Self-Insurer Feb 2013 by SIPC

February 2013

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Stop loss

Processing at a

CrOss rOaDs

February 2013

The Self-Insurer

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February 2013 | Volume 52

February 2013 The Self-Insurer (ISSN 10913815) is published monthly by Self-Insurers’ Publishing Corp. (SIPC), Postmaster: Send address changes to The Self-Insurer P.O. Box 1237 Simpsonville, SC 29681

Features

8 From the Bench

editorial staff PuBlIShINg DIreCTOr James A. Kinder MANAgINg eDITOr erica Massey

artICLes

SeNIOr eDITOr gretchen grote

ArT gallery: Why government is the problem – at all levels

PPACA, HIPAA and Federal Health Benefit Mandates: IrS Issues game-Changing regulations Interpreting health Care reform’s Pay or Play requirement, Part One

stop Loss Processing at a Crossroads by Kenneth Walker and Mike Farley

DeSIgN/grAPhICS Indexx Printing CONTrIBuTINg eDITOr Mike Ferguson

InDustry LeaDershIP

DIreCTOr OF OPerATIONS Justin Miller DIreCTOr OF ADverTISINg Shane Byars Editorial and Advertising Office P.O. 1237, Simpsonville, SC 29681 (888) 394-5688 2013 self-Insurers’ Publishing Corp. Officers

SIIA President’s Message

elections, the Fiscal Cliff, sovereign Debt Crises… by Joe LoPorto

James A. Kinder, CeO/Chairman erica M. Massey, President lynne Bolduc, esq. Secretary

The Self-Insurer | February 2013

Stop loss Processing at a

CrOss rOaDs by Kenneth Walker and Mike Farley

February 2013

The Self-Insurer

n the early 1980’s, metal boxes the size of refrigerators began to pop up at a handful of Third Party Administrators (TPAs) across the country. They were expensive, but incredibly powerful computer systems built to pay claims. The early adopters said these systems would help them do more with less, but many of their industry peers were skeptical. Thirty years on, hindsight confirms that those early adopters were correct. Today, it would be ridiculous for a TPA to even consider paying claims manually. In every service industry, this process of adopting new technologies plays out in much the same way. Companies start out doing a particular function manually (e.g. paying a claim, booking a flight, processing a check). Over time, technology arises to standardize and automate these functions allowing companies to increase efficiency and effectiveness. The early adopters see the most benefit because they get a leg up on their competition. Others resist because they perceive the pain and risk associated with the change as too high to justify the effort. however, in time adoption of the technology becomes universal because the benefits are so obvious that they become impossible to ignore.

Complex and time consuming process Processing stop loss today bears a striking similarity to the claim processing of thirty years ago. The process of submitting, receiving, and processing common stop-loss requests like quotes, claim filings, and notifications is complicated and time consuming because, for the most part, it is still done manually. Standardizing and automating stop loss processing can result in substantial cost savings and improved service.Yet the idea of change is met with skepticism and resistance because “we’ve been doing it this way for years”.

A typical mid-size TPA requires two or more dedicated employees with a title such as “stop loss coordinator.” This position is critical to the TPA, but very difficult to staff. These individuals spend the bulk of their time managing the various phases of the quoting/rFP process. each phase of an rFP often requires multiple iterations, which, when multiplied across all the carriers and Mgus to whom the request has been sent, result in scores of interactions for a single stop loss plan. The burden of managing this flurry of interactions falls on the stop loss coordinators.

Outmoded tools Stop loss coordinators must know where everything stands in every stop loss process at any given time. This is critical because it is their job to keep the a TPA’s frontline sales and service representatives up to date on the constantly changing statuses of rFPs and claims. until recently, however, the most commonly used tools for stop loss coordinators have been email and spreadsheets. Both tools present numerous limitations since neither was designed specifically for the stop loss process. Due to the quantity of email correspondence related to stop loss, it is not uncommon for important information to get lost. regardless of who lost it, it usually falls to the stop loss coordinator to waste time hunting through lengthy email strings to locate the needed information. The stop loss process also requires a level of information sharing that spreadsheets simply cannot handle. The risk of someone operating on out of date information is high and the cost of doing so is huge.

Information silos In order to deal with the stop loss processing challenges, each stop loss coordinator creates their own method for managing stop loss using email and spreadsheets. In effect, the stop loss coordinator develops a proprietary hold on the process, making it difficult to train new frontline employees in stop loss. The stop loss coordinator becomes an information silo to whom account managers and sales executives must continually turn to extract the data and information they require to close sales and service customers. This division of labor is not only inefficient, it can also be detrimental to a TPAs ability to provide quality service to its clients. This is because the people who know the customer best, the sales executives and account managers, are also the ones who know little about the stop loss process since they have forfeited this critical knowledge over to the stop loss coordinator. until recently, however, the lack of adequate tools made it impossible to merge job functions.

Filings are yet another issue When it comes to filing claims and 50% notifications, the problems are different but just as serious. Maintaining adequate records of who said what and when is essential. Tracking down this information, however, is a slow and painful process in which the answer may be overlooked. This inability to maintain reliable records makes it difficult to determine responsibility when a discrepancy arises with a carrier or Mgu. The inadequate methods available for tracking stop loss can also lead to problems if the person responsible for a large claim is unexpectedly absent. The timely payment of large claims is essential. An absence occurring at a critical time can stall the filing process if needed data remains locked in the computer of the

The Self-Insurer

| February 2013

absentee. Such a delay can potentially result in the loss of the PPO discount (often 25-40% of the claim).

root Cause: Lack of standardization every TPA has felt the impact of these issues on their business to one degree or another. As demand for stop loss has increased, those who can afford it have added staff. however, since the stop loss process continues to be done manually, additional staff only increases the number of information silos and further amplifies the amount of inefficiencies present in the system. This is because the core issue remains unchanged; that is the lack of a standardized, automated process that everyone from managers to frontline service and sales representatives can follow. Today, the industry is going through the same adoption pattern with stop loss that it went through thirty years ago with the payment of

claims. The early adopters are claiming that technology is helping them do more with less, while others remain skeptical. Only time will tell which side is correct. Based on the histories of this and other service industries, however, the odds favor the advocates of standardization and automation.

The Benefits of standardization Standardizing the stop loss process helps eliminate the inherent problems of information silos. Process standardization also reduces the amount of training needed to onboard new employees, and enables sales and customer support representatives to quickly learn the stop loss process. By having frontline employees intimately involved with all aspects of a client, TPAs can significantly improve the service they provide to their clients. The ability to provide such high quality customer service increases customer confidence and loyalty.

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Mike Farley is the President of Yottaflow, Inc.. Yottaflow is the company behind Stop Loss Connect, a web-based software application that allows TPAs to automatically track and manage stop loss quoting and filings. Contact Mike: 216245-7160 or mike@yottaflow.com.

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February 2013

The Self-Insurer

No matter the size of the organization, every TPA deals with scarce resources. There is always a long list of initiatives a TPA would undertake if resources were available. By taking advantage of new stop loss technologies, early adopters have been able to free up resources, giving them the opportunity to make more of these initiatives a reality. This is enabling them to gain a competitive edge while providing added value to their clients. n Kenneth Walker is the Managing Member of Nexus Insurance Marketing group. Nexus represents multiple Stop Loss Carriers/MGUs and is integral in the stop loss quoting process with many TPAs and brokers. Prior to Nexus, Kenneth ran two TPAs and was often in a decision making role regarding new or improved products for TPA solutions. Contact Kenneth: 312.445.0555 or kwalker@nexus-img.com

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until recently, the expense associated with standardizing stop loss made it a realistic option for only the most advanced TPA operations. The advent of of new technologies is changing this. Those on the leading edge are finding that standardization and automation have allowed them greater flexibility in deploying personnel. early adopters of these new technologies are able to redistribute the responsibilities formerly held by dedicated stop loss administrators. These duties can now be carried out by the sales and service representatives with a positive impact on the service they provide to clients.

1/21/2013 1:38:48 PM

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The Self-Insurer

| February 2013

bench From the

by Steve Polino

tPa Beware: third party administrator liable for wrongful denial of benefits

n a recent case originating in Texas, the Fifth Circuit Court of Appeals held a third party administrator (“TPA”) liable for denying two (2) separate benefit claims. The Court found that the TPA misinterpreted plan language and such misinterpretation was an abuse of discretion. The basis of the courts holding against the TPA was that the TPA took on the responsibilities of the Plan Administrator. Thus, the TPA was liable for benefits in excess of $400,000.00 and $300,000.00 in attorneys’ fees. The case presents two critical lessons for TPA’s and other entities which make or participate in decisions on behalf of plans. First, be careful how you interpret and apply plan language to claims. Second, obtain approval from the Plan Administrator for denial of all

February 2013

The Self-Insurer

disputed claims regardless of whether you think denial is warranted. The case involved two separate plans contracting with the same TPA. The TPA denied claims made on behalf of two patients who received treatment from the same medical provider. Patient 1 suffered a cervical spine fracture that resulted in quadriplegia. Patient 2 suffered an acute stroke. Both received treatment at a long term acute care facility (“lTAC”). Patient 1 and Patient 2 participated in similar medical benefit plans. Both plans limited reimbursements to “skilled nursing facilities” (“SNFs”). The plans used identical language to define an “SNF”. Skilled Nursing Facility is a facility that fully meets all of these tests: 1. It is licensed to provide professional nursing services on an inpatient basis to persons convalescing from injury or sickness. The service must be rendered by a registered nurse (r.N.) or by licensed practical nurse (l.P.N) under the direction of a registered nurse. Services to help restore patients to self-care in essential daily living activities must be provided. 2. Its services are provided for compensation and under the fulltime supervision of a Physician. 3. It provides 24 hour per day nursing services by licensed nurses, under the direction of a full-time registered nurse. 4. It maintains a complete medical record on each patient.

