The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”), added a new prescription drug program to Medicare, referred to as “Part D.” Prescription drug coverage under Part D will be available to eligible individuals starting January 1, 2006. In January 2005, the Centers for Medicare and Medicaid Services (“CMS”) issued final regulations establishing many of the rules and requirements for Part D coverage.
Over the course of the past few months, CMS has issued additional guidance on its website regarding the Part D requirements that will be of interest to employers and plan sponsors. Specifically, CMS has issued additional guidance regarding:
· The obligation to send certificates of creditable coverage to all plan participants who are eligible for Part D coverage. This obligation applies to all employers who sponsor a health plan, even if the employer does not provide retiree health coverage. · The operation of the tax-free retiree drug subsidy, and · In June 2005, CMS issued additional guidance regarding how the certificate of creditable coverage requirements and the retiree drug subsidy rules apply to account-based health plans (e.g., health flexible spending accounts, health reimbursement arrangements and health savings accounts). Certificates of Creditable Coverage If a Part D eligible individual delays enrollment in Part D, Part D provides for a higher premium charge for those individuals who do not have creditable prescription drug coverage for any continuous period of 63 days or longer after the end of their initial enrollment period under Part D. The higher premium charge is based on the number of months that the individual did not have creditable coverage and will apply for as long as the individual remains enrolled in Part D. Additionally, since the higher premium is based on a percentage of the standard premium, it will increase each year as the standard premium increases. Therefore, it is important for eligible individuals to know whether their current prescription drug coverage is creditable, so that they can make an informed decision on whether they need to enroll in Part D when they are initially eligible or whether they can delay Part D enrollment because their current coverage is creditable. Who Must Provide the Certificate? Substantially all entities that provide prescription drug coverage to Part D eligible individuals must disclose whether the entity’s coverage is creditable prescription drug coverage (the “Certificate”). For example, any group health plan that it is subject to ERISA as an employee welfare benefit plan must provide the Certificate. The Certificate requirement is imposed on the plan sponsor regardless of whether the prescription drug coverage is insured or self-insured. In this regard, CMS has informally indicated a plan sponsor may contract with the plan’s insurer or third-party administrator to provide the Certificate (as well as to determine if the coverage is creditable as discussed below). A Certificate is required regardless of whether the individual’s health plan coverage is primary or secondary to Medicare. In addition, it is also important to note that a Certificate is required even if the employer does not apply for the retiree drug subsidy. Under recent CMS guidance, a health reimbursement arrangement (“HRA”) that provides prescription drug coverage either on a stand-alone basis or in conjunction with a related health plan must provide a Certificate to Part D eligible individuals. However, health flexible spending accounts (“FSA”), health savings accounts (“HSA”) and Archer medical savings accounts (“MSA”) are not required to provide Certificates. Who Must Receive the Certificate? The Certificate must be provided to all Part D eligible individuals (including employees, retirees and dependents) who are covered under, or who apply for, a group health plan’s prescription drug coverage. A Part D eligible individual is an individual who is entitled to Medicare Part A and/or enrolled in Medicare Part B. In general, an individual becomes entitled to Medicare Part A if the person has reached age 65 and has monthly social security benefits. Individuals under age 65 may also become entitled to Medicare Part A if they receive at least 24 months of social security benefits based upon a disability. Based on these rules, even employers who do not provide retiree health coverage will be required to send a Certificate, whenever they have active employees receiving employer health coverage who are age 65 and entitled to enroll in Part D. If health coverage is provided to disabled employees, they will also be entitled to a Certificate. Because it may be difficult and time-consuming to determine which participants are Part D eligible individuals, CMS has provided that group health plans may send the Certificate to all of their participants, rather than attempt to determine who is a Part D eligible individual. Health plans may provide a single Certificate to the plan participant and all other Medicare eligible dependents covered under the same plan. (However, if the plan knows that a spouse or dependent that is a Part D eligible individual