The Best of Times and the Worst of Times: How Imperfect Regulatory Action May Still Create Opportunities for Self-Funding

Regulators have been busy over the course of the past few months. Between the issuance of executive orders, a tax bill, and state regulatory action, employers are scrambling to understand the implications. And while regulatory action has been quick, it has not necessarily been thorough, creating possibilities and opportunities for self-funded health plans.

Upon review of the various regulations, it seems new incentives for the creation of self-funded employer plans now exist.  Employers may investigate taking advantage of this environment to form, create, or modify their self-funded benefit plans.  Let’s examine certain recent regulatory developments.

Executive Order 13813

On October 12, 2017 President Trump issued Executive Order 13813 to save “the American people from the nightmare of Obamacare.” While this executive order did not modify any laws or regulations, it did direct the Department of Labor (DOL), the Department of Health and Human Services (HHS), and the Department of the Treasury to issue proposed regulations concerning expanded coverage under health reimbursement arrangements (HRAs) and association health plans (AHPs).

HRAs are tax advantaged arrangements subject to the Affordable Care Act (ACA) regulations. As a result, an HRA may not impose annual dollar limits on benefits unless it is integrated with a group health plan. An exception exists, however, for small employers. Pursuant to a provision within the 21st Century Cures Act, certain small employers may offer a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA).  This provision allows small businesses (i.e. employers with under 50 employees) to reimburse employees for out of pocket costs and premiums on the individual market. The regulations, however, impose tight restrictions on the employers’ ability to offer a QSEHRA.

Based on the current regulations and guidance for QSEHRAs issued by the Internal Revenue Service (IRS) in Notice 2017-67, an employer offering any group health plan is ineligible.  As a result, even employers who only offered group dental coverage, for example, would be disqualified.  The IRS did request comments on this guidance (due January 19, 2018).

The anticipated comments on Notice 2017-67, combined with the executive order directing the agencies to propose regulations expanding opportunities for employers to offer an HRA, may loosen current restrictions and expand the employer eligibility requirements.  Guidance is still pending, but the proposed regulations could present options for self-funding which do not currently exist.

Proposed DOL Regulations

In addition to the expansion of HRAs, the executive order directed regulators to increase access to health care by allowing a broader pool of employers to create AHPs. In early January 2018, responding to the executive order, the DOL issued proposed regulations to extend the circumstances under which an association may function as an employer under the Employee Retirement Income Security Act (ERISA).

Currently, coverage provided via an AHP is regulated pursuant to the same standards applicable to the individual and small employer health insurance market.  Under ERISA, an AHP’s reach is currently limited to circumstances where it is an employer sponsored plan. Specifically, association members must share a common interest, connect for reasons other than providing health insurance, exercise sufficient control over the health plan, and have at least one non-business owner employee.

The proposed rules may be game-changing for working owners (i.e. sole proprietors and self-employed individuals), allowing them to function as both the employer – for purposes of joining the association – and as the employee – for purposes of being covered by the plan.  This unique dual status could allow working owners to participate in association health plans, and the adjustment could allow a new class of individuals (and potentially attract a large and previously ineligible pool of individuals) to self-funding.

Additionally, the proposed regulations contemplate the formation of an association for the purpose of offering health insurance. The rule does not impose prohibitions on forming new associations (or specify size limitations), but it does provide formal organizational requirements for associations. These newly formed associations would need affordable health insurance options, and may want to explore the benefits of self-funding. This could also create a new pool of entities for self-funding.

Tax Cuts and Jobs Act

In December 2017, the Tax Cuts and Jobs Act (Act) was signed into law, reforming both individual and corporate income tax issues in the most sweeping and drastic changes to the Tax Code since 1986.

While the Act maintains 7 tax brackets for individuals, it reduces the rates and increases the thresholds on the brackets for individuals.  Potentially even more significantly, the Act reduces the individual mandate penalty to $0 (as of January 1, 2019). While the elimination of the individual tax penalty will likely have a significant negative impact on employers, and their employer sponsored health plans, the greater fear is that if individuals are no longer required to have coverage, the healthy, low risk individuals will terminate coverage altogether (whether individual or employer based). Without healthy lives the risk pools will suffer.

While the Act affects the individual mandate, it does not alter current employer mandate requirements; employers are still required to offer affordable coverage meeting minimum value requirements, or face an excise tax. This is troubling for employers.  If, with the reduction of the individual mandate penalty to $0 employees are effectively no longer required to maintain coverage, employers anticipate covering a less balanced risk pool, making (still) mandated employer coverage more expensive.

While the individual and employer mandate were intended to work together to increase access to care and balance risk, the elimination of the individual mandate does not fully undermines the continued value of offering employer sponsored coverage as an employee benefit.  Employers still recognize the culture and corporate benefits that attract and retain a talented work force, like employee health plans. Many employees (even healthy ones) value the benefit of comprehensive healthcare and the elimination of the individual mandate will not deter them from continuing coverage under an employer plan, or seeking an employer that provides one.

This does mean, however, that employers will need to be creative and flexible to counterbalance the potential new costs. One way to offset costs would be to create a tailored plan, designed specifically for the individuals that value healthcare as an employee benefit, and the best way to offer flexibility is via a self-funded plan.  This might be an opportunity to attract more employers who are concerned about rising costs and investigating new solutions.  Only with self-funding can an employer implement a targeted health plan that is loaded with unique benefits and creative cost-containment methodologies.

The Act also creates tax savings for businesses by slashing the corporate income tax rate from 35% to 21%, and creating a 20% deduction for qualified business income (QBI). While the specifics of the business tax changes are beyond the scope of this discussion, and the determination of QBI is not a straightforward analysis, the takeaway is that these tax benefits should (in theory) generate opportunities for employers to save on their tax bill.  With the savings, employers invest in more creative employee benefits, like self-funded healthcare plans.

Despite the complexity of the Act and the continued uncertainty of some of its implications, the potential opportunities for self-funding should not be overlooked.  Employers should discuss the impact of the Act on their individual situation with their tax advisors to better understand planning opportunities.

State Action

In response to the Act’s repeal of the individual mandate, certain states are taking action. For example, a Maryland proposal would require individuals to have insurance or pay a penalty of 2.5% of their income or $696 (whichever is greater).   The imposition of insurance mandates at the state level would encourage participation in employer plans, making employer sponsored coverage an attractive option and broadening the risk pool.   If states like Maryland join Massachusetts in mandating coverage it could positively impact self-funding.  More individuals would be looking for cost effective health plan options, something that an employer with a self-funded plan would be able to provide.

Summary

While recent regulatory developments have been swift, leaving anxiety over their interplay and interaction, employers should look for opportunities to embrace change as it relates to benefits they must offer (i.e. employers are still subject to the employer mandate), and those that could be advantageous or strategic to offer.

With new challenges come new opportunities for HRAs, AHPs, and employers under the executive orders, proposed DOL regulations, tax reform, and state level developments.  Self-funding, with unmatched flexibility for employers of all sizes, could be a cornerstone of the solution to reduce costs in the provision of healthcare.


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