5. It has an effective utilization review plan. 6. It is not, other than incidentally, a place for rest, the aged, drug addicts, alcoholics, mental retardates, custodial or educational care of care of mental disorders. 7. It is approved and licensed by Medicare. The plans further provided in a final sentence that the term “skilled nursing facility” “also applies to charges incurred in a facility referring to itself as an extended care facility, convalescent nursing home, rehabilitation hospital, long-term acute care facility or any other similar nomenclature.” (Citation omitted). The TPA’s administration service agreements allowed the TPA process to process all claims presented for benefits under the respective plans. The TPA made the determination to deny both claims by explaining that the provider did not meet the definition of a SNF as defined in the plans. The Provider brought suit directly against the TPA and the respective plans under the employee retirement Income Security Act (“erISA”), as an assignee of benefits. As in any erISA case, the court limits its review to the administrative record. The purpose of the review is to determine whether the interpretation of a plan is “legally correct.” The factors courts consider are: “(1) whether the administrator has given the plan a uniform construction, (2) whether the interpretation is consistent with a fair reading of the plan, and (3) any unanticipated costs resulting from different interpretations of the plan.” Crowell v. Shell Oil Co., 541 F.3d 295, 312 (5th Cir. 2008). The most important factor is whether the administrator gave the plan a fair reading. An administrator’s interpretation is consistent with a fair reading of the plan if it construes the plan according to the “plain meaning of the plan language.” Threadgill v. Prudential Sec. grp., Inc., 145 F.3d 286, 292 (5th Cir. 1998).

If the court finds that an administrator’s interpretation of a plan is incorrect, then the court turns to consider whether the interpretation was an abuse of discretion. A plan administrator abuses its discretion when there is no concrete evidence in the administrative record that supports the denial of the claim. Abuse of discretion factors include: “(1) the internal consistency of the plan under the administrator’s interpretation, (2) any relevant regulations formulated by the appropriate administrative agencies, and (3) the factual background of the determination and any inferences of lack of good faith”. gosselink v. Am. Tel. & Tel. Inc., 272 F.3d 722, 726 (5th Cir. 2001). however, “if any administrator interprets an erISA plan in a manner that directly contradicts the plain meaning of the plan language, the administrator has abused his discretion even if there is neither evidence of bad faith nor a violation of any relevant administrative regulations.” Id at 727 (emphasis added). In the case at hand, the TPA’s

interpretation of the respective plans was incorrect because its finding was inconsistent with a fair reading of the plan language.The plan stated that an SNF “Is a facility that fully meets all of ” seven SNF tests.The TPA’s denial of Patient 1’s claim referenced only two of the seven factors and its denial of Patient 2’s claim did not reference a single factor. More importantly, the final sentence of both sections of the respective plans stated, in essence, that a SNF by any other name is still an SNF. As noted above, that final sentence stated, in pertinent part, “the term ‘skilled nursing facility’ also applies to a facility – referring to itself as a…long term acute care facility or any other similar nomenclature.” Thus, it was not a far reach for the court to conclude that the TPA’s interpretation of the plans was an abuse of discretion. The TPA’s categorization of the provider as an lTCA but not a SNF directly contracted the plain meaning of the plan language under the factual background abuse of discretion prong.

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The Self-Insurer

| February 2013

upcomingeVents self-Insured health Plan executive Forum

March 20-21, 2013 • JW Marriott Desert Springs Resort & Spa • Palm Desert, CA The Self-Insured health Plan executive Forum (formerly known as the TPA/ Mgu excess Insurer executive Forum) will be held March 20-21, 2013 at the beautiful J.W. Marriott Desert Springs resort in Palm Springs, CA. The educational focus for this event will be expanded to address the interests of plan sponsors, in addition to third party administrators and stop-loss entities.

27th annual Legislative/regulatory Conference

April 17-18, 2013 • Washington Marriott at Metro Center • Washington, DC SIIA’s Annual legislative and regulatory Conference is your opportunity to hear directly from the policy-makers who will shape the health policy agenda in 2013 and beyond. Experience the political process first hand by participating in SIIA’s popular “Walk on Capitol hill.” Meet with your federal legislators in their Capitol Hill offices and let your voice be heard. SIIA staff will set up your appointments, provide you with “talking points” and lobbying materials in advance of your meetings.

self-Insured Workers’ Comp executive Forum

May 29-30, 2013 • Chase Park Plaza Hotel • St. Louis, MO SIIA’s Annual Self-Insured Workers’ Compensation executive Forum is the country’s premier association sponsored conference dedicated exclusively to self-insured Workers’ Compensation funds. In addition to a strong educational program focusing on such topics as excess insurance and risk management strategies, this event will offer tremendous networking opportunities that are specifically designed to help you strengthen your business relationships within the self-insured/alternative risk transfer industry.

International Conference

June 10-12, 2013 • Newport Beach Marriott Hotel & Spa • Newport Beach, CA Beyond Emerging: Innovations in Self-Insurance Around the Pacific Rim SIIA’s International Conference provides a unique opportunity for attendees to learn how companies are utilizing self-insurance/alternative risk transfer strategies on a global basis. The conference will also highlight self-insurance/ ArT business opportunities in key international markets. Participation is expected from countries all over the world.

33rd annual national educational Conference & expo October 21-23, 2013 • Sheraton Chicago Hotel & Towers • Chicago, IL SIIA’s National educational Conference & expo is the world’s largest event dedicated exclusively to the self-insurance/alternative risk transfer industry. registrants will enjoy a cutting-edge educational program combined with unique networking opportunities, and a world-class tradeshow of industry product and service providers guaranteed to provide exceptional value in four fastpaced, activity-packed days.

February 2013

The Self-Insurer

To support in holding, the Fifth Circuit recognized that at least four circuits have found that entities other than the benefit plans or the employer plan administrator may be held liable under the civil enforcement provisions of erISA, 29 uSC § 1132(a)(1)(B). Nonetheless, courts attempt to apply a restrained functional test toward the acts of third parties acting on behalf of plan administrators. under this functional test, a third- party will be exposed to liability only if it exercises “actual control” over the administration of the plan. Garren v. John Hancock Mut. Life Ins. Co., 114 F.3d 186, 187 (11th Cir. 1997) (per curiam) (“The proper party defendant in an action concerning ERISA benefits is the party that controls administration of the plan.”); Gore v. El Paso Energy Corp. Long Term Disability Plan, 477 F.3d 833, 842 (6th Cir. 2007) (finding that an employer administrator was not liable because it did not control the claims process.) This case would have been different had the administration contracts not given the TPA the power to deny claims the TPA considered routine and if the TPA referred all disputed claims to the Plans for resolution.

Conclusion given the broad nature of the plan language in the case, the TPA clearly dropped the ball regarding interpretation and application of plan language. This unfortunate occurrence for the TPA resulted in severe monetary repercussions. n Steven T. Polino is the Managing Member of the Law Offices of Steven T. Polino, P.L.L.C. Mr. Polino performs a wide variety of regulatory compliance, contract review, preparation, consultation, Plan document preparation and compliance, ERISA consultation, litigation and managed care litigation. He was formerly National Coordinating Counsel in more than twentysix states concerning medical stop-loss and excess workers compensation litigation. Mr. Polino can be reached at (817) 992-6359 or stplaw@sbcglobal.net.

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The Self-Insurer

| February 2013

art gAllerY by Dick Goff

Why government is the problem – at all levels

hen ronald reagan famously said that government is not the solution to our problems but that government is the problem he didn’t say exactly why, and so we were left with decades of conjecture as the great cavalcade of government became increasingly dysfunctional. Could it be that too many people in government at all levels grovel for their salaries and perks while they lose sight of their missions to serve the public and become defenders of their ideologies, parties, agencies and personal power within a structure of bureaucratic intransigence? Oh, could be. I’ll gladly cite a few personal observations. A risk retention group of my acquaintance chose to add a layer of reinsurance on risks that it was writing on a direct basis. This was strategically intended to increase its A.M. Best rating, and A.M. Best agreed. When the RRG filed an amended business plan with its domicile’s department of insurance, the regulator responded that he didn’t think that rrgs could participate in reinsurance contracts. I asked the regulator if he would be persuaded by an opinion from a law firm known and respected by the department, and he encouraged that effort. 12

February 2013

The Self-Insurer

When we came back with an opinion stating that the rrg could properly take reinsurance under federal law and state license, the regulator again resisted. Pressed for a reason he said, “But this rrg does business in California and California won’t like that.”