lives at a different address than the participant, a separate Certificate must be provided to the spouse or dependent.) A separate mailing of the Certificate is not required; instead it may be provided with or incorporated into other plan information materials, including enrollment materials and SPDs. However, if the Certificate is incorporated into other plan information materials, the Certificate must be prominent and conspicuous and a reference to the section or page number of the Certificate must be prominently displayed on the first page of the information materials. CMS has also provided specific rules on distribution of the Certificate through electronic means. These rules generally follow the Department of Labor’s rules on distribution of plan information through electronic means. (See, DOL Regulation § 2520.104b-1(c)) When Must the Certificate by Provided? The final regulations provide that the Certificate must be initially provided prior to November 15, 2005 (i.e., prior to the beginning of the first initial enrollment period under Part D). A Certificate must also be provided at the following additional times –
· The operation of the tax-free retiree drug subsidy, and · In June 2005, CMS issued additional guidance regarding how the certificate of creditable coverage requirements and the retiree drug subsidy rules apply to account-based health plans (e.g., health flexible spending accounts, health reimbursement arrangements and health savings accounts). Certificates of Creditable Coverage If a Part D eligible individual delays enrollment in Part D, Part D provides for a higher premium charge for those individuals who do not have creditable prescription drug coverage for any continuous period of 63 days or longer after the end of their initial enrollment period under Part D. The higher premium charge is based on the number of months that the individual did not have creditable coverage and will apply for as long as the individual remains enrolled in Part D. Additionally, since the higher premium is based on a percentage of the standard premium, it will increase each year as the standard premium increases. Therefore, it is important for eligible individuals to know whether their current prescription drug coverage is creditable, so that they can make an informed decision on whether they need to enroll in Part D when they are initially eligible or whether they can delay Part D enrollment because their current coverage is creditable. Who Must Provide the Certificate? Substantially all entities that provide prescription drug coverage to Part D eligible individuals must disclose whether the entity’s coverage is creditable prescription drug coverage (the “Certificate”). For example, any group health plan that it is subject to ERISA as an employee welfare benefit plan must provide the Certificate. The Certificate requirement is imposed on the plan sponsor regardless of whether the prescription drug coverage is insured or self-insured. In this regard, CMS has informally indicated a plan sponsor may contract with the plan’s insurer or third-party administrator to provide the Certificate (as well as to determine if the coverage is creditable as discussed below). A Certificate is required regardless of whether the individual’s health plan coverage is primary or secondary to Medicare. In addition, it is also important to note that a Certificate is required even if the employer does not apply for the retiree drug subsidy. Under recent CMS guidance, a health reimbursement arrangement (“HRA”) that provides prescription drug coverage either on a stand-alone basis or in conjunction with a related health plan must provide a Certificate to Part D eligible individuals. However, health flexible spending accounts (“FSA”), health savings accounts (“HSA”) and Archer medical savings accounts (“MSA”) are not required to provide Certificates. Who Must Receive the Certificate? The Certificate must be provided to all Part D eligible individuals (including employees, retirees and dependents) who are covered under, or who apply for, a group health plan’s prescription drug coverage. A Part D eligible individual is an individual who is entitled to Medicare Part A and/or enrolled in Medicare Part B. In general, an individual becomes entitled to Medicare Part A if the person has reached age 65 and has monthly social security benefits. Individuals under age 65 may also become entitled to Medicare Part A if they receive at least 24 months of social security benefits based upon a disability. Based on these rules, even employers who do not provide retiree health coverage will be required to send a Certificate, whenever they have active employees receiving employer health coverage who are age 65 and entitled to enroll in Part D. If health coverage is provided to disabled employees, they will also be entitled to a Certificate. Because it may be difficult and time-consuming to determine which participants are Part D eligible individuals, CMS has provided that group health plans may send the Certificate to all of their participants, rather than attempt to determine who is a Part D eligible individual.
