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April 1997
This is one of a series of periodic reports on new laws and other important legal developments affecting labor and pension law.
DOL WAIVES SOP 92-6 COMPLIANCE
NEW REGULATIONS INTERPRET HIPAA
DOL WAIVES SOP 92-6 COMPLIANCE
In 1992, the American Institute of Certified Public Accountants ("AICPA") adopted Statement of Position ("SOP") 92-6, requiring that all welfare plans report the present value of "post-retirement benefit obligations" in order to be considered in compliance with Generally Accepted Accounting Principles ("GAAP"). In other words, a welfare plan that does not disclose its future retiree benefit obligations cannot get a clean audit, but will either receive a "qualified" or "adverse" audit. Although SOP 92-6 became effective for single employer plans at the end of 1992, it did not become effective for multiemployer plans until plan years beginning after December 15, 1995.
Although this means that compliance for multiemployer plans should start with the 1996 plan year, for over a year, officials at the Department of Labor ("DOL") have suggested that the new standard may be waived, and that plans may wish to delay compliance. Good to their word, DOL has now published a formal Notice in the Federal Register stating that multiemployer plans need not comply with the accounting standard for Plan Years 1996 and 1997.
DOL does not have the authority to revise the AICPA's accounting standards, so that a plan that does not comply with SOP 92-6 may still receive a qualified or adverse audit. However, DOL will nevertheless accept an annual report (Form 5500) as complete and sufficient, notwithstanding the fact that it contains an audit that is qualified or adverse for failure to comply with SOP 92-6. Although this ruling only applies to the 1996 and 1997 plan years, DOL is accepting comments on their proposal to make the ruling permanent, although possibly with additional conditions and safeguards attached. The comment period ends May 12, 1997.
DOL's decision in this matter was motivated by an uncharacteristically "real world" understanding that the substantial cost of compliance would ultimately be borne by the participant populations, since the substantial consulting fees would come out of plan assets that would otherwise have been available for benefits. They concluded that any protection that might be afforded to those participants through compliance would be outweighed by the cost. Of course, no law prohibits a plan from complying with SOP 92-6 (and many plans have chosen to do so); compliance is, at least for the time being, not required.
NEW REGULATIONS INTERPRET HIPAA
The Department of Labor ("DOL"), Internal Revenue Service ("IRS") and Health and Human Services ("HHS") have recently issued regulations implementing the provisions of the Health Insurance Portability and Accountability Act ("HIPAA"), signed into law last summer. In more than 100 pages, these three agencies have addressed a number of issues, which are summarized below.
Limitations on Exclusions for Pre-Existing Conditions
HIPAA sharply limited the ability of a health plan or an individual health insurance policy to exclude coverage for preexisting conditions. Under the new rules, coverage for a preexisting condition may not be excluded unless each of the following conditions is met:
An individual is a "late enrollee" if he or she enrolled in the plan subsequent to the earliest date on which coverage could have become effective, and did not enroll on a "special enrollment date" (see below).
There are two permitted methods by which a plan may determine whether coverage under a prior plan counts as "creditable coverage." Under the "standard method", with very limited exceptions, a plan simply looks to whether the participant had any health coverage at all under the prior plan. Alternatively, in determining the creditable coverage period for benefits falling into one of five specific categories (mental health, substance abuse treatment, prescription drugs, dental care or vision care), the plan may look to see whether the previous policy had any coverage for that specific category of benefits. If a plan uses the alternative method, it must do so on a consistent basis, and must provide prominent notice that the alternative method is to be used.
Certification and Disclosure of Previous Coverage
In order to assist individual participants in taking advantage of the restrictions on a plan's ability to impose exclusions on preexisting conditions, HIPAA required that a plan provide certification of periods of creditable coverage at the time the individual ceases to be covered, becomes covered by COBRA, terminates COBRA coverage, or makes a request within 24 months of the date coverage ceased. That way, when a participant changes plans, he or she will be able to easily provide evidence of prior coverage. The regulations further flesh out this requirement.