The politics became clear even if the legal point was fallacious. The California insurance commissioner is on a crusade within the National Association of Insurance Commissioners to outlaw rrgs in total, completely ignoring the fact that they fall under federal law. Some commissioners in other states are intimidated by California’s clout, and hesitate to be a source of irritation. So far, the rrg’s request for its business plan to be amended for the purpose of taking reinsurance has been held in limbo by its domicile regulator, a condition the RRG and its management company fear will continue indefinitely. Of course the larger scale examples of government dysfunction include recent acts of Congress when the “fiscal cliff ” was dumbed down to a “fiscal speed bump,” and as aid to victims of Superstorm Sandy was allocated. CBS News reported that the last-minute fiscal cliff law, purported to reduce the national deficit, added $74 billion in new federal spending. Imagine that! And the Senate’s original Sandy relief bill was a pork bonanza according to American Majority Action: “Only $9 billion of the $60 billion would be spent in 2013…It’s disgraceful to load a bill like this that has good motives, that has good intentions, that is going to help people, with pork. It’s disgraceful. It’s typical of Washington.” Of course in our industry we are supremely aware of the great government dysfunction of Obamacare. Now, I’m not saying that the idea of national health

reform is wrong, but clearly it should be presented as a benefit to the public. But Obamacare has been designated by the Supreme Court as a tax under its logic that the federal government can’t force the public to join a national health program, but it has the constitutional power to levy taxes. That has been taken seriously by the current administration which has put the IrS police in charge of what should be rolling out as a benefit to the public. But what they’ve given us is another form of taxation. In the first days of 2013 the IrS issued procedures to update compliance with employee health plan laws, and guidance on “pay or play” healthcare reform provisions. That was the IrS telling us how to run a health program rather than the Department of health and human Services, or even the Department of labor. That was because those agencies deal with benefit programs, not taxes.

www.wspactuaries.com | Email: info@wspactuaries.com

But the IrS is running full speed in leading the u.S. to adoption of Obamacare,The Tax. If that doesn’t tell you our government has gone off a much higher cliff than we knew, I’ll just have to find more examples. I’m sure they’ll occur shortly. Finally, I’ll commiserate with all those who deal with supremely bureaucratic local government agencies such as motor vehicles departments. When a 6-year Navy petty officer, who happens to be my niece, can’t get a driver’s license in her home state where her car is registered, that means that no righteous clerk will take the trouble to cut through some red tape. But don’t get me started on that. n Dick Goff is managing member of The Taft Companies LLC, a captive insurance management firm and Bermuda broker at dick@taftcos.com.

The Self-Insurer

| February 2013

PPaCa, HIPaa and Federal Health beneﬁt Mandates:

Practical

The Patent Protection and Affordable Care Act (PPACA), the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and other federal health benefit mandates (e.g., the Mental Health Parity Act, the Newborns and Mothers Health Protection Act, and the Women’s Health and Cancer Rights Act) dramatically impact the administration of self-insured health plans. This monthly column provides practical answers to administration questions and current guidance on PPACA, HIPAA and other federal benefit mandates.

Q&A

Irs Issues Game-Changing regulations Interpreting health Care reform’s Pay or Play requirement, Part One

ealth care reform does not require that every employer offer health coverage. rather, in 2014, certain “applicable large employers” (or “ALEs”) will become subject to a confiscatory excise tax if they fail to make coverage available to all full time employees and/or they fail to make affordable coverage available that provides a minimum value to all eligible full time employees and at least one full time employee enrolls for subsidized coverage under the new Affordable Care Act (ACA) exchange plans. Now, less than a year before these game-changing rules go into effect, the IrS has issued comprehensive proposed regulations (the “Proposed rules”) that clarify and change the operating rules that apply with regard to this so-called “employer shared responsibility” or “pay or play” requirement. The IrS also issued a set of FAQs that helps make the otherwise complex Proposed rules more palatable. This two part article walks through these new rules. Part One provides the underlying framework for the rules while Part Two will address how assessments will be made. employer plan sponsors should take heed now while there is still time to react.

February 2013

The Self-Insurer

or Tackhammer Penalty) that may apply where coverage is offered to full-time employees during a month but it is not affordable or doesn’t provide minimum value. The Proposed rules clarify when coverage is considered offered to a full-time employee for a month, when it is considered affordable and how to calculate the penalty, when applicable.

Practice Pointer:Terms and concepts that are critical in the analysis triggered by 4980H are italicized throughout. These are terms and concepts you should become familiar with in order to understand the impact the new 4980H rules will have on you and your plans. Although questions still remain, the Proposed rules begin to answer the following fundamental, compliance related questions arising with respect to the 4980h rules: • Am I an applicable large employer? Only applicable large employers are subject to the new 4980h rules and the Proposed rules provide much needed guidance on how to make that determination. Many employers that consider themselves small may find that they get caught up in the rules. • Who are my full-time employees? 4980h penalties, which are assessed on a monthly basis, are assessed only with respect to coverage offered or not offered during a month to full-time employees, as defined by Code Section 4980h. The Proposed rules clarify the rules for identifying full-time employees – including defining hours of service and substantially incorporating the look back safe harbor prescribed under prior IrS guidance (in IrS Notice 2012-58). • how much in penalties do/will I owe? There are two mutually exclusive penalties – a penalty for failing to offer minimum essential coverage to full-time employees (the so-called “nocoverage” or Sledgehammer Penalty) and a smaller (at least in the aggregate) penalty (the so-called “non-qualified coverage”

It goes without saying that the 4980H rules will have a significant impact on group health plan coverage offered in 2014 and the answers to the questions above are critical for identifying that impact and strategically planning for the impact. The Proposed rules go a long way to answering those questions. This overview identifies the highlights of the Proposed rules and provides a comprehensive summary with the hope of helping employers and their advisors better understand the 4980h rules and the impact they rules will have. Key terms and concepts are italicized throughout. Practice Pointer: It is tempting to consider the 4980H rules as a mandate either to offer coverage to full-time employees or a mandate to offer full-time employees a certain level of coverage but this is not correct.The 4980H rules simply prescribe penalties under 4980H if affordable coverage is not made available. Applicable large employers are free to offer whatever coverage they desire to whomever they desire- albeit subject to a potential penalty. Although counterintuitive, in some cases the applicable penalty may be less abhorrent than the changes necessary to avoid the penalties. Employers who view 4980H as a coverage mandate will focus primarily on avoiding the penalties, regardless of the cost instead of understanding what the penalties might be and comparing that to the cost to avoid the penalties.

a. highlights of the Proposed rules The IrS has issued several, key pieces of guidance and requests for comments regarding the 4980h rules over the last 2 years, including but not limited to the safe harbor method for identifying full-time employees first introduced in Notice 2012-58. The Proposed rules are a culmination of the prior guidance with critical clarifications and transition rules that should better enable employers to plan for 2014. highlights of the Proposed rules include the following: • The Proposed rules provide a transition rule for 2014 that enables employers to use a period of at least six consecutive calendar months in 2013 to determine if they are an applicable large employer for 2014 – a determination that is typically based on the entire preceding calendar year. See the “Applicable large employer” section below for more details. • The Proposed Rules confirm that the controlled group rules apply to determine if an employer is an applicable large employer subject to the requirements; however, compliance with 4980h is determined on a controlled group member basis. Moreover the Proposed rules clarify that employers must use actual hours of service to determine applicable large employer status; the safe harbor method to identify fulltime employees for purposes of 4980h compliance does NOT apply for determining whether the employer is an applicable large employer. • The Proposed rules largely incorporate the safe harbor described in Notice 2012-58 for identifying full-time employees

The Self-Insurer

| February 2013

with a few clarifications. For example, the Proposed Rules clarify how an employee who experiences a break in service (such as a termination of employment or unpaid leave of absence) and then resumes service is treated under the safe harbor. Also, the Proposed rules provide transition relief for the first stability period that begins in 2014. Under the transition relief, employers who generally desire to use a 12 month stability period beginning in 2014 may nevertheless use a shorter determination (or measurement) period beginning in 2013 so long as the measurement period begins on or before July 1, 2013. • The Proposed rules clarify the rules regarding hours of service calculations, including but not limited to prescribing methods for calculating hours of service for non-hourly employees and excluding hours of service performed outside the United States. Until further guidance is issued, flexibility is provided for calculating the hours of service of commissioned employees, adjunct faculty, transportation employees (e.g. airline pilots) and employees in similar positions. See the “Identifying Full-Time employees” section below for more details. • The Proposed rules do NOT provide guidance on what type of coverage qualifies as minimum essential coverage (as defined in Code Section 5000A); however, the Proposed rules indicate that guidance is forthcoming on that issue. • Although applicable large employer status is determined on a controlled group basis, compliance with 4980h is determined on a controlled group member basis. Thus, penalties, if any, are assessed on each individual controlled group member based on that controlled group member’s full-time employees – and only that controlled group member’s full-time employees. As a result of this clarification, an applicable large employer member’s failure to offer minimum essential coverage to its full-time employees does not jeopardize the entire controlled group and the penalties assessed for the failure to provide coverage are based only on that applicable large employer member’s full-time employees. See the “Assessing Penalties” section in Part Two of our article for more details. • An applicable large employer member is deemed to offer minimum essential coverage to its full-time employees for purposes of the Sledgehammer Penalty if it offers minimum essential coverage to at least 95% of its full-time employees. NOTe: even if you avoid the Sledgehammer Penalty because you offer coverage to at least 95% of your full-time employees, you may still

be eligible for the Tackhammer Penalty, but only for those employees (within the 5%) who apply for and receive subsidized coverage through an exchange. See the “Sledgehammer Penalties” section in Part Two for more details. • The Proposed Rules confirm that applicable large employers who offer minimum essential coverage to their full-time employees are still at risk for the Sledgehammer Penalty unless they also offer coverage to dependents; however, the Proposed rules clarify that dependents only include children, as defined in Code Section 152(f) (1), who are under age 26. The term dependent does not include spouses or other individuals (e.g., grandchildren or domestic partners). There is also transition relief for 2014 for plans that do not currently offer coverage to children. See the “Sledgehammer Penalties” section in Part Two for more details. • The Proposed rules incorporate and clarify the safe harbor rule for determining affordability based on the employee’s W-2 wages from the employer. In addition, the Proposed rules identify two additional affordability safe harbors. See the “Tackhammer Penalties” section in Part Two for more details. • The Proposed rules provide a transition rule for 2014 for applicable large employer members that maintain fiscal year plans. under the transition rule, employers who maintain a plan with a fiscal plan year will generally not be subject to a penalty for months in 2014 prior to the start of the plan year so long as the employer

