December 8, 2005
Year End Alert: Federal Law Changes in 2005 and Clean Up
A number of statutory and regulatory changes have occurred in 2005 affecting group health plans. In addition, other changes will take effect in early 2006. As you prepare to wind up 2005 and look forward to 2006, make sure you have reviewed your plans in light of the following developments.
Flex Plan Grace Period. The IRS approved the use of a 2½ month claims grace period for reimbursement accounts contained in flex plans. The grace period, which is discretionary, allows participants to use current year benefits to pay for claims incurred during the first 2½ months of the following plan year. In order for the grace period to be available to plan participants, an amendment is needed to the plan document. If the grace period is to apply to benefits available during the 2005 plan year, the plan document must be amended prior to the expiration of the plan year. Special amendments may be necessary where the employer sponsors a high deductible health plan with a health savings account (HSA). See our prior alert “Health Savings Account Eligibility During a Cafeteria Plan Grace Period.”
WFTRA . The Working Families Tax Relief Act (WFTRA) was passed near the end of 2004 and became effective in 2005. WFTRA revised the definition of “dependent” in sections of the Internal Revenue Code (the “Code”) that address exemptions for individual federal tax returns and tax-free coverage under group health plans and dependent care assistance programs. For purposes of welfare plans, the changes to the definition of “dependent” are minimal. However, there are differences between the prior definition and the new definition. In addition, because of the changes plan document, references to Code sections containing the definition may be inaccurate. All group health plans, including major medical plans, dental plans, medical reimbursement features of flex plans, and health reimbursement arrangements (HRA) should be reviewed to determine whether changes to the definition of dependent are needed to ensure tax-free coverage.
Medicare Part D. Medicare Part D prescription drug plans become effective on January 1, 2006. Enrollment of eligible individuals has already begun. All group health plans that provide prescription drug benefits, such as major medical plans and health reimbursements arrangements (HRAs) (but not including medical reimbursement features of a flex plan), are required to provide certain disclosures to Medicare eligible participants (both active employees and retirees). Such disclosures were required to be provided prior to November 15, 2005. If you have not provided such notices, immediate action is required. In addition, ongoing notification responsibilities apply.
HIPAA Portability . New regulations regarding HIPAA special enrollment, pre-existing condition limitations, and certificates of creditable coverage became or become effective for plan years beginning after July 1, 2005. For plans with calendar year plan years, these regulations are effective beginning January 1, 2006. Compliance with the new regulations will require updates to plan documents and the use of updated notices and certificates of creditable coverage.
HIPAA Security. For most group health plans, HIPAA security rules apply to the plan beginning April 20, 2006. (For large group health plans, the compliance date was April 20, 2005.) Compliance with the rules involve amendments to plan document, amendments to business associate agreements, updated and additional HIPAA policies and procedures, additional HIPAA training, and possible changes to your IT systems.
Subrogation and Reimbursement. Since a Supreme Court decision in 2002 (the “Knudson case”), group health plans governed by ERISA have generally been restricted in their ability to bring lawsuits to enforce the plan’s subrogation and reimbursement rights. Typically, plans reserve the right to be compensated or reimbursed in cases where a third party is liable for an illness or injury for which the plan has paid benefits. The Knudson case limited the situations in which plans may enforce these rights. A federal district court case decided in October 2005 clarifies the reach of the Knudson case. The court held that the restrictions imposed under the Knudson case do not apply to a plan’s ability to reduce or suspend future benefit payments in order to recoup prior overpayments made by the plan. Such a provision, according to the court, does not violate ERISA. Plan sponsors should review their plan documentation to ensure it specifically provides that the plan may reduce or suspend benefits in order to recoup prior overpayments.
IRS Settlement Program for Abusive Benefits Transactions. The IRS has announced a settlement program that will allow eligible taxpayers to voluntarily resolve various transactions the IRS considers abusive, including certain double-dipping employee benefit arrangements previously disapproved by the IRS. One of these double-dipping arrangements called for tax-free reimbursements to employees for health insurance premiums that the employees had already paid on a pre-tax salary reduction basis; the other schemes were variations involving “reimbursements” or “loans” for medical or transportation expenses. To participate in the settlement program, eligible taxpayers must file an election with the IRS by January 23, 2006. Details of the program are set forth in IRS Announcement 2005-80 and on the IRS website.
Health Reimbursement Arrangements (HRA). The IRS issued a Notice earlier this year in which it identified several HRA plan designs that are not allowed under the Code, including designs that provide certain types of death benefits or post-death access. The impact of this Notice was addressed in two of our prior alerts, dated April 13, 2005 and October 19, 2005, which are available on our website. For HRAs having plan designs that do not comply with the rules identified in the Notice, the plan must be amended by December 31, 2005 to bring it into compliance. Plans amended by that date will not be “disqualified” (i.e., deemed not to be HRAs) by the IRS.
If you have any questions about the foregoing items, or need assistance bringing your plans into compliance with the new requirements, please contact us.