A plan is required to provide certification in the form of a certificate that must, at a minimum, include the following:
To simplify matters, DOL has published a model certificate that may be used. In addition to these items, if a second plan uses the "alternative method" for determining creditable coverage (i.e., divides coverage into permissible categories), a plan that has issued a certificate must, upon request, provide the information required for the second plan to make its determination of creditable coverage. A plan that requests such information is required to pay the first plan the reasonable cost of providing the information. Although a Certificate is ordinarily provided to the covered individual in written form, by mutual agreement of the first and second plan and the individual, the notice may be provided in unwritten form (e.g. by telephone) directly to the new plan.
A plan may provide a single certificate for more than one member of the same family, if all of the information for each is provided (or there is a statement that the information is identical for each).
If coverage is provided through a contract of insurance, the plan satisfies the requirements that it issue a certificate if the insurance carrier has agreed to issue the certificate. Thus, if the insurer fails to provide the certificate, although it has not complied with the statutory obligation, the plan will not be held accountable.
If an individual cannot get a certificate, believes that the certificate provided by a plan is wrong, has lost the certificate, or cannot wait for a certificate to be prepared, he or she may use other means of proving creditable coverage. In order to prove such coverage, the individual may "attest[] to the period of creditable coverage," and must present corroborating evidence, and cooperate with the plan's efforts to verify the coverage.
Once a plan has the information necessary to make its determination concerning an individual's period of creditable coverage, it must make that determination within a "reasonable time period," based upon the facts and circumstances. In the event a plan determines that it may impose a preexisting condition exclusion, it must notify the individual in writing, including the basis for that determination, and must provide the individual with a right to appeal.
Plans do not have to begin issuing such certificates until June 1, 1997, and certificates do not have to include coverage information for any period prior to July 1, 1996. For events occurring between June 1, 1996 and September 30, 1996, a certificate need only be provided on written request. If the event occurs on or after October 1, 1996, but prior to June 1, 1997, a plan must generally issue either a certificate or a short-form notice (a sample of which was published along with the regulations) no later than June 1, 1997. If the plan provides the notice, a participant or beneficiary has the right to request a certificate.
If a plan provides coverage through an HMO, in lieu of a preexisting illness exclusion, the plan may require an affiliation period prior to commencement of coverage through the HMO. However, if an affiliation period is required, it must be applied uniformly, it may not exceed 2 months (3 months in the case of a late enrollee), it must run concurrently with any plan eligibility waiting period, the HMO must not have a separate preexisting illness exclusion, and the individual must not be required to pay anything during the affiliation period. The regulations specifically permit individual states to allow alternative methods to address problems of adverse selection for HMOs..
Special Enrollment Periods
Group health plans that limit the ability of employees and dependents to enroll (typically these are plans that charge a premium and permit enrollment only upon initial employment, birth or marriage) must now permit employees and dependents to enroll at other specified times. Both the statute and the regulations are very clear that these provisions apply only to "employees" and dependents of "employees." Consequently, the special enrollment requirements are not applicable to retirees and their dependents.
An employee or dependent who initially declined enrollment as the result of coverage under another plan must now be given the opportunity to enroll if the other coverage terminates, as long as it does not terminate as the result of the individual's failure to pay COBRA premiums on a timely basis, or was canceled for cause (such as for making fraudulent claims).
Under these circumstances, the new plan is permitted to require, as a condition of taking advantage of this special enrollment provision, that the employee or dependent have stated in writing at the time enrollment was originally declined that the reason coverage was declined was because he or she was covered under another plan or insurance policy. In order to impose this requirement, however, the plan must also, at the time coverage was originally declined, have required a written statement describing why coverage was declined, and the employee must have been provided with notice of the consequences of failing to make such a written statement.
In order to take advantage of this provision, the employee must request enrollment within 30 days after the exhaustion of the other coverage. Enrollment is then effective not later than the first day of the first calendar month after the date the completed request for enrollment is received.