February 2013

The Self-Insurer

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| February 2013

offers minimum essential coverage that is affordable and provides minimum value to full-time employees by the first day of the plan year that begins in 2014. See the “Sledgehammer Penalty” section in Part Two for more details. • The Proposed rules provide a special transition rule through 2014 for applicable large employers that contribute to multi-employer plans. under the transition rule, an applicable large employer member will not be treated as failing to offer the opportunity to enroll in minimum essential coverage to a full-time employee (or the employee’s dependents) for purposes of the Sledgehammer Penalty and will not be subject to a Tackhammer Penalty with respect to a full-time employee

if(i) the employer is required to make a contribution to a multiemployer plan with respect to a full-time employee pursuant to a collective bargaining agreement, (ii) coverage under the multiemployer plan is offered to the full-time employee (and the employee’s dependents) and (iii) the coverage offered is affordable and provides minimum value. Moreover, coverage will be considered affordable if the employee’s required contribution for self only coverage does not exceed 9.5% of the wages reported to the multiemployer plan.

allow employees to revoke their election once during the fiscal plan year beginning in 2013 without a corresponding change in status or cost or coverage change. Moreover, the employer may also amend the plan to allow employees to elect to participate in the cafeteria plan during the plan year beginning in 2013 without a corresponding change in status or cost or coverage change. Amendments to the cafeteria plan must be made by December 31, 2014. See the “Impact of the 4980h rules on Cafeteria Plans” section below for more details. Practice Pointer:The IRS requests comments on the Proposed Rules.The comments are due by March 18, 2013.

• The Proposed rules provide a transition rule for cafeteria plans with a fiscal plan year beginning in 2013. under the transition rule, employers may amend their cafeteria plans to

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February 2013

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full understanding and appreciation of the Proposed rules is unobtainable outside the context of the new 4980h rules. Thus, we provide below a more comprehensive summary of the 4980h rules, in light of the Proposed rules.

B. Overview of Code section 4980h generally, applicable large employers will pay a penalty for any month during a calendar year in which one or more of the employer’s fulltime employees are certified as having received a premium tax credit or cost share reduction (“Premium Subsidy”) in accordance with Code Section 36B for coverage in an exchange AND either of the following applies: • The applicable large employer failed to offer minimum essential coverage during that month to its full-time employees. In this case, the employer would be liable for what we refer to as the Sledgehammer Penalty; Or • The applicable large employer offered minimum essential coverage to its full-time employees during that month but the coverage was not affordable or didn’t provide minimum value. In this case, the employer would be liable for what we call the Tackhammer Penalty because it will typically be smaller, in the aggregate, than the Sledgehammer Penalty. each penalty is discussed in more detail in Part Two of this article. Practice Pointer: It is important to understand for planning purposes that an applicable large employer member is not liable for a 4980H penalty, regardless of the coverage offered (or not offered), if no full-time employee of the applicable large employer member receives a Premium Subsidy for enrolling in an Exchange. For example, a full-time employee will not receive a Premium Subsidy if (i) the full-time employee does not enroll in an Exchange or (ii) the employee voluntarily enrolls in minimum essential coverage offered by the employer, even if that

coverage is unaffordable or doesn’t provide minimum value. Nevertheless, the employer may be liable for penalties if only one full-time employee receives a Premium Subsidy in the Exchange. employers must understand each of the following key terms and concepts in order to fully grasp the impact of the 4980h rules: • Applicable large employer • Full-time employee • hours of service • variable hour employee • Seasonal employee • Initial Measurement Period • Standard Measurement Period • Minimum essential coverage • Affordable coverage • Minimum value • Sledgehammer Penalty (also referred to as the “no-coverage” or 4980h(a) Penalty) • Tackhammer Penalty (also referred to as the “non-qualified coverage” or 4980h(b) penalty) Practice Pointer:The 4980H rules only apply to applicable large employers. These terms and concepts are discussed more in the upcoming paragraphs.

C. applicable Large employer Determination A threshold question for many will be: Is my company an applicable large employer? An applicable large employer is defined generally in Section 4980H(c) as any “employer” who employed, on average, at least 50 full-time employees (including full time equivalencies for part time employees) on business days during the preceding calendar year. For many employers, there is no doubt that they are an applicable large employer. If there is no doubt that you are an applicable large employer, you can skip to the next section – “Compliance with 4980h”. For those who have doubts or who are close to the threshold (especially small employers who are members of a controlled group of employers or employers with a small number of full-time employees but who employ a large number of part-time employees), continue reading. The applicable large employer determination is based on the following fundamental concepts: • An “employer” for purposes of the Code Section 4980h rules includes any common law employer, including governmental entities and tax exempt entities. • All employers that are members of a controlled group as defined in Code Section 414(b),(c),(m) or (0) are considered a single employer. Thus, a company or entity with only 10 full-time employees may still qualify as an applicable large employer if it is a member of a controlled group of employers who, in the aggregate, have 50 or more full-time employees. It is important to note that for this purpose the separate line of business rules in 414(r) apparently do not apply. • Practice Pointer: Applicable large employer status is determined on a controlled group basis; however, the Proposed rules indicate that each member of the controlled group is independently liable for penalties based

The Self-Insurer

| February 2013

on its own full-time employees. See “Identifying Full-Time employees” below and “Assessing Penalties” in Part Two of our article for more details on the application of the controlled group aggregation rules. • The determination is based on the number of full-time employees employed by the controlled group employer during the preceding calendar year. The plan year of the employer’s plan isnt relevant to the applicable large employer determination. If the employer was not in existence during the preceding calendar year, the employer will qualify as an applicable large employer if the employer is reasonably expected to employ on average at least 50 full-time employees AND the employer actually employs an average of at least 50 full-time employees. Practice Pointer: The Proposed Rule provides a transition rule for determining applicable large employer status for 2014 only. Under the transition rule, employers may use a period of at least six consecutive months in 2013 to determine applicable large employer status. • Only common law employees of the employer are considered. Thus, partners in a partnership, a 2% shareholder of an S-corporation and a sole proprietor are NOT considered employees for purpose of this rule. In addition, a “leased employee” as defined in Code Section 414(n) is NOT treated as a common law employee for purpose of the 4980h rules. Practice Pointer:The rule is relatively simple in theory. If the individual is a common law employee credited with an hour of service (as defined by the rules), then the individual is considered in the 4980H analysis.There is no specific exclusion for temporary employees, seasonal employees, interns and/or other employees who typically do not have a permanent or long term relationship with the employer. Although not excluded from the analysis entirely, there are special rules for employees that are seasonal, commissioned, adjunct faculty, transportation employees or in similar positions. • A full-time employee is any employee who is employed during a month on average at least 30 hours of service each week. The Proposed rules clarify that 130 hours of service is treated as the monthly equivalent of at least 30 hours of service per week. Whether an employee is a full-time employee is based on the actual hours of service in the preceding calendar year. The Proposed Rules prescribe specific rules for counting hours of service, including an exclusion for foreign hours of service. See the “Identifying Full-time employee” section below for a more detailed description of hours of service. Practice Pointer:The safe harbor originally prescribed in Notice 2012-58 and incorporated into the Proposed Rules does not apply for purposes of the applicable large employer determination.The safe harbor is applicable only to identify full-time employees for purposes of assessing penalties. • The employer must count full-time equivalents for part time employees in addition to full-time employees.The number of full-time equivalents is equal to the total hours of service in a month for employees who are NOT full-time employees (not to exceed 120 for each such employee) divided by 120.The number of full-time employees each month for purposes of the applicable large employer determination is the sum of full-time employees plus full-time equivalents.

February 2013

The Self-Insurer

Practice Pointer:The number of fulltime equivalents is relevant only for purposes of the applicable large employer determination-not for purposes of assessing penalties. Penalties are assessed based solely on the employer’s full-time employees. • Fractions are considered in the calculation; however, once the calculation is made, fractions are rounded DOWN to the nearest whole number. Thus, an employer with 49 ½ full-time employees would be treated as having 49. • There is a special rule regarding employees who qualify as seasonal. under the special rule, if the employer exceeds 50 employees for 4 calendar months (not necessarily consecutive) or 120 days (not necessarily consecutive) and the excess over 50 qualify for those 4 months or 120 days are seasonal employees, then the employer is not an applicable large employer. Seasonal employee is generally defined as an employee who performs services on a seasonal basis, as defined by the Secretary of labor, including but not limited to employees covered by 29 C.F.r. 500.20(s)(1) and retail workers employed exclusively during holiday seasons. See “Identifying Full-Time employees” below for a more detailed discussion of seasonal employees, including a comment opportunity under the rules. Practice Pointer:There is a tendency by many to assume that seasonal employees are not considered full-time employees for any purpose under 4980H even though the seasonal employees may be employed on average at least 30 hours of service per week during a month.This is an incorrect assumption. Seasonal employees are not excluded from the definition

of full-time employee for any purpose under 4980H, including the penalty assessments (i.e. you may have to offer coverage to a seasonal employee under certain circumstances if you want to avoid penalties); however, there are special rules applicable to seasonal employees, such as the special rule discussed above regarding the impact of seasonal employees on applicable large employer status. See the “Identifying Full-time Employees” section below for another special rule related to seasonal employees.

waiting period limitation, both of which go into effect for plan years beginning on or after January 1, 2014), the PCORI fee and the reinsurance fee may still have a significant impact on you or your plans.