· In June 2005, CMS issued additional guidance regarding how the certificate of creditable coverage requirements and the retiree drug subsidy rules apply to account-based health plans (e.g., health flexible spending accounts, health reimbursement arrangements and health savings accounts). Certificates of Creditable Coverage
If a Part D eligible individual delays enrollment in Part D, Part D provides for a higher premium charge for those individuals who do not have creditable prescription drug coverage for any continuous period of 63 days or longer after the end of their initial enrollment period under Part D. The higher premium charge is based on the number of months that the individual did not have creditable coverage and will apply for as long as the individual remains enrolled in Part D. Additionally, since the higher premium is based on a percentage of the standard premium, it will increase each year as the standard premium increases. Therefore, it is important for eligible individuals to know whether their current prescription drug coverage is creditable, so that they can make an informed decision on whether they need to enroll in Part D when they are initially eligible or whether they can delay Part D enrollment because their current coverage is creditable.
Who Must Provide the Certificate? Substantially all entities that provide prescription drug coverage to Part D eligible individuals must disclose whether the entity’s coverage is creditable prescription drug coverage (the “Certificate”). For example, any group health plan that it is subject to ERISA as an employee welfare benefit plan must provide the Certificate. The Certificate requirement is imposed on the plan sponsor regardless of whether the prescription drug coverage is insured or self-insured. In this regard, CMS has informally indicated a plan sponsor may contract with the plan’s insurer or third-party administrator to provide the Certificate (as well as to determine if the coverage is creditable as discussed below). A Certificate is required regardless of whether the individual’s health plan coverage is primary or secondary to Medicare. In addition, it is also important to note that a Certificate is required even if the employer does not apply for the retiree drug subsidy.
Under recent CMS guidance, a health reimbursement arrangement (“HRA”) that provides prescription drug coverage either on a stand-alone basis or in conjunction with a related health plan must provide a Certificate to Part D eligible individuals. However, health flexible spending accounts (“FSA”), health savings accounts (“HSA”) and Archer medical savings accounts (“MSA”) are not required to provide Certificates.
Who Must Receive the Certificate?
The Certificate must be provided to all Part D eligible individuals (including employees, retirees and dependents) who are covered under, or who apply for, a group health plan’s prescription drug coverage. A Part D eligible individual is an individual who is entitled to Medicare Part A and/or enrolled in Medicare Part B. In general, an individual becomes entitled to Medicare Part A if the person has reached age 65 and has monthly social security benefits. Individuals under age 65 may also become entitled to Medicare Part A if they receive at least 24 months of social security benefits based upon a disability. Based on these rules, even employers who do not provide retiree health coverage will be required to send a Certificate, whenever they have active employees receiving employer health coverage who are age 65 and entitled to enroll in Part D. If health coverage is provided to disabled employees, they will also be entitled to a Certificate. Because it may be difficult and time-consuming to determine which participants are Part D eligible individuals, CMS has provided that group health plans may send the Certificate to all of their participants, rather than attempt to determine who is a Part D eligible individual.
Health plans may provide a single Certificate to the plan participant and all other Medicare eligible dependents covered under the same plan. (However, if the plan knows that a spouse or dependent that is a Part D eligible individual lives at a different address than the participant, a separate Certificate must be provided to the spouse or dependent.) A separate mailing of the Certificate is not required; instead it may be provided with or incorporated into other plan information materials, including enrollment materials and SPDs. However, if the Certificate is incorporated into other plan information materials, the Certificate must be prominent and conspicuous and a reference to the section or page number of the Certificate must be prominently displayed on the first page of the information materials. CMS has also provided specific rules on distribution of the Certificate through electronic means. These rules generally follow the Department of Labor’s rules on distribution of plan information through electronic means. (See, DOL Regulation § 2520.104b-1(c))
When Must the Certificate by Provided?
