their employees, or have already been considering it, may take advantage of this tax benefit with little added difficulty. (Obviously tax-exempt employers cannot take advantage of the tax credit.) On the other hand, employers may find the incentive to be too small to offset the expense of paid leave. In any case, the provision is set to expire at the end of 2019. Unless Congress extends it, employers will only be able to take advantage of this benefit for two years. The IRS has said that it will likely give more specific guidance on how the credit will work in the near future.

New Jersey Individual Mandate

On May 30, 2018, New Jersey became the second state in the nation, after Massachusetts in 2006, to adopt a state-level individual health insurance mandate. The new legislation, the New Jersey Health Insurance Market Preservation Act, was signed into law by Governor Phil Murphy and will go into effect on January 1, 2019.

New Jersey’s mandate, which mirrors the former federal requirement, includes an annual penalty of 2.5 percent of a household‘s income or a per-person charge — whichever is higher. The maximum penalty based on household income will be the average yearly premium of a bronze plan. If it’s based on a per-person charge, the maximum household penalty will be $2,085. A “hardship exception” for individuals who cannot afford coverage would be determined by state Treasurer Elizabeth Muoio.

Revenue collected from New Jersey’s individual mandate penalty will help fund a state-based reinsurance program to help insurers cover the cost of the most expensive Exchange patients. The reinsurance program will be established under separate legislation also signed by Governor Murphy on May 30.

The cost estimate is based on $93.9 million the Internal Revenue Service collected from the more than 188,500 New Jersey residents who paid the penalty under the federal mandate. The state expects to collect between $90 million and $100 million in penalties. The reinsurance program is supposed to reduce the average premium increase by 10 percent to 20 percent.

Vermont Gov. Phil Scott, a Republican, signed a bill on May 28 that would establish an individual mandate, but the details, including the financial penalty and enforcement mechanisms, will be determined during the 2019 legislative session. The Vermont mandate won’t go into effect until Jan. 1, 2020.