If, after performing the analysis above, you have determined that you are NOT an applicable large employer, you do not need to read any further – the 4980h rules do not apply to you.

So, you have determined that you are an applicable large employer. You must now comply with Code Section 4980h. To help you better understand compliance with 4980h, we have broken down 4980h compliance into three categories:

Practice Pointer: Even if you are not an applicable large employer, you are still not free and clear from the grasp of the ACA. Other ACA related rules, such as the health insurance reforms (e.g. the new wellness program rules and the 90 day

But, if you have determined that you Are an applicable large employer, you will have to comply with 4980h. The remainder of the article addresses 4980h compliance.

D. Compliance with 4980h

• Identifying full-time employees. As noted above, the penalties relate only to the coverage offered or not offered to full-

time employees. Consequently, employers must first identify their full-time employees in accordance with the 4980h rules before they can determine potential penalties. • Sledgehammer Penalties. Once you identify your full-time employees, you must determine whether you may be liable for the Sledgehammer Penalty. One of the keys to making this determination is ensuring that full-time employees are provided an effective opportunity to enroll in minimum essential coverage. The Proposed rules clarify when coverage is effectively offered for purposes of the new 4980h rules. More importantly, the Proposed rules clarify that applicable large employer members avoid the Sledgehammer Penalty if minimum essential coverage is offered to at least 95% of the applicable large employer

The Self-Insurer

| February 2013

member’s full-time employees. • Tackhammer Penalties. If you aren’t liable for a Sledgehammer Penalty, you may still be liable for a Tackhammer Penalty. An applicable large employer member may be liable for the Tackhammer Penalty if the coverage offered to full-time employees is not affordable or does not provide minimum value. The applicable large employer member may also be liable for a Tackhammer Penalty if it fails to offer coverage to up to 5% of its full-time employees and one of those 5% receives a Premium Subsidy in the exchange. The Proposed rules offer guidance regarding the affordability determination. each of these elements of 4980h compliance is discussed in detail below. Practice Pointer: It is critical to strategic planning that you understand not only

February 2013

The Self-Insurer

when you may be liable for a penalty but also how the penalties are calculated. For example, the penalties are assessed on each applicable large employer members based only on that member’s full-time employees.The Sledgehammer Penalty is assessed based on all of the applicable large employer member’s full-time employees, even those who did not receive a Premium Subsidy.The Tackhammer Penalty is based only on the full-time employees of that applicable large employer member who actually receive a Premium Subsidy.These concepts, which are discussed in more detail below, play a significant role in the strategic planning process.

1. Identifying Full-time employees A full-time employee for purposes of Code Section 4980h is any employee who, on average, is employed at least 30 hours of service per week during a month. The first step in identifying full-time employees is understanding the hours of service rules prescribed in the Proposed rules.

Hours of Service Rules The following is a summary of the fundamental concepts regarding hours of service calculations prescribed in the Proposed rules: • hours of service means each hour for which the employee is paid or entitled to payment for performance of services AND hours for which the employee is paid or entitled to payment by the employer for a period of time, without limitation, during which no duties are performed due to any of the following (i.e. paid leave): • layoff • vacation • Jury Duty • holiday, • Illness or incapacity (i.e. disability) • Military duty or leave of absence

Practice Pointer #1: The preamble suggests that the hours of service rules are based on existing Department of Labor rules – in fact, the calculation of hours of service during a paid leave are specifically based on 29 C.F.R. 2530.200b-2. Under those rules, paid leaves of absence would include periods during which the employee is paid by a third party, such as a disability insurer. Practice Pointer #2: If you are using the safe harbor method to identify full-time employees, there are special rules for employees on certain unpaid leaves of absence or “special leaves of absence”. See the “4980H Safe Harbor” section below for more details on special leaves of absence. • hours of service for which the compensation for such hours constitutes income from sources outside the united States are not counted. Practice Pointer: Oddly enough, United States is defined to include only the 50 States and the District of Columbia. United States for this purpose does NOT include possessions or territories of the United States, such as Guam or Puerto Rico. • employers must determine hours of service for hourly employees based on actual hours of service from records of hours worked and hours for which payment is due. • employers must determine hours of service for non-hourly employees based on one of the following three methods and only these three methods: • actual hours of service worked or hours for which payment is due based on the records, • days equivalency test based on labor rules set forth in 29 C.F.r. 2530.200b-2(a) (an employee is credited with 8 hours of

service for each day that the employee would be required to be credited with one hour of service), or • weeks equivalency test based on labor rules set forth in 29 C.F.r. 2530.200b-2(a) (an employee is credited with 40 hours of service for each week in which the employee would be required to be credited with one hour of service). • The employer is NOT required to use the same hours of service calculation method for all nonhourly employees as long as the classifications are reasonable. Practice Pointer:The equivalency tests may not be used if use of the tests substantially understates an employee’s hours of service in a manner that would cause that employee to not be treated as full-time. • until further guidance is issued, any reasonable method for calculating hours of service may be used for the following employees: • Commissioned employees • Adjunct faculty • Transportation employees (e.g. airline pilots) • employees in similar positions Practice Pointer: Hours of service for adjunct faculty must be based not only on time spent teaching classes but also time preparing for classes. • hours of service calculations that result in a fraction are rounded uP to the nearest whole number. • An employee’s hours of service attributable to another applicable large employer member are considered by an applicable large employer when making a determination whether one of its employees was full-time during a month (or during a

measurement period if using the safe harbor). This very well could cause recordkeeping issues for controlled group employers who do not share recordkeeping data (and even some who do). • The proposed rules largely incorporate the safe harbor method for identifying full-time employees previously prescribed in Notice 2012-58. The safe harbor, which is described in more detail below, is not a required method for calculating full-time employee status. See below for a more detailed discussion of the safe harbor method.

4980H Safe Harbor The 4980h Safe harbor provides an optional method for applicable large employers to use to determine full-time status for purposes of Code Section 4980h. The 4980h Safe harbor generally operates on the following principles: applicable large employer members who choose to use the safe harbor will establish a “measurement period” between 3 and 12 months (as chosen by the employer) during which an employee’s hours of service are measured and each employee that averages 30 hours of service per week during that measurement period must be treated as full-time during a subsequent stability period that is generally the same length as the measurement period (subject to limited exceptions) or 6 months, whichever is greater. Practice Pointer: Remember, compliance with 4980H is determined on an applicable large employer member basis – not on a controlled group basis.Thus each applicable large employer member who chooses to use the safe harbor will choose its own measurement periods and stability periods in accordance with the rules and those periods may differ from the periods chosen by other applicable large employer members.

The Self-Insurer

| February 2013

The manner in which the 4980h Safe harbor is applied differs slightly depending on whether the employee is a new employee or an ongoing employee.The following summarizes the fundamental concepts set forth in the safe harbor with respect to new employees.

Applying the 4980H Safe Harbor to New Employees The 4980h Safe harbor applicable to new employees is based on the following fundamental concepts: • There are two different categories of new employees: non-variable and variable/seasonal. Applicable large employer members using the safe harbor must determine which employee the category fits to identify the appropriate safe harbor method to apply. • If the employee is a non-variable hour employee, i.e. it can be determined at the time of hire that an employee is reasonably expected to work (or not work), on average, 30 hours or more per week during a month, then the safe harbor does NOT apply. In this case, the employer will be liable for the Sledgehammer Penalty unless the non-variable employee who is determined to be full-time is offered minimum essential coverage before the end of the employee’s initial three full calendar months of employment. Practice Pointer #1: Presumably, any such employee for whom it can be reasonably expected to be employed on average 30 hours of service or more per week must be treated as full-time employee in accordance with the rules, regardless of how long they are employed as long as the period is longer than 3 months. Employees expected to be employed on average 30 hours of service or more per week during a month but are hired for less than 3 months are not subject to the 4980H rules.