The final regulations provide that the Certificate must be initially provided prior to November 15, 2005 (i.e., prior to the beginning of the first initial enrollment period under Part D). A Certificate must also be provided at the following additional times –
1. Prior to the Part D annual coordinated election period (beginning November 15th of each year); 2. Prior to an individual’s initial enrollment period for Part D; 3. Prior to the effective date of coverage for any Part D eligible individual that joins the plan; 4. Whenever prescription drug coverage ends or changes so that it is no longer creditable or becomes creditable; and 5. At any time, upon request. If the Certificate is provided to all plan participants, CMS will consider the first two items above to be automatically satisfied. CMS has also clarified that “prior to” means that a Certificate must have been provided within the past 12 months before the time that an individual is required to receive a Certificate. Based upon the above two rules, if employers do not desire to specifically determine who is a Part D eligible individual, employers will need to send the Certificate on an annual basis to all plan participants. For this reason, employers should consider adding the Certificate to their plan enrollment materials and/or SPD (if it is distributed annually), bearing in mind the requirement discussed above to make the Certificate prominent and conspicuous. What is the Content of the Certificate? CMS has provided sample language that entities can (but are not required to) use when disclosing creditable coverage status to Part D eligible individuals. The current sample language only applies to the first initial open enrollment period – November 15, 2005 through May 15, 2006. CMS intends to provide additional sample language for use after May 15, 2006 and in future plan years. If an entity chooses not to use the sample language, the Certificate must include at least the following general information – (1) whether the entity has determined the prescription drug coverage to be creditable or not creditable, (2) the meaning of creditable coverage, (3) an explanation of why creditable coverage is important, and (4) if the coverage is not creditable, an explanation of the times that the individual can enroll in Part D. Therefore, plan sponsors are required to provide a Certificate even if the plan does not provide creditable coverage. Whether or not entities use the sample language, CMS also recommends that entities provide certain other statements in the Certificate as well, including an explanation of the individual’s right to a Certificate, and the options that individuals will have available when they are eligible to enroll in Part D (e.g., retain existing employer-provided coverage and delay Part D enrollment or enroll in Part D as a supplement to or in lieu of employer coverage). For those employers that also apply for the retiree drug subsidy, the Certificate will be an important “marketing” opportunity, because an employer only receives the subsidy for those Part D eligible individuals that retain employer-provided coverage and do not enroll in Part D. Therefore, these employers will want to convince their retirees to delay enrollment in Part D and retain employer-provided coverage. On this issue, CMS has informally indicated that employers could include in the Certificate statements that indicate the employer’s plan is as good as or better than Part D (based upon an average, actuarial basis) and that any Part D coverage would be duplicative of the employer-provided coverage. However, because Part D may cover certain drugs that the employer plan does not cover, CMS has cautioned that employers could not say that individuals should not (or could not) enroll in Part D. How to Determine Creditable Coverage. A health plan’s prescription drug coverage is creditable if the actuarial value of the coverage equals or exceeds the actuarial value of the standard Part D benefit, as demonstrated through the use of generally accepted actuarial principles and in accordance with CMS guidelines. This determination measures whether the expected amount of paid claims for Part D eligible individuals under the plan’s prescription drug coverage is at least as much as the expected amount of paid claims for the same individuals under the standard Part D benefit. This calculation does not take into account whether the coverage is financed by the participant or the employer – it is simply a gross test. (This test is also the same as the Gross Test for purposes of the retiree drug subsidy as discussed below.) In calculating the expected paid claims of the health plan, only prescription drugs that are Part D drugs can be considered (e.g., over-the-counter drugs, experimental, and cosmetic drugs covered by a plan cannot be included if Part D does not cover them). Conversely, in calculating the expected paid claims under the standard Part D benefit, all Part D drugs are included, including those that the employer’s plan does not cover. For plans that have multiple benefit options (i.e., a particular benefit design, category of benefits or cost sharing arrangement), Part D requires that the plan