Signed into law on September 8, 2006, the Massachusetts Health Care Reform Act provides that all Massachusetts employers must arrange (but not necessarily pay) for their employees to obtain healthcare insurance coverage.
Beginning on July 1, 2007, the Massachusetts Health Care Reform Act (the "Act") will impose three principal obligations on Massachusetts employers with 11 or more full-time employees working in Massachusetts:
- Massachusetts employers must either make a "Fair and Reasonable Premium Contribution" to their employees' healthcare premiums or make a contribution to the Commonwealth of Massachusetts of up to $295 per year per employee (referred to as the "Fair Share Contribution").
- Massachusetts employers must establish a cafeteria plan for their employees under Section 125 of the Internal Revenue Code. Employers who do not comply with this second provision, in certain circumstances, will be required to reimburse a Massachusetts trust fund for part or all of their employees' state funded healthcare costs after a $50,000 annual deductible (referred to as the "Free Rider Surcharge"). Thus, if an uninsured employee requires $150,000 of state-funded health care, the employer may have to reimburse up to $100,000.
- Every employer is required to report whether the employer has offered to pay for - or to arrange for - healthcare insurance coverage and whether the employee has accepted or declined it.
It is important to keep in mind that the Act is still in its infancy. Consequently, interpretive guidance and regulations are still being issued by the Division of Health Care Finance and Policy and the Division of Insurance, the two Agencies charged with administering the Act.
Fair And Reasonable Premium Contribution
An employer that makes a Fair and Reasonable Premium Contribution will be exempt from the $295 per year per employee Fair Share Contribution. An employer will be determined to make a Fair and Reasonable Premium Contribution if the employer satisfies either the Primary Test or the Secondary Test, described below:
The Primary Test
An employer with at least 25% of its full-time employees enrolled in an employer sponsored Group Health Plan will be exempt from the Fair Share Contribution. A Group Health Plan is, in relevant part, a plan (whether insured or self-funded) that is sponsored and paid for, in whole or in part, by an employer. This 25% primary test calculation is calculated by dividing the Total Payroll Hours of Enrolled Full-Time Employees by the Total Payroll Hours of Full-Time Employees. The period of calculation is from October 1 to September 30.
Employer X employs 1000 employees from October 1, 2005 to September 30, 2006. 700 of these employees work at least 35 hours per week (i.e., full-time employees) and 150 of them work less than 35 hours per week (i.e., parttime employees). 535 (500 full-time, 35 part-time) employees are enrolled in the Group Health Plan sponsored by Employer X.
Total payroll hours of enrolled full-time employees = 1,020,000 hours
Total payroll hours of all full-time employees = 1,428,000 hours
For purposes of this example, total payroll hours are calculated by taking the total number of full-time employees (enrolled employees for the numerator only) and multiplying that number by 2040 hours. Payroll hours includes regular, vacation, sick, FMLA, short-term disability, long-term disability, overtime and holiday payroll hours.
Therefore, Employer X satisfies the Fair Share Contribution.
Several categories of employees may be excluded from the calculation, including independent contractors (individuals who provide services not deemed to be employment), seasonal employees (individuals hired to perform services not to exceed sixteen weeks), and temporary employees (full- or part-time employees whose employment does not exceed twelve consecutive weeks during the period from October 1 to September 30).
The Secondary Test
An employer must first perform the primary test calculation. However, if the percentage calculated in the primary test is less than 25%, but the employer offered to pay at least 33% of the premium cost of all Group Health Plans offered by the employer to its Full Time Employees that were employed at least 90 days during the period from October 1 to September 30, the employer will be exempt from the Fair Share Contribution. To pass the secondary test, an employer must contribute at least 33% to the premium cost for all full-time employees employed at least 90 days.
Fair Share Contribution
The Fair Share Contribution is currently capped at a maximum of $295 per full-time employee.
Two factors determine if an employer will be required to pay the Fair Share Contribution. First, only employers with 11 or more full-time employees will be subject to the requirement. Second, only "non-contributing" employers are subject to the requirement. These are employers who do not offer a Group Health Plan and do not make a Fair and Reasonable Premium Contribution.