February 2013

The Self-Insurer

Practice Pointer #2:The Proposed Rules indicate that an applicable large employer member who offers the employee coverage by the end of the employee’s initial three, full calendar months of employment is not liable for a penalty during the months that coverage was not offered.This suggests that employers can establish a waiting period that is greater than 90 days. Assume that Employer A hires Bob on March 16, 2014. Employer A determines that Bob is reasonably expected to work 30 hours or more per week.The Proposed Rule implies that coverage need only be offered no later than June 30 (the end of the 3rd full calendar month after being hired).This is not consistent with guidance on PHSA Section 2708, which imposes a true 90 day limit on waiting periods. Also, as noted in more detail in Part Two of this article, coverage is not considered offered for purposes of the 4980H rules unless it is generally offered for the entire month.Thus, the exact date that coverage must be offered to such an employee to avoid penalties isn’t clear.We anticipate that IRS will clarify this issue when the guidance is finalized. • If the employee is a variable hour or seasonal employee, then the employer may determine full-time status by using the safe harbor. A variable hour employee is any employee for whom the applicable large employer cannot make a determination on the employee’s start date that the employee will be reasonably expected to be employed, on average, at least 30 hours of service or more a week during the initial measurement period (the period chosen by the employer to calculate hours of service following the employee’s start date). An employee may be a variable hour employee even if the employee is expected to initially be employed 30 hours of service per week if the period of employment at 30 hours of service is expected to be of limited duration and it

cannot be determined that the employee is expected to be employed on average at least 30 hours per week over the initial measurement period. Practice Pointer: Beginning January 1, 2015, when determining whether an employee is a variable hour employee or not, the applicable large employer member may not take into account the likelihood that an employee (other than a seasonal employee) may terminate employment with the applicable large employer member before the end of the initial measurement period. • An employee is a seasonal employee if he/she performs services on a seasonal basis as determined by the Department of labor, including but not limited to employees covered by 29 C.F.r. 500.20(s)(1) and retail workers employed exclusively during the holiday seasons. employers are permitted to use a good faith interpretation of the term “seasonal worker” and 29 C.F.r. 500.20(s)(1) (including as applied by analogy to employment positions not covered by the Department of labor’s regulations). Practice Pointer: Applicable large employer members may be subject to penalties if they fail to offer coverage to a seasonal employee who is determined to be fulltime during the applicable measurement period if the seasonal employee is still an employee during the associated stability period. So what is the impact of seasonal employee status? It appears to be that the only impact relates to the break in service rules described in more detail below. If the employee is seasonal as defined by the rules, it appears that the break in service rules do not apply.Thus, a seasonal employee who terminates employment and is later rehired would qualify as a new employee regardless of the duration of the break in service.

• The measurement period for new variable hour and seasonal employees is called the initial measurement period. The initial measurement period may be anywhere from 3 to 12 months and may begin anytime between the employee’s start date (the date that the employee is first credited with an hour of service) and the first day of the month following the employee’s start date. If the applicable large employer delays the initial measurement period in accordance with the 4980h rules, the period between the start date and the start of the initial measurement period is counted towards the maximum administrative period, which is discussed in more detail below. Practice Pointer: Applicable large employer members may have different initial measurement and stability periods than other applicable large employer members. But keep in mind that hours of service credited to the employee with respect to another applicable large employer member are treated as hours of service with any other applicable large employer member as long as they are in the same controlled group. This seems to suggest that the start date for an employee transferred within the controlled group would be the date for which an hour of service was first credited to the employee from any controlled group member – not the date transferred to the applicable large employer. • If a variable hour/seasonal employee experiences a change in employment status before the end of the initial measurement period such that the

employee is reasonably expected to be employed on average at least 30 hours of service per week, the applicable large employer must treat the employee as full-time by no later than the first day of the fourth month following the change in status, or if earlier, the first day of the stability period if the variable hour/seasonal employee is determined to be full-time during the initial measurement period. • If it is determined during the initial measurement period that the employee is a full-time employee, then the employee must be treated as a full-time employee during the corresponding stability period subject to the break in service rules described below. The stability period

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must be at least 6 months but no shorter in duration than the initial measurement period and must begin immediately following the initial measurement period or after the expiration of any applicable administrative period. If the employer uses an administrative period, the length of the stability period may be affected (see below regarding special rules related to administrative periods). Practice Pointer: If an employee is determined during the initial measurement period to be full-time, the stability period must be the same length as the stability period for ongoing employees. See below for more details regarding the stability period for ongoing employees, including a definition of ongoing employees. • If it is determined during the initial measurement period that the employee is not

full-time, then the applicable large employer member may generally treat the employee as other than full-time throughout the stability period for such employee (i.e. there is generally no penalty for failing to offer such employee coverage during the applicable stability period). In this case, the stability period for such employee cannot be more than 1 month longer in duration than the initial measurement period and in no event can it extend beyond the standard measurement period applicable to ongoing employees (including any administrative period associated with the standard measurement period for ongoing employees). Consequently, an employee who is treated as other than full-time during the stability period following the initial measurement period may have to be treated as full-time before the end of that stability period if the employee is determined to be fulltime during the standard measurement period and the stability period that follows begins prior to the end of the stability period that follows the initial measurement period. Practice Pointer: A change in employment status during the stability period does not change a continuing employee’s status determined as of the start of the stability period. See the discussion below regarding breaks in service for more details on who is a continuing employee. • employers who choose to establish an administrative period must be aware of the following special rules: • The total administrative period (i.e. combined period before and after the initial measurement period) cannot exceed 90 days in length. • In addition to any other applicable rule, if an employee is determined to be full-time during the initial measurement period, then the administrative period and the initial measurement period together cannot extend beyond

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February 2013

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the last day of the first calendar month beginning on or after the employee’s first anniversary of the employee’s start date. • each applicable large employer may use initial measurement and stability periods that differ in length and/or starting and ending dates from other applicable large employer members. In addition, each applicable large employer member may vary the initial measurement and stability periods for each of the following groups of employees: • employees subject to a collectively bargained agreement and employees not subject to a collectively bargained agreement • each group of collectively bargained employees covered by a different collectively bargained agreement • Salaried and hourly employees • employees located in different states

Applying the 4980H Safe Harbor to ongoing employees Ongoing employees are defined in the guidance as employees who have been employed for one entire standard measurement period, which is the static period chosen by the applicable large employer member to measure the hours of service for existing employees. The 4980h safe harbor as applied to ongoing employees is based on the following fundamental concepts. • Applicable large employer members may apparently use the safe harbor for ongoing employees that are variable hour (as defined above). • The standard measurement period must no less than 3 and no more than 12 months. • If an employee is determined during the standard measurement period to be full-time, then the applicable large employer member

must treat the employee as full-time during the associated stability period. The stability period following the standard measurement period for such employees must be no shorter in duration than the standard measurement period but not less than 6 months, and it must begin immediately following the standard measurement period and any applicable administrative period. Practice Pointer: Employers will want to establish a standard measurement period and administrative period that corresponds to the employer’s plan year. Fortunately, the Proposed Rules provide a transition rule for employers that sponsor plans with fiscal plan years that will allow them to escape penalties for months in 2014 prior to the start of the 2014 plan year. See below for more detail on this transition rule. • If an employee is determined during the standard measurement period to be other than full-time, then he or she may be treated as other than full-time during a stability period that follows the standard measurement period, and any administrative period (i.e. there is no penalty for failing to offer coverage during that stability period). In this case, the stability period for such an employee cannot be longer than the standard measurement period (even if the standard measurement period is less than 6 months). • The administrative period following the standard measurement period may not exceed 90 days. • Applicable large employer members may vary the standard measurement period (including any administrative period) and associated stability period according to the same rules that are applicable to the

initial measurement period and associated stability period. See above for a more detailed discussion of the rules regarding variable measurement and stability periods. In addition, employers may change the measurement and stability periods so long as the period has not started. • With respect to the stability period that begins in 2014, applicable large employer members who generally wish to utilize a 12 month measurement period and a 12 month stability period may use a shorter measurement period during 2013 so long as the measurement period is at least 6 consecutive months and begins on or before July 1, 2013. Practice Pointer: Applicable large employer members who maintain calendar year plans or plans with plan years that begin on a date that is less than the sum of 12 months and the duration of the desired administrative period from the date the employer implements the safe harbor will want to take advantage of the transition rule if they generally want to use 12 month measurement and stability periods and they will need to do so before July 1. On other hand, applicable large employer members who maintain plans with a fiscal plan year will not need to take advantage of this transition rule if the start of the plan year in 2014 is more than 12 months away from the date the applicable large employer implements the safe harbor. • With respect to applicable large employer members that maintain a plan or plans as of December 27, 2012 with fiscal plan years, such employers will not be subject to a penalty for months in 2014 preceding the start of the 2014 plan year so long as full-time employees are offered

The Self-Insurer

| February 2013

minimum essential coverage that is affordable and provides minimum value by the first day of the month of the 2014 plan year. The effect of this transition relief and additional transition relief provided to applicable large employers with both fiscal year plans and calendar year plans is discussed in more detail in Part Two of this article. Practice Pointer: Even though applicable large employer members that maintain plans with fiscal plan years are potentially relieved of penalties for months prior to the first day of the plan year in 2014, the applicable large employer member is still responsible for Code Section 6055 and 6056 reporting for the entire 2014 calendar year.Thus, the applicable large employer that maintains a plan with a fiscal plan year will still be required to report information related to the applicable large employer member’s full-time employees, as required by Code Section 6056, for the entire calendar year. It is not clear how applicable large employer members who use the safe harbor will identify full-time employees for the period prior to the start of the plan year beginning in 2014.

Breaks in Service The Proposed rules clarify the treatment of employees who experience periods for which they are not credited with any hours of service (e.g. unpaid leave, termination of employment) after which there is a period during which they are credited with hours of service (e.g. rehire, return from unpaid leave). The Proposed rules provide the following clarifications with regard to breaks in service: • generally, employees who experience a break in service (e.g. termination of employment or unpaid leave, other than a “special leave”) of less than 26 weeks (or a shorter period of at

February 2013

The Self-Insurer

least 4 consecutive weeks that exceeds the number of weeks of that employee’s period of employment with the applicable large employer immediately preceding the period during which the employee was not credited with any hours of service) and then resumes service is treated as a continuous employee for purposes of the measurement period and stability periods. If the employee begins a break in service during a measurement period (other than a “special leave”), and then resumes services as a continuous employee, the employee would go back into his or her measurement period and months during that measurement period for which there are no hours of service are allocated a “0”. likewise if the employee begins a break in service (other than a special leave) during a stability period and resume services as a continuous employee, the employee would be assigned the same full-time or non-fulltime status assigned to that employee for that stability period prior to the break in service. however, if the employee that resumes service during either a measurement or stability period is not a continuous employee (e.g. the break in service exceeds 26 weeks) then the employee is treated as a new employee and may start a new initial measurement period. Practice Pointer: If a continuous employee resumes services during the same stability period in which he/she began a break in service, the applicable large employer member must treat the employee as a full-time as of the date he/she is credited with an hour of service or as soon as reasonably practical.

