United States: Employers Face July 1 Deadline On Massachusetts Health Plan Mandate

As of July 1, 2007, all employers with more than 10 full-time equivalent employees at locations in Massachusetts generally must have a "cafeteria" plan that complies with Section 125 of the Internal Revenue Code and with regulations issued by the Commonwealth Health Insurance Connector Authority.

This requirement is the latest to go into effect under the 2006 Massachusetts Health Care Reform Act, which was enacted in 2006 to expand access to health care for Massachusetts residents and increase the affordability of health insurance. The centerpiece of the law is a requirement that all residents of Massachusetts purchase "creditable" health insurance coverage no later than July 1, 2007. The Commonwealth Health Insurance Connector Authority (generally called the "Commonwealth Connector") is a quasi-legislative body established to help implement the law and help individuals and small employers purchase affordable health insurance if they do not already have it.

Cafeteria Plan Required

If an employer that does not pay the full cost of medical coverage for all of its employees fails to adopt and maintain a cafeteria plan that complies with Section 125 and the Commonwealth Connector regulations, and its non-collectively bargained employees or their dependents receive five or more instances of free health care services in a year or any such employee receives free care services more than three times in a year, then the employer must pay a "free rider surcharge." The amount of the surcharge depends on a number of factors, including the number of employees, the number of state-funded admissions and visits, the employer’s compliance with certain disclosure requirements, and the number of successive years that the employer has been subject to the surcharge. It is intended to be equal to a portion of the state’s cost for the health care services.

The Commonwealth Connector regulations require the cafeteria plan, at a minimum, to offer eligible employees access to one or more health care coverage options (other than flexible spending accounts) and allow them to pay for the coverage on a pre-tax basis. Employers do not have to contribute to the cost of the coverage. The plan may exclude certain classes of employees, including employees under 18, temporary employees, and certain part-time employees. A copy of the plan must be filed with the Commonwealth Connector.

Beginning this year, all employers must file Health Insurance Responsibility Disclosure (HIRD) forms each year with the Massachusetts Executive Office of Health and Human Services confirming whether they maintain a Section 125 cafeteria plan and/or subsidized health insurance. The Employer HIRD Form must be filed no later than November 15 of each year, based on data as of each September 30. In addition, the employer must collect and retain HIRD forms from each employee who declines to enroll in an employer-sponsored health plan or participate in the employer’s cafeteria plan. The Employee HIRD Form confirms that the employee was offered, and declined, participation in a cafeteria plan or subsidized health insurance and that the employee has other health insurance.

Employers Required to "Pay or Play"

The new law also requires employers to make a "fair and reasonable premium contribution" to the health insurance costs of their employees or to make an annual contribution of up to $295 per employee (prorated) into the state’s Commonwealth Care Trust Fund, which provides health insurance subsidies for low-income individuals and pays for other initiatives under the law. An employer is deemed to have made a "fair and reasonable premium contribution" if 25% or more of its full-time permanent Massachusetts employees are enrolled in its group health plan or if the employer offers to pay at least 33% of the premium cost of any group health plan offered to its full-time permanent Massachusetts employees.

The new law contains a number of other provisions of interest to employers, including a sweeping non-discrimination provision that prohibits employers from making a smaller premium contribution, as a percentage of the total premium, for any employee than for an employee with a similar or lesser salary. This requirement does not carve out part-time or seasonal workers, and applies to all insured arrangements, including insured executive compensation arrangements as well as broad-based plans.

There is an argument that the cafeteria plan and certain other requirements of the new law are preempted by ERISA, but we are unaware of any challenges that have been brought on that basis to date.

The attorneys in Pillsbury’s Executive Compensation & Employee Benefits Practice group can help you design and draft cafeteria plans and health care programs that will serve a number of goals, including favorable tax treatment and broad or targeted employee coverage. For this type of assistance and general questions about health care, please contact any of the benefits attorneys at Pillsbury. For specific questions about the Health Care Reform Act, please contact your Massachusetts counsel.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.