The contribution is prorated for part-time employees using a standard formula that divides the annual number of hours worked by one employee by 2,000. Thus, for a part-time employee who worked 20 hours a week for 50 weeks in a year the employer would pay a contribution of $147.50, assuming that the full contribution is calculated at $295.
Free Rider Surcharge
The Free Rider Surcharge penalizes non-providing employers whose employees get free care that is reimbursed by the Uncompensated Care Pool ("UCP").A non-providing employer is an employer with 11 or more employees who does not adopt and maintain a Section 125 cafeteria plan for the benefit of its employees.
An employer that offers a cafeteria plan to employees will automatically be exempt from the Free Rider Surcharge. If an employee or dependent of such employee uses free care more than three times in a year, or if there are five or more uses of free care in the aggregate by the employees or dependents, then the employer will pay a surcharge of between 10% and 100% of the State's cost of that care.
The first $50,000 of costs will be exempted, and the actual percent level of the surcharge will be determined by the Division of Health Care Finance and Policy. For fiscal year 2007, the surcharge will be assessed only for the period from July 1, 2007 through September 30, 2007.
Plan Design Considerations Going Forward
All employers with 11 or more employees must adopt a Section 125 Plan.
Group Health Plan policies providing family coverage must maintain coverage for dependents up to the earlier of: (i) the dependent's 26th birthday, or (ii) 2 years following the loss of dependent status under the provisions of the Tax Code. The date on which a person loses dependent status is December 31 of the last federal tax year for which said person was claimed as a dependent on another person's federal income tax form.
An employer is no longer able to purchase a Group Health Plan product from a vendor unless the employer offers the insurance to all Full-Time Employees who live in Massachusetts. Further, an employer may not make a lower percentage contribution amount to a low-wage employee than the employer makes for a high-wage employee receiving the same insurance.
However, the Division of Insurance has informally indicated that the following design features satisfy the discrimination rules:
- Establishing different percentage contributions for different plan choices, whether fully insured or selffunded, as long as the contributions made with respect to each plan on behalf of employees do not differ based on the salary level of the employees.
- Establishing a fixed dollar amount as a contribution to premium for all employees regardless of salary.
- Establishing greater contribution levels for increasing lengths of service, as long as it is part of a formal employee benefit plan and is designed as a reward for longevity rather than as a pretext for providing better health insurance contributions to more highly paid employees. Consistent with the foregoing, an employer may establish a reasonable probationary period of no more than five months before a newly hired full-time employee is eligible for benefits.
- Establishing greater contributions levels for persons who participate in company-sponsored health and wellness programs.
It is likely that the preemption rules of ERISA are applicable to preclude the State's regulation of self-insured Group Health Plans. Accordingly, it is arguable that the above discrimination rules are not applicable to self-insured Group Health Plans. We understand that the Division of Insurance is currently addressing their position with respect to this issue.
Employers are required to file information about the health insurance status of their employees. Each employee that declines an employer's offer of health insurance or the offer to arrange for the purchase of health insurance is required to sign an Employee Health Insurance Responsibility Disclosure (HIRD) Form. The employer must retain the signed HIRD form for a period of three years. If the employee does not comply with the employer's request to return the signed form, the employer must document diligent efforts to obtain such form and maintain the documentation for a period of three years. Data from the forms will be used to administer and enforce the Individual Insurance Mandate, the Employer Fair Share Contribution and the Employer Surcharge for State-Funded Health Costs.
Some important record keeping dates to keep in mind are as follows:
- The employer must obtain a signed Employee HIRD form for each employee declining employer sponsored coverage by the earlier of 15 days after the close of the open enrollment period for the employer's health insurance, or July 1 of the reporting year.
- If an employer's open enrollment period for 2007 ended prior to January 1, 2007, and an employee has signed an employer form acknowledging that he or she was offered and declined employer-sponsored insurance, such employee is not required to sign an Employee HIRD until the next open enrollment period. The employer must retain the signed employer form until the employee signs a HIRD form for 2008.
- If an employee enrolled in an employer-sponsored health insurance plan notifies the employer that he or she has elected to terminate participation in the plan, the employer must require the employee to sign a HIRD form within 15 days of the employee's election to terminate participation.
- The employer must obtain the signed Employee HIRD form from each new employee that either declines employer-sponsored health insurance or declines the employer's offer to arrange for the purchase of health insurance within 15 days of hire.
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.