• If the employee takes a “special leave” during which no hours of service are credited to the employee, special treatment is required for purposes of the measurement periods described above. Special leaves are defined as unpaid FMlA leave, uSerrA leave, and Jury Duty. Special leaves are subject to the following rules: • The duration of the special leave is not factored into whether the employee has experienced a break in service. Thus, an employee who is out on a special leave for longer than 26 weeks is not treated as a new employee. Moreover, an employer who uses the safe harbor must treat the duration of the special leave in one of the following ways for purpose of calculating hours during a measurement period: • The applicable large employer member may disregard the period that such employee was on a special leave when calculating the hours of service of the employee during the applicable measurement period (i.e. the measurement period for such an employee will be reduced by the period the employee is on a special leave) or • The employer may choose to treat the employee as credited with hours of service for any period of special unpaid leave at a rate equal to the average weekly rate at which the employee was credited with hours of service during the weeks in the measurement period that are not part of the special leave. employers may use any reasonable method

for calculating the average weekly rate. • likewise, “employment breaks” are afforded similar treatment as special leaves. employment breaks are defined as a period of at least four consecutive weeks (disregarding unpaid special leave) during which an employee at an educational organization is not credited with hours of service. unlike special leaves, though, no more than a period of 501 hours of services are required to be excluded or credited (depending on the particular averaging method described above that is used by the employer) – excluding any periods of special unpaid leave. The next step after identifying the applicable large employer member’s full-time employees is identifying whether the applicable large employer is liable for penalties and how much. This will be addressed in Part Two of our article, in the March issue of The Self-Insurer. n

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| February 2013

elections, the Fiscal Cliff, sovereign Debt Crises… and the Potential Affect that Might Have on How Insurers Deﬁne Investment

rISK

“

by Joe LoPorto Courtesy of CapVisor Quarterly Newsletter

I used to think if there was reincarnation, I wanted to come back as the President or the Pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everyone.

“

– James Carville, Bill Clinton campaign strategist, November 1994

February 2013

The Self-Insurer

n recent publications we have been exploring the sources of volatility in traditional US investment grade bonds. There is a specific source of volatility in fixed income markets that has been consistently dampened through negative correlation that has existed between movements in interest rates and credit spreads. While that relationship has exhibited remarkable consistency over time, the economic climate, political gridlock and US sovereign fiscal health creates at least the potential for the breakdown of that relationship which would increase the mark-to-market volatility of fixed income securities. The worst case scenario in this context would be an extended period where both interest rates and credit spreads rise. The insurance industry has been benefitted greatly by the low volatility and superior returns achieved thus far in investment grade bonds… but concerns around fiscal imbalances amid a weak economic environment could create much more risk for the industry (albeit tail risk for the moment).

with a correlation coefficient of +1 or perfectly uncorrelated with a correlation coefficient of -1 and all points in between). Asset classes that exhibit low or negative correlation provide a significant diversification benefit when combined. In a simple example, if both Stock A and B have an observed volatility (standard deviation) of 10% and their returns are negatively correlated a 50/50 combination of the two could produce a combined volatility (mean variance) of maybe 6 or 7%. The bond market behaves slightly differently in this regard, however, since an investor in a nominal fixed income security is purchasing an equal share of volatility from both changes in credit spreads and changes in interest rates. Credit spreads react to many of the same forces that drive equity markets. When Wal-Mart’s earnings and outlook improves their stock price goes up and the credit spread on their bonds goes down. In periods of higher than normal market volatility like the beginning of a recession, credit spreads can move violently along with equity markets… Interest rates move violently as well but historically in the opposite direction.

In just the first two days after the election, financial markets exhibited a great deal of volatility. In examining volatility trends in the bond market, we will address the potential impact of the election result and the political environment. Market performance over the first few post-election trading sessions also provides a good example for the primary topic of this article. From the morning of November 7 through the market close on November 8, the Dow Jones Industrial Average fell a whopping 430 points. Over that same time period, the 10 year treasury rate fell by nearly 19 basis points from a pre-election close of 1.79% to about 1.62%. This is a perfect example of the role that uS Treasury securities have historically played: a flight to quality destination in times of market turmoil. To put those movements into context, from November 7 to November 8, an equity investor lost around 3% in two days while an investor in a 10 year zero coupon Treasury Bond gained around 1.9% in two days. Money managers frequently look at the diversification benefit of various asset classes; that is the benefit of combining certain asset classes to improve risk adjusted returns. Mathematically speaking, the degree of diversification benefit between investments or asset classes is best measured by “correlation” (a way to express covariance in a finite range, i.e. two asset classes can either be perfectly correlated

Changes in Interest rates and Credit spreads

raw empirical data from recent history demonstrates that strong diversification benefit between credit spreads and interest rates. Changing those underlying assumptions, however, has a significant effect. The following chart shows the changes in credit spreads and interest rates using the uS Broad Market as an example. During the period leading up the Credit Crisis, the correlation coefficient between credit spreads and interest rates was around 0.19 (low but positive correlation). From the end of 2006 forward, the correlation coefficient shifts to -0.44 (significant negative correlation) and in the fall of 2008 the credit spread of the BarCap Aggregate Index jumped 62 basis points while

The Self-Insurer

| February 2013

interest rates fell 169 basis points. If we look at the monthly price returns of the index over that entire period of time, which would include the combined effect of these movements in interest rates and credit spreads, we would observe an annualized standard deviation of about 3.6%. We can parse that volatility measure into its major component parts, price volatility from interest rate movements and price volatility from changes in credit spreads. The price volatility from changes in interest rates was approximately 3.98% and the price volatility from changes in credit spreads was 1.74%. The correlation coefficient over the entire series was approximately -.31 and with that we can calculate a mean variance of about 3.8% (fairly close the actual observed price volatility). Since that simple model fits well with the actual observed data, we can use that to make some assumptions about volatility

under different scenarios. If we assume that interest rate movements and credit spread movements are highly correlated, the modeled mean variance based on the last ten years would be approximately 5.72%. While that is still far less volatile than equity securities, the uS broad fixed income market would be roughly 50% more volatile than what we have experienced so far if we assume that there is the potential for a protracted period where both interest rates and credit spreads rise simultaneously. The problem is that any downside volatility in US fixed income markets, let alone marginally more volatility, will be harder to tolerate going forward given the exceptionally low interest rate environment. To be clear, standard deviation helps set the upper and lower bound around an expected return forecast. With expected returns in uS fixed in the low single digits, the lower

bound at any confidence level becomes increasingly negative. The following chart attempts to describe the lower bound at the 90% Confidence level with both the current yield environment and a more normal yield environment and assuming a diversification benefit between interest rates and credit spreads compared to no diversification benefit. In a normal interest rate environment with normal volatility assumptions, the lower bound is just barely negative. With a very modest interest rate outlook and assuming a limited diversification benefit among interest rates and credit spreads, the lower bound is around -6.62%. With average balance sheet leverage, that tail risk measure would present a significant impact to policyholder surplus and capital. So what are the fundamental circumstances where interest rates and credit spreads could widen

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February 2013

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simultaneously over a sustained period? historically, longer term interest rates are a product of short term rates (set by the Federal reserve), future economic growth expectations and future inflation expectations. The underlying assumptions that drive market behavior are that uS Treasury securities carry no credit risk. While runaway inflation is an influence that could drive interest rates much higher, inflation itself is hard to link to weaker economic growth or pressure on the corporate sector (the stagflation of the 1970’s notwithstanding). In fact, inflation conceptually is supportive to nominal debtors, since borrowers are repaying nominal loans with cheaper dollars. The specter of sovereign credit risk in the uS would directly link to pressure on corporate credit (and equity holders, for that matter).

