New proposed regulations modify the rules that would allow employers to offer limited wraparound health coverage as an “excepted benefit” to employees who purchase individual health coverage through an Exchange.  Although the new rules relax some of the controversial requirements proposed in 2013, they also create new restrictions and reporting requirements.

The new proposed regulations include a sunset date that generally allows the coverage to remain in effect for only three years (or for the duration of a collective bargaining agreement, if longer).  The preamble of the new proposal explains that the rules will operate as a pilot program that will allow the agencies to evaluate their effect on employer-provided health coverage.  Employers have until January 22, 2015, to comment on the proposed regulations. 

Competing Policies Shape the Rules

Employers with at least 50 full-time employees must offer affordable, minimum-value health coverage to their full-time employees in order to avoid an excise tax.  This employer mandate does not extend to former employees, however, nor does it apply to part-time, temporary, and seasonal employees who average less than 30 hours of work per week.  As a result, individuals who are not full-time employees might not have access to affordable group health coverage from their employer.  These individuals often will be better off if they purchase coverage through an Exchange, where refundable premium tax credits are available to help them afford the coverage.

The coverage available on an Exchange might be less comprehensive than the employer’s group health coverage, however.  For example, the Exchange coverage might fail to cover certain expenses that are not considered essential health benefits, or it might apply less favorable out-of-network reimbursement rates to certain providers.  Employers that are not able to provide affordable primary coverage to part-time workers and retirees often wish to offer these individuals low-cost “wraparound” coverage that fills in some of the gaps in the coverage they purchase through the Exchange.

Although an employer’s willingness to offer wraparound coverage helps workers, it conflicts with a bedrock principle of the Affordable Care Act.  The statute is designed so that an individual who receives group health coverage from an employer —even coverage that is limited in scope—generally is not eligible for premium tax credits for coverage purchased through an Exchange.  This rule serves two purposes.  It prevents individuals from “double-dipping” by receiving tax-advantaged group health coverage from an employer and also receiving direct tax subsidies in the form of premium tax credits.  It also discourages employers from shifting lower-income workers to an Exchange, where the workers will receive their primary health coverage at the government’s expense while the employer finances only supplemental coverage.

There is an exception to this rule, however, for a class of benefits called “excepted benefits.”  A lower-income individual who receives excepted benefits from an employer remains eligible for premium tax credits when the individual purchases coverage through an Exchange.  The new proposed regulations attempt to balance competing policies by allowing employers to offer certain forms of wraparound coverage as an excepted benefit, while limiting the circumstances in which this exception is available.

Eligibility Rules for Wraparound Coverage

Regulations proposed in 2013 identified five conditions that wraparound coverage must meet in order to qualify as an excepted benefit.  One of these conditions was particularly controversial: an employer could offer wraparound coverage only if it sponsored a “primary plan” providing minimum-value group health coverage that was affordable for a majority of employees eligible to participate in the primary plan.  The only individuals eligible to receive wraparound coverage were individuals who were eligible for the primary plan.

Commenters complained that this requirement made wraparound coverage unavailable where it was needed most.  Employers with a high percentage of part-time workers could not afford to sponsor an affordable primary plan for those workers, especially in industries where their competitors provided no health coverage.

In response, the new proposal replaces the “primary plan” requirement with two separate eligibility requirements: one for wraparound coverage offered to retirees and part-time employees, and the other for coverage that wraps around Multi-State Plan coverage.  (Under the Multi-State Plan program, the federal Office of Personnel Management contracts with private health insurers in each state to offer affordable health insurance options.  Multi-State Plans are intended to drive competition and to ensure that consumers have a choice of plans across the country.)

An employer may offer excepted-benefit wraparound coverage only under one of these two options.  If the employer wishes to offer wraparound coverage to a full-time employee, the employee must be enrolled in a Multi-State Plan, since the other eligibility option is limited to individuals who are not full-time employees.  An individual who is eligible for wraparound coverage under either option cannot be enrolled in excepted-benefit coverage that is a health flexible spending arrangement.

Both options come with a number of conditions.  For example, if an employer wishes to offer wraparound coverage under the option for part-time employees and retirees, the employer must offer substantially all of its full-time employees affordable minimum-value coverage.  In addition, the employer must offer other group health coverage that is not excepted-benefit coverage to any individual who is eligible for the wraparound coverage, although there is no requirement that the other coverage be affordable or provide minimum value.  The Multi-State Plan option, too, imposes conditions designed to ensure that the wraparound coverage does not replace the employer’s primary group health coverage.

Both options are subject to several conditions that appeared in the 2013 proposed regulations.  For example, the wraparound coverage must provide benefits that are not available through the underlying coverage: it cannot cover only cost-sharing requirements such as deductibles and coinsurance.  The wraparound coverage may not discriminate based on pre-existing conditions or health status, or discriminate in favor of highly-compensated individuals.  The total cost of the wraparound coverage must be limited, although the ceiling under the new proposal is a flat $2,500 (indexed for inflation) rather than a percentage of the cost of the employer’s primary coverage.

New Reporting Requirements

Both the wraparound option for Multi-State Plans and the wraparound option for retirees and part-time employees are subject to new reporting requirements. A self-insured plan or insurance issuer offering coverage that wraps around a Multi-State Plan must report information sufficient to allow OPM to determine whether the plan or policy meets the wraparound requirements.  In addition, a plan sponsor offering wraparound coverage under either option must report information sufficient to allow HHS to determine whether the regulatory exception for wraparound coverage is functioning as intended, so that it enhances workers’ benefits without contributing to the erosion of employer-provided coverage.  The reporting requirements will be spelled out in later guidance issued by OPM and HHS.