We are contemplating making significant plan design changes to our self-insured medical plans. These include increasing copays, coinsurance and deductibles as well as excluding certain benefits currently covered under the plan (e.g., excluding GLP-1 drugs used for weight loss). The medical plans are maintained on a calendar-year basis, and we would like to make these changes now instead of waiting until the start of the next plan year. What compliance issues should we consider when making midyear plan design changes?
The following FAQs address the compliance considerations when making midyear plan design changes, including ERISA and cafeteria plan issues.
Can we make midyear changes under ERISA?
Yes. ERISA gives employers broad authority over the employee benefit plans they maintain, including the right to amend or terminate the plans at any time. Plan documents typically include a plan provision specifically reserving the employer’s right to amend or terminate the plan at any time and for any reason. That being said, an employer’s right to make changes to the plan could be limited by a provision in the plan document or by entering into an agreement that limits the right to make plan changes, such as a collective bargaining agreement between the employer and a union.
Must we offer a midyear open enrollment period to give employees an opportunity to make new elections?
No. In fact, if employees are paying their medical premiums on a pre-tax basis through an Internal Revenue Code (IRC) section 125 cafeteria plan, the cafeteria plan midyear election rules will apply. Under these rules, pre-tax elections are irrevocable for the period of coverage (e.g., plan year), except in limited circumstances allowed under both the rules and the terms of the plan.
Election changes must be on account of and consistent with the event triggering the change in election right. For example, allowing employees to make changes to their dental coverage elections when only the design of the medical plan is changing or allowing employees who are currently waiving medical coverage to newly enroll would run afoul of the cafeteria plan midyear change in election rules.
However, a cafeteria plan may be drafted to allow an employee to change elections midyear on account of a “significant coverage curtailment.” Under the cafeteria plan regulations, coverage “is significantly curtailed only if there is an overall reduction in coverage provided under the plan so as to constitute reduced coverage generally.” Curtailment is determined by looking at the impact on the entire plan and not on individual employees. Significant coverage curtailment includes a significant increase in deductible, copayments or out-of-pocket cost-sharing amounts under the plan. Whether a particular plan change is significant is generally determined on a facts and circumstances basis.
What election changes an employee may make when a significant curtailment of coverage occurs depends on whether the curtailment results in a loss of coverage. If there is no loss of coverage, an employee may elect alternative similar coverage but cannot drop coverage.
If a loss of coverage occurs, however, then the employee can drop the coverage elected but only if no other option providing similar coverage is available. Note that this provision does not apply to elections for health flexible spending accounts.
A loss of coverage is defined as a complete loss of coverage under a benefit option and includes:
A cafeteria plan may also treat the following events as a loss of coverage:
Must we communicate midyear plan design changes to plan participants, and by when?
Yes. ERISA requires that a summary of material modification (SMM) be provided when there is a “material modification” in the terms of the plan or any changes in the information required to be in the summary plan description (SPD). Changes to the plan, such as taking away existing benefits or reducing the conditions under which benefits are paid, are considered material modifications that must be disclosed to plan participants.
The general rule is that an SMM (or updated SPD) must be furnished within 210 days after the end of the plan year in which a modification or change is adopted. However, if there is any material reduction in covered services or benefits under a group health plan, the SMM (also referred to as a summary of material reduction or SMR) must be provided within 60 days after the change is adopted. Note that the employer may wait beyond the 60-day limit if it maintains a system of communication, with respect to which plan participants are provided information concerning their plan, including SMMs, at regular intervals of not more than 90 days and such communication otherwise meets ERISA’s disclosure requirements. This exception only applies to those plan participants that receive the communication.
Regulatory examples of a material reduction in covered services or benefits include:
Midyear plan design changes may also trigger the advanced notice requirement for the summary of benefits and coverage (SBC). If there is a material modification to a group health plan’s terms or coverage that affects the SBC’s required content and is not reflected in the most recently provided SBC, then a notice of material modification (or updated SBC) must be furnished at least 60 days before the modification becomes effective. Note that where a complete notice is provided in a timely manner under the SBC rules, an ERISA-covered plan will also satisfy ERISA’s requirement to provide an SMM.
Does excluding coverage for certain healthcare services or prescription drugs under the self-insured medical plan midyear raise any additional compliance concerns?
Possibly. While self-insured group health plans are subject to certain coverage mandates under ERISA, the IRC and the Public Health Service Act, employers generally have considerable flexibility when it comes to determining what benefits and services will be covered and to what extent.
While limitations and exclusions may be permissible under certain applicable laws, they could be problematic under others. For example, HIPAA nondiscrimination rules permit exclusions and limitations in relation to a specific disease or condition or for certain types of treatment or drugs so long as they apply uniformly to all similarly situated individuals. However, such exclusions or limitations may run afoul of federal nondiscrimination laws. Choosing to exclude all benefits for a particular health condition or disorder or capping coverage (where permissible under the ACA) for certain health conditions but not others may raise concerns under federal nondiscrimination laws, such as the Americans with Disabilities Act or Title VII of the Civil Rights Act.
Other types of exclusions under the group health plan, such as exclusions of specific treatments for certain conditions or exclusions based on medical necessity or medical appropriateness, or based on whether the treatment is experimental or investigative, could also be problematic depending on the facts and circumstances. For example, the Mental Health Parity and Addiction Equity Act (MHPAEA) requires parity between medical/surgical (M/S) benefits and mental health/substance use disorder (MH/SUD) benefits regarding financial requirements (e.g., deductibles, copayments and coinsurance), quantitative treatment limitations (e.g., day or visit limits) and nonquantitative treatment limitations (NQTLs) (e.g., prior authorization, standards related to network composition and other medical management techniques). While MHPAEA does not require group health plans to provide MH/SUD benefits, exclusions or limitations affecting MH/SUD benefits could be noncompliant with the MHPAEA’s parity requirements.