Peripheral europe As fresh concerns emerge about greece’s ability to restore its sovereign balance sheet to manageable levels, stock prices in Greece fell nearly 15% while 10 year Greek bonds rose 142 basis points (currently at 17.9%). Most of peripheral Europe followed suit over that period in the mid fall. greece is an extreme example of a country with a massive debt overhang that is seemingly impossible to liquidate through austerity measures since the severity of those measures creates such a massive drag on the economy. The unemployment rate in Greece is nearly 25% with the younger generation facing unemployment rates of almost 50%. The US is far from these conditions. Nonetheless, greece is a small country and is therefore more isolated in terms of the impact of a sovereign debt crisis. The uS Treasury market and the uS dollar play a massive role in the global economy (as both a reserve currency, an invoice currency and a flight to quality destination for the world’s capital markets). It is therefore possible, if not likely, that financial markets may ultimately have less patience for US fiscal imbalances. The invisible ceiling may well be lower, but the options available to policymakers to fix the problem in the US are at least perceived to be broad enough. Thus far financial markets, both here and abroad, have continued keep uS treasuries in their historical role, a safe place to park money in times of uncertainty… but while that may in fact be the case, it is not beyond the realm of possibilities that we could enter extended periods where financial markets will protest US fiscal policies as they did in the early 1990’s.

tax increases that were passed in 2011 that were scheduled to take effect on January 1, 2013. This law was dubbed the “Fiscal Cliff ” by Fed Chairman Ben Bernanke. The net effect of the Fiscal Cliff was expected to immediately reduce the Federal current account deficit by approximately $500 billion. however, the economic drag of lower government spending and higher taxes is expected to reduce uS gross Domestic Product by around 4.5% in total, though this effect is expected to phase in gradually. Consensus forecasts for gDP growth in the uS is around 2%. If this Fiscal Cliff adjustment was phased in over a manageable period of time, we could have expected uS gDP growth to be just above recession levels. Through an amazing display of political theatrics, a fiscal cliff deal was reached at the literal 11th hour where a moderate revenue increase (tax hike) was signed into law and the automatic sequestration (spending reform) portion was extended for two months.

the election The 2012 election cycle is now over. President Obama is returning to the White house for second term and the balance of power in the Congress was more or less preserved with the republicans controlling the house of representatives and the Democrats retaining the Senate. All of these politicians returned to their offices and faced immediate challenges, namely the automatic spending cuts and

The Self-Insurer

| February 2013

This would the other half of the fiscal cliff, so while a deal was reached, we are still only half way there. And the two month lag wasn’t just an arbitrary timeline designed to provide breathing room. It has been well understood that the debt ceiling (the statutory limit on Federal borrowing) was going to be reached at around December 31. The Treasury department and many observers understood in December that, using extraordinary measures, the Treasury could continue to finance itself until about mid-February. As many market observers knew, the real deadline for the Fiscal Cliff was roughly February 15. And that is roughly where we are. We have a partial deal on revenue increases with some form of sequester coming in February.

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February 2013

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ACCREDITED INDEPENDENT REVIEW ORGANIZATION

even with a relatively modest tax increase, the combination of significant spending cuts creates the potential for a uS recession. As a result, it’s more likely than not lawmakers will either compromise or kick the can down the road again. The problem, however, is that our national debt (currently locked at $16.4 trillion) will not materially improve as a percentage of gDP in any outcome, since even with the full effect of the Fiscal Cliff, we are still running a current deficit and creating a drag effect on the economy. This is a major conundrum, the path forward will involve numerous unintended consequences regardless of the path we choose. It should therefore be no surprise that voting results here in the US reflect that confusion and discord. Neither the Congress nor the President left this election cycle with a clear mandate. What is nearly certain is that the Federal government’s financial condition will likely continue to deteriorate in the very near term, relative to uS gDP. That still doesn’t suggest the financial markets will begin to perceive uS sovereign credit risk

and the probability of crossing some invisible line in the sand is still very low even at these Post War record debt levels. These circumstances should however change the way we define tail risk and should suggest that there are many scenarios that can lead us towards to higher interest rates in the future (true economic growth, unexpected inflation, and the potential reemergence of the Bond vigilantes that plagued the Clinton Administration). With a changing regulatory environment here and abroad which will likely include stricter solvency and risk-based capital requirements, we suggest that insurers focus more intently on mark-to-market, total return oriented measures, that they closely monitor the risk and return trade-offs in their investments, and that they look closely at the specific sources of risk and return in their portfolios even within specific asset classes like investment grade bonds. n

Joseph LoPorto is a Managing Director and Senior Consultant at CapVisor Associates specializing in investment strategy design, strategic asset allocation, ALM, risk management, investment management selection and oversight, and financial planning for domestic and international insurers, reinsurers and alternative risk transfer programs ( captive and selfinsurance pools). Mr. LoPorto has extensive experience in the US, Bermuda and Lloyd’s market places and speaks frequently at industry conferences and regularly publishes research in insurance industry journals on a range of topics including investment management, economic, financial markets, regulatory and risk management topics.

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The Self-Insurer

| February 2013

SIIA PreSIDeNT’S MeSSAge Les Boughner

his year’s Self-Insured health Plan executive Forum (formerly known as the TPA/ Mgu excess Insurer executive Forum) will be held March 20-22, 2013 at the beautiful J.W. Marriott Desert Springs resort in Palm Springs, CA. This is an excellent opportunity to network with top corporate benefit directors, third party administrators, brokers/ consultants, stop-loss insurance carriers/Mgus, captive managers and industry service providers. The conference kicks off with the golf tournament benefiting the Self-Insurance educational Foundation (SIeF) on Wednesday, March 20th at Desert Springs Country Club. Don’t miss this exclusive opportunity to improve your handicap, refine your putting skills and support the foundation dedicated to ensuring the development of tomorrow’s leaders in the self-insurance/ArT industry. The tournament is open to all conference registrants and will be a scramble format. You can either sign up as an individual or reserve a foursome. All skill levels are welcome! In typical form, SIIA has top notch educational sessions and speakers planned for this year’s Forum. The opening session looks to start things off with bang. “The Top 10 Things Self-Insurers and their Business Partners Need to Know About Health Care Reform RIGHT NOW!” features some the

February 2013

The Self-Insurer

of SIIA’s most knowledgeable and popular speakers, including: ernie A. Clevenger, President, Carehere, llC, Ashley gillihan, esq., Attorney, Alston & Bird, llP, Adam russo, Chief executive Officer, The Phia Group, LLC and lawrence Thompson, President/CeO, Advantria, llC. This expert panel will count down the 10 most important things that self-insurers and their business partners need to know about health care reform with nine months to go before many of the major ACA rules go into effect. This promises to be a must-attend session that set the pace and stage for the rest of the educational program, so please make your travel plans accordingly so you arrive in time.

Other sessions on the lineup include: “Federal Regulators Talk ACA Compliance for Self-Insurers” with Kevin Knopf, Attorney-Advisor, Office of Benefits Tax Counsel, U.S. Department of the Treasury, and Diane gerrits, Director, Division of reinsurance Operations, Center for Consumer Information and Insurance Oversight, u.S. Department of health and human Services. “The Economic Reality of Health Care Financing Post PPACA” presented by Alain C. enthoven, Senior Fellow, Freeman Spogli Institute for International Studies at Stanford.

“Emerging Trend #1: Deeper Dive on Rising Health Care Costs” will be a panel presentation discussing how much are the large claims driving experience. “Emerging Trend #2: To PPO or not PPO? That is the question” promises to be point-counter-point discussion on the viability of PPOs into the postPPACA era. “Emerging Trend #3: Deeper Dive into the Provider Perspective” will be a panel presentation focusing on an inside look at the provider perspective on how they are adapting to the postACA world. “The SIIA Situation Room” concludes this year’s Forum and is a not to be missed session for those wondering how to summarize two days of SIIA presentations into an “elevator speech” for your manager, co-workers and clients. A take away presentation for all! In addition to the invaluable educational and networking opportunities, The Self-Insured health Plan executive Forum, like all SIIA events, can be a great way to promote your company’s corporate brand through a variety of sponsorship opportunities. For sponsorship information, detailed schedules and to register, visit www.siia.org. I look forward to seeing you in Palm Springs! n

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| February 2013

SIIA would like to recognize our leadership and welcome new members Full SIIA Committee listings can be found at www.siia.org

2013 Board of Directors

Committee Chairs

ChAIrMAN OF The BOArD* John T. Jones, Partner Moulton Bellingham PC Billings, MT

ChAIrMAN, AlTerNATIve rISK TrANSFer COMMITTee Andrew Cavenagh President Pareto Captive Services, llC Conshohocken, PA

PreSIDeNT* les Boughner executive vP & Managing Director Willis North American Captive + Consulting Practice Burlington, vT vICe PreSIDeNT OPerATIONS* Donald K. Drelich, Chairman & CeO D.W. van Dyke & Co. Wilton, CT vICe PreSIDeNT FINANCe/ChIeF FINANCIAl OFFICer/COrPOrATe SeCreTArY* Steven J. link executive vice President Midwest employers Casualty Company Chesterfield, MO

Directors ernie A. Clevenger, President Carehere, llC Brentwood, TN ronald K. Dewsnup President & general Manager Allegiance Benefit Plan Management, Inc. Missoula, MT

ChAIrMAN, gOverNMeNT relATIONS COMMITTee Horace Garfield vice President Transamerica Employee Benefits louisville, KY ChAIrWOMAN, heAlTh CAre COMMITTee elizabeth Midtlien Senior vice President, Sales Starline uSA, llC Minneapolis, MN ChAIrMAN, INTerNATIONAl COMMITTee greg Arms Co-Leader Mercer Marsh Benefits global leader, employee health & Benefits Practice Marsh, Inc. New York, NY

SIIA New Members regular Members Company name/ Voting representative Jim Mocho, Advantage Consulting Services, ltd., Cleveland, Oh

Josh Flood, President, Pay Yourself First, Alexandria, vA

employer Members holly hubbell, Manager- Benefits and Compensation, Cimarex energy Co., Tulsa, OK

Cindy ernst, Director, Integrated healthcare Association, Oakland, CA

ChAIrMAN, WOrKerS’ COMPeNSATION COMMITTee Duke Niedringhaus vice President J.W. Terrill, Inc. St louis, MO

elizabeth D. Mariner executive vice President re-Solutions, llC Wellington, Fl Jay ritchie Senior vice President hCC life Insurance Company Kennesaw, gA

| Self-Insurer The Self-Insurer February 2013 | The

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| February 2013

February 2013

The Self-Insurer