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Edward I. Leeds is counsel in the Employee Benefits and Executive Compensation Group and a member of the Health Care Group at Ballard Spahr Andrews & Ingersoll, LLP. Leeds represents employers in the negotiation and drafting of insurance, administrative services and other contracts; in documenting and communicating welfare benefit plans; and in complying with applicable state and federal laws. Ballard Spahr Andrews & Ingersoll, LLP has more than 500 lawyers in 10 offices in the Mid-Atlantic and the western United States. It has one of the largest employee benefits and executive compensation practices in the country.Editor's note: This is an updated version of an article originally posted in June. It reflects guidance and rules just recently announced by Massachusetts.
Effective July 1, 2007, the Massachusetts Health Care Reform Act allows residents of Massachusetts who do not have health coverage that meets certain minimum standards to purchase coverage under plans made available by the "Commonwealth Connector." Massachusetts residents who do not have qualifying coverage will lose their state individual income tax exemption and be subject to other financial penalties.
The new law directly and indirectly imposes a number of requirements on employers with 11 or more employees in Massachusetts.
Fair Share Contribution
The new law requires employers to pay a "Fair Share Contribution" of up to $295 per employee per year. These fees will be used to help finance state-subsidized coverage for individuals who do not have access to employer-sponsored plans. Employers who meet either of the following two tests with respect to their full-time employees working in Massachusetts will not need to pay this contribution. For these purposes, an employee is considered a full-time worker if he or she works at least 35 hours per week. Certain employees may be disregarded for purposes of these tests:
• The 25 Percent Test. At least 25% of full-time employees receive employer-subsidized health coverage. The test is to be conducted based on payroll hours during the October 1 - September 30 year, beginning with the 12-month period that ends September 30, 2007.
• The 33 Percent Test. The employer offers to contribute at least 33% of the cost of group health plan coverage for all full-time employees who work at least 90 days during the October 1 - September 30 year.
Comment: We expect that most employers will be able to satisfy one of these tests and avoid paying the fair share contribution.
Cafeteria Plan Mandate
Under the new law, covered Massachusetts employers must allow their Massachusetts employees (with relatively narrow exceptions) to pay for health coverage with pre-tax dollars through a cafeteria plan. Employers who do not extend coverage under their own health insurance plans to, for example, part-time employees who work more than 64 hours per month may choose to comply with the cafeteria plan requirement. To do so, they would need to establish a new cafeteria plan that allows these employees to pay on a pre-tax basis for health coverage that they purchase on their own, in particular coverage purchased through the Commonwealth Connector. Employers wishing to follow that course must take the following measures:
• Establish an account with the Commonwealth Connector to pay for the coverage.
• Communicate the election opportunity to employees and allow them to enroll or waive participation in the cafeteria plan.
• Adopt a written cafeteria plan document.
• File all written cafeteria plan documents with the Connector (the submission date for this filing has been postponed from July 1 to October 1, 2007).
An Employer may adopt a plan that uses model forms published by Massachusetts, or establish a plan that more fully reflects its own plan design decisions.
Free Rider Surcharge
An employer with one or more employees who receive state-subsidized health care in excess of prescribed thresholds will be subject to a surcharge designed to help finance the cost of that care. This surcharge has the potential to be very large, but it will not apply to employers who comply with the cafeteria plan requirements.
Comment: The surcharge is determined through a complicated formula that takes into account various facts and circumstances, including the health care expenses that certain employees happen to incur in a particular year. Because of this uncertainty, the surcharge may present the greatest financial risk to employers under the Massachusetts law and raises the importance of complying with the cafeteria plan mandate.
Reporting Requirements
The state issued new guidance on certain reporting requirements in late June. Most significantly:
• The Massachusetts Division of Unemployment Assistance is developing a program that will allow employers to report information on their Fair Share Contribution obligation electronically. Even employers who do not expect to owe any amount in fair share contributions will need to gather data to demonstrate that they are relieved of this obligation. This information is due by November 15.
• That same electronic program will allow employers to meet their Health Insurance Responsibility Disclosure (Employer HIRD) obligation to report certain information about the number of its Massachusetts employees and about the availability of coverage under its plans.
• Employers will still need to collect Employee HIRD forms from Massachusetts employees who waive either health coverage under an employer-sponsored plan or participation in an employer-sponsored cafeteria plan. A sample Employee HIRD form is available. Employer must retain these forms for at least three years.
• An Employer is relieved of the obligation to collect employee HIRD forms for elections made before July 1, 2007, to the extent it maintains signed waivers from employees that acknowledge that coverage was offered and declined. It appears as if an affirmative waiver of coverage is required and not merely a waiver by default.
Additional reporting (and guidance on reporting) is expected.
Individual Mandate
Residents of Massachusetts have been offered a reprieve that allows them to avoid state tax penalties by enrolling for coverage by the end of the calendar year. However, the availability of a cafeteria plan now may convince Massachusetts employees to make that decision earlier.Insurance Requirements
Under the new law, insured plans will need to meet certain HIPAA-like requirements regarding matters such as pre-existing conditions, waiting periods, and non-discrimination on account of health status. The law imposes certain other requirements regarding insured plans. For example, coverage must be extended to dependents for at least two years after they lose dependent status under federal income tax rules (although not beyond age 26). The law also prohibits insurers from issuing most types of group health insurance policies to an employer in Massachusetts, unless the employer meets certain non-discrimination requirements. In particular, the employer must make the coverage available to all full -time employees in the Commonwealth and may not contribute more toward the cost of coverage for more highly paid employees.
Comment:In view of ERISA preemption issues and other uncertainties, employers have particular reason to comply with the Massachusetts law in a way that minimizes expense and administrative burdens. Compliance may require immediate action and will require employers to remain on the lookout for continuing developments.
To read guidance from Ballard Spahr on other issues, click here.
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