In addition, a newly-born or adopted child (as well as a child newly placed with the participant pending adoption), or newly-wed spouse have the right to become participants in a plan. Moreover, in the event an employee who has chosen not to enroll for any reason marries, has a child, adopts a child, or has a child placed with him or her for adoption, the employee (and consequently the dependent) has the right to enroll in the plan. The special enrollment period under these provisions is no less than 30 days from the marriage, birth, adoption or placement for adoption. For a marriage, coverage becomes effective no later than the first day of the first calendar month beginning after the date the completed request for enrollment is received. In the case of a birth, adoption, or placement for adoption, coverage becomes effective on the date of the birth, adoption or placement.
Anti-Discrimination Provisions
Under HIPAA, a Plan may no longer deny coverage or charge a higher premium to, or as the result of the coverage of, an
individual on the basis of the individual's health or physical condition. The regulations make it clear that a plan or insurance
company may no longer take into account any of the following with regard to an individual or dependent:
Notwithstanding the prohibition on denying coverage as the result of these conditions, the regulations also make clear that HIPAA does not require plans or insurance policies to provide any particular types or levels of benefits.
Effective Dates
In general, the regulations simply restate the effective date set out in HIPAA. Thus, for non-collectively bargained plans, the HIPAA requirements become generally effective as of the first plan year beginning after June 30, 1997. For collectively bargained plans, the HIPAA effective date is generally the first day of the first plan year following the later of June 30, 1997, and the date of the expiration of the last collective bargaining agreement in effect on August 21, 1996 (without regard to any subsequent extensions). The regulations also provide that no enforcement action may be brought against a plan or insurance company for any violation that occurred prior to January 1, 1998, if the plan or insurance company sought to comply in good faith. Compliance with the regulations is considered to be good faith compliance.
Changes in Contents of SPD
In separate regulations published on the same day, DOL issued a series of interim regulations concerning changes in the plan disclosure rules mandated by HIPAA and by the Newborns' and Mothers' Health Protection Act of 1996 ("NMHPA"). Among the statements that are now specifically required to be included in a plan's Summary Plan Description ("SPD") is whether, and to what extent, benefits are guaranteed under a contract of insurance. Moreover, if a health insurance company is involved in the administration of a plan, the SPD must clearly specify the nature of the services it provides. Additionally, an SPD must include the address of the Department of Labor in Washington, along with a statement that the national office may be contacted by participants seeking assistance. The new regulations make it clear that these changes constitute a "material modification," which must be included in the SPD. Moreover, notice of the changes must be provided to participants and beneficiaries no later than 60 days after the first day of the first plan year beginning after June 30, 1997.
NMHPA mandated minimum periods during which plans are required to provide coverage to a mother and newborn following the birth of a baby (48 hours following a normal delivery, and 96 hours following a caesarean). The regulations define these changes as a "material modification," which must be included in the SPD. Moreover, notice of the changes must be furnished to each participant and beneficiary no later than 60 days after the first day of the first plan year beginning after January 1, 1998.
The regulations change the time limits for a plan to notify participants of certain other plan changes as well. Previously, a plan was permitted to provide a notice of material modifications as late as 210 days after the close of the plan year in which the change was adopted. Under the new rules, in the case of a "material reduction in covered services or benefits," notice must be given no later than 60 days after the date of adoption of the change. The exception to this rule is in cases where the plan routinely contacts each participant and beneficiary with a communication (such as a newsletter) at intervals of no more than 90 days. In such a case, the plan may simply include the notice of the modification in the regular communication. These new reporting requirements are effective as of the first day of the first plan year beginning after June 30, 1997.
Finally, there are now special provisions for satisfying the plan notification requirements by use of "electronic media" (i.e.,
E-mail). According to the new regulations, a plan is permitted to satisfy its obligation to provide a summary plan
description, a summary of material modification, the summary annual report, and even the plan document, Form 5500, and
other materials required to be furnished to participants upon request, through electronic means as long as particular
conditions are met. These conditions are as follows:
These electronic media provisions become effective as of June 1, 1997.
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This Newsletter provides an update on current legal developments, and is not intended as legal advice. Copyright © 1997 Mooney, Green, Baker & Saindon, P.C.