apply the above test separately for each benefit option. Unless the plan satisfies the safe harbor guidelines discussed below, the plan will likely need to hire an actuary to determine whether its coverage is creditable. (However, an official actuarial attestation by a qualified actuary is not required unless the employer is applying for the retiree drug subsidy.) Under these safe harbor guidelines, a plan will automatically be deemed to be providing creditable coverage if it – · Provides coverage for brand and generic prescriptions; · Provides reasonable access to retail providers and optionally, for mail order providers; · Is designed to pay on average at least 60% of participants’ prescription drug expenses; · For plans that have integrated health coverage, the integrated coverage has (i) no more than a $250 deductible per year, (ii) a maximum annual benefit payment of at least $25,000, and (iii) no less than a $1,000,000 lifetime maximum; and · For non-integrated plans, the prescription drug coverage has (i) a maximum annual benefit of at least $25,000, or (ii) an actuarial expectation that the amount payable by the plan will be at least $2,000 per Part D eligible individual in 2006. Although most employer health plans will satisfy at least the first two requirements of the safe harbor, some employer health plans will not satisfy the 60% requirement. Therefore, those employers will need to hire an actuary to determine whether their coverage is creditable. Although there does not appear to be any direct requirement that creditable coverage must be re-tested each year, in practice most employers will need to re-test each year. This is because the employer will need to provide a Certificate to individuals who are newly eligible for Part D coverage during the coming year or otherwise provide it to all participants, and the employer will need to know whether the coverage is still creditable. (If the employer is applying for the retiree drug subsidy, the employer is required to re-test each year for actuarial equivalence under the retiree drug subsidy requirements.) In recent guidance, CMS has clarified how the determination of creditable coverage affects account-based health plans. Specifically, a health FSA is disregarded for purposes of determining whether the individual has creditable coverage, and coverage under an HSA or Archer MSA cannot be taken into account in determining whether the related high deductible plan qualifies as creditable coverage. (This means that a Certificate is not required for a health FSA, or the account portion of an HSA or an Archer MSA.) Further, it is important to note that some high deductible health plan (“HDHP”) designs that are paired with HSAs may not satisfy the creditable coverage requirements. If the HDHP is not creditable coverage, those employees who are eligible to enroll in Part D will be forced to enroll (or otherwise pay the higher Part D premium when they enroll later). Those that then enroll in Part D will lose their eligibility to make HSA contributions. Alternatively, for purposes of an HRA, an employer can consider a portion of the amounts credited to the HRA in a given year as being used for prescription drug coverage. For HRAs that pay for both prescription drugs and other medical expenses (which is the norm), a portion of a year’s allocation should be reasonably estimated and allocated to prescription drugs. However, existing balances in the HRA that have been rolled-over from prior years cannot be used in valuing the arrangement. If the HRA is a stand alone HRA, then the HRA’s creditable coverage determination is made by treating the HRA as if it were a separate plan with no deductible and an annual limit equal to the amount of the credit for that year. Retiree Drug Subsidy The MMA provides employers and other plan sponsors of qualified retiree prescription drug plans the ability to receive tax-free drug subsidy payments for a portion of their plan’s prescription drug costs. In general, for each qualifying covered retiree, an employer or sponsor is eligible to receive payments of 28% of allowable drug costs that are within a certain cost threshold (for 2006 the threshold is between $250 and $5,000). Employers and sponsors who desire to claim the tax-free subsidy must apply each year, and for 2006 the deadline is September 30, 2005. Actuarial Attestation. Employers and sponsors who desire to apply for the subsidy must provide to CMS an attestation that the actuarial value of the retiree prescription drug coverage under their plan is at least equal to the actuarial value of the standard Part D benefit. In general, the attestation must be signed by a qualified actuary, must be based upon generally accepted actuarial principles and CMS actuarial guidelines and must include the following assurances – · The actuarial gross value of the retiree prescription drug coverage under the plan for the plan year is at least equal to the actuarial gross value of the standard Part D drug benefit for the plan year (the “Gross Test”); and · The actuarial net value of the retiree drug coverage under the plan for the plan year is at least equal to the actuarial net value of the standard Part D benefit for the plan year (the “Net Test”). The Gross Test is the same test that is used above in calculating whether a plan is providing creditable coverage. The Net Test, on the other hand, is an additional test that employers and sponsors must satisfy for purposes of the retiree drug subsidy, and is calculated by subtracting the retiree’s premium or contribution from the gross value of the employer’s or sponsor’s plan. For plans with multiple benefit options, each benefit option must separately pass the Gross Test, but the plan is allowed to pass the Net Test by either separately testing the benefit options or aggregating one or more options together into one option. Therefore, if some options fail the Net Test on an individual basis, employers will want to aggregate their options so that they can qualify for the subsidy on all their options. Account Based Health Plans. In its recent guidance, CMS clarified how account based health plans are treated under the actuarial equivalence tests of the retiree drug subsidy. For HRAs, claims paid from an HRA for Part D drugs will be eligible for retiree drug subsidy payments in the same manner as claims paid from any other non-account based health plan. Further, if a retiree participates in both an HRA and a related health plan and if the arrangement on a combined basis satisfies the Gross Test, then any contributions (e.g., after-tax contributions for COBRA beneficiaries) required under the HRA will be treated as any other retiree premium (and therefore excluded) under the Net Test. Alternatively, for purposes of determining eligibility and payments under the retiree drug subsidy, health FSAs are disregarded (for both tests), and funds contributed to HSAs and Archer MSAs cannot be used in determining whether the related high deductible health plan meets the actuarial equivalence tests. While employers and sponsors cannot receive retiree drug subsidy payments for HSAs and Archer MSAs, it is important to note that a retiree can withdraw funds accumulated in an HSA or Archer MSA on a tax-free basis to pay for Part D prescription drug co-payments and have those funds counted towards the retiree’s $3,600 true out-of-pocket (also referred to as “TrOOP”) limit. (The $3,600 limit is effective for 2006 and will be adjusted in future years.) This is important because once a retiree has reached the $3,600 TrOOP limit, catastrophic coverage under Part D takes effect. In addition, retirees who are at least age 65 can withdraw funds from an HSA or Archer MSA on a tax-free basis to pay for Part D premiums (as well as employer-provided retiree health insurance premiums). These withdrawals also do not affect the retiree’s TrOOP calculations under Part D. Looking Forward Under the final MMA regulations, health plans are required to inform CMS whether the prescription drug coverage they provide is creditable coverage. CMS has yet to issue guidance on the form and manner of this notification, but CMS has indicated that additional guidance will be forthcoming. In addition, CMS also intends to issue sample language that can be used for Certificates for future plan years. The information contained in this Legal Alert is not intended as legal advice or as an opinion on specific facts. For more information about these issues, please contact Mark Wincek or Mark Stember in the Washington office (202) 508-5800, Bill Vesely or Jennifer Schumacher in the Atlanta office (404) 815-6500, Craig Wheaton or Martha Sewell in the Raleigh office (919) 420-1700, or Bill Wright in the Winston-Salem office (336) 607-7300. The invitation to contact the above individuals is not to be construed as a solicitation for legal work in any jurisdiction in which the individuals are not admitted to practice. There will be no charge for the initial contact. Any attorney/client relationship will be confirmed in writing. You can also contact us through our Web site at www.KilpatrickStockton.com
2. Prior to an individual’s initial enrollment period for Part D; 3. Prior to the effective date of coverage for any Part D eligible individual that joins the plan; 4. Whenever prescription drug coverage ends or changes so that it is no longer creditable or becomes creditable; and 5. At any time, upon request. If the Certificate is provided to all plan participants, CMS will consider the first two items above to be automatically satisfied. CMS has also clarified that “prior to” means that a Certificate must have been provided within the past 12 months before the time that an individual is required to receive a Certificate. Based upon the above two rules, if employers do not desire to specifically determine who is a Part D eligible individual, employers will need to send the Certificate on an annual basis to all plan participants. For this reason, employers should consider adding the Certificate to their plan enrollment materials and/or SPD (if it is distributed annually), bearing in mind the requirement discussed above to make the Certificate prominent and conspicuous. What is the Content of the Certificate? CMS has provided sample language that entities can (but are not required to) use when disclosing creditable coverage status to Part D eligible individuals. The current sample language only applies to the first initial open enrollment period – November 15, 2005 through May 15, 2006. CMS intends to provide additional sample language for use after May 15, 2006 and in future plan years. If an entity chooses not to use the sample language, the Certificate must include at least the following general information – (1) whether the entity has determined the prescription drug coverage to be creditable or not creditable, (2) the meaning of creditable coverage, (3) an explanation of why creditable coverage is important, and (4) if the coverage is not creditable, an explanation of the times that the individual can enroll in Part D. Therefore, plan sponsors are required to provide a Certificate even if the plan does not provide creditable coverage. Whether or not entities use the sample language, CMS also recommends that entities provide certain other statements in the Certificate as well, including an explanation of the individual’s right to a Certificate, and the options that individuals will have available when they are eligible to enroll in Part D (e.g., retain existing employer-provided coverage and delay Part D enrollment or enroll in Part D as a supplement to or in lieu of employer coverage). For those employers that also apply for the retiree drug subsidy, the Certificate will be an important “marketing” opportunity, because an employer only receives the subsidy for those Part D eligible individuals that retain employer-provided coverage and do not enroll in Part D. Therefore, these employers will want to convince their retirees to delay enrollment in Part D and retain employer-provided coverage. On this issue, CMS has informally indicated that employers could include in the Certificate statements that indicate the employer’s plan is as good as or better than Part D (based upon an average, actuarial basis) and that any Part D coverage would be duplicative of the employer-provided coverage. However, because Part D may cover certain drugs that the employer plan does not cover, CMS has cautioned that employers could not say that individuals should not (or could not) enroll in Part D. How to Determine Creditable Coverage. A health plan’s prescription drug coverage is creditable if the actuarial value of the coverage equals or exceeds the actuarial value of the standard Part D benefit, as demonstrated through the use of generally accepted actuarial principles and in accordance with CMS guidelines. This determination measures whether the expected amount of paid claims for Part D eligible individuals under the plan’s prescription drug coverage is at least as much as the expected amount of paid claims for the same individuals under the standard Part D benefit. This calculation does not take into account whether the coverage is financed by the participant or the employer – it is simply a gross test. (This test is also the same as the Gross Test for purposes of the retiree drug subsidy as discussed below.) In calculating the expected paid claims of the health plan, only prescription drugs that are Part D drugs can be considered (e.g., over-the-counter drugs, experimental, and cosmetic drugs covered by a plan cannot be included if Part D does not cover them). Conversely, in calculating the expected paid claims under the standard Part D benefit, all Part D drugs are included, including those that the employer’s plan does not cover. For plans that have multiple benefit options (i.e., a particular benefit design, category of benefits or cost sharing arrangement), Part D requires that the plan apply the above test separately for each benefit option. Unless the plan satisfies the safe harbor guidelines discussed below, the plan will likely need to hire an actuary to determine whether its coverage is creditable. (However, an official actuarial attestation by a qualified actuary is not required unless the employer is applying for the retiree drug subsidy.) Under these safe harbor guidelines, a plan will automatically be deemed to be providing creditable coverage if it – · Provides coverage for brand and generic prescriptions; · Provides reasonable access to retail providers and optionally, for mail order providers; · Is designed to pay on average at least 60% of participants’ prescription drug expenses; · For plans that have integrated health coverage, the integrated coverage has (i) no more than a $250 deductible per year, (ii) a maximum annual benefit payment of at least $25,000, and (iii) no less than a $1,000,000 lifetime maximum; and · For non-integrated plans, the prescription drug coverage has (i) a maximum annual benefit of at least $25,000, or (ii) an actuarial expectation that the amount payable by the plan will be at least $2,000 per Part D eligible individual in 2006. Although most employer health plans will satisfy at least the first two requirements of the safe harbor, some employer health plans will not satisfy the 60% requirement. Therefore, those employers will need to hire an actuary to determine whether their coverage is creditable. Although there does not appear to be any direct requirement that creditable coverage must be re-tested each year, in practice most employers will need to re-test each year. This is because the employer will need to provide a Certificate to individuals who are newly eligible for Part D coverage during the coming year or otherwise provide it to all participants, and the employer will need to know whether the coverage is still creditable. (If the employer is applying for the retiree drug subsidy, the employer is required to re-test each year for actuarial equivalence under the retiree drug subsidy requirements.) In recent guidance, CMS has clarified how the determination of creditable coverage affects account-based health plans. Specifically, a health FSA is disregarded for purposes of determining whether the individual has creditable coverage, and coverage under an HSA or Archer MSA cannot be taken into account in determining whether the related high deductible plan qualifies as creditable coverage. (This means that a Certificate is not required for a health FSA, or the account portion of an HSA or an Archer MSA.) Further, it is important to note that some high deductible health plan (“HDHP”) designs that are paired with HSAs may not satisfy the creditable coverage requirements. If the HDHP is not creditable coverage, those employees who are eligible to enroll in Part D will be forced to enroll (or otherwise pay the higher Part D premium when they enroll later). Those that then enroll in Part D will lose their eligibility to make HSA contributions. Alternatively, for purposes of an HRA, an employer can consider a portion of the amounts credited to the HRA in a given year as being used for prescription drug coverage. For HRAs that pay for both prescription drugs and other medical expenses (which is the norm), a portion of a year’s allocation should be reasonably estimated and allocated to prescription drugs. However, existing balances in the HRA that have been rolled-over from prior years cannot be used in valuing the arrangement. If the HRA is a stand alone HRA, then the HRA’s creditable coverage determination is made by treating the HRA as if it were a separate plan with no deductible and an annual limit equal to the amount of the credit for that year. Retiree Drug Subsidy The MMA provides employers and other plan sponsors of qualified retiree prescription drug plans the ability to receive tax-free drug subsidy payments for a portion of their plan’s prescription drug costs. In general, for each qualifying covered retiree, an employer or sponsor is eligible to receive payments of 28% of allowable drug costs that are within a certain cost threshold (for 2006 the threshold is between $250 and $5,000). Employers and sponsors who desire to claim the tax-free subsidy must apply each year, and for 2006 the deadline is September 30, 2005. Actuarial Attestation. Employers and sponsors who desire to apply for the subsidy must provide to CMS an attestation that the actuarial value of the retiree prescription drug coverage under their plan is at least equal to the actuarial value of the standard Part D benefit. In general, the attestation must be signed by a qualified actuary, must be based upon generally accepted actuarial principles and CMS actuarial guidelines and must include the following assurances – · The actuarial gross value of the retiree prescription drug coverage under the plan for the plan year is at least equal to the actuarial gross value of the standard Part D drug benefit for the plan year (the “Gross Test”); and · The actuarial net value of the retiree drug coverage under the plan for the plan year is at least equal to the actuarial net value of the standard Part D benefit for the plan year (the “Net Test”). The Gross Test is the same test that is used above in calculating whether a plan is providing creditable coverage. The Net Test, on the other hand, is an additional test that employers and sponsors must satisfy for purposes of the retiree drug subsidy, and is calculated by subtracting the retiree’s premium or contribution from the gross value of the employer’s or sponsor’s plan. For plans with multiple benefit options, each benefit option must separately pass the Gross Test, but the plan is allowed to pass the Net Test by either separately testing the benefit options or aggregating one or more options together into one option. Therefore, if some options fail the Net Test on an individual basis, employers will want to aggregate their options so that they can qualify for the subsidy on all their options. Account Based Health Plans. In its recent guidance, CMS clarified how account based health plans are treated under the actuarial equivalence tests of the retiree drug subsidy. For HRAs, claims paid from an HRA for Part D drugs will be eligible for retiree drug subsidy payments in the same manner as claims paid from any other non-account based health plan. Further, if a retiree participates in both an HRA and a related health plan and if the arrangement on a combined basis satisfies the Gross Test, then any contributions (e.g., after-tax contributions for COBRA beneficiaries) required under the HRA will be treated as any other retiree premium (and therefore excluded) under the Net Test. Alternatively, for purposes of determining eligibility and payments under the retiree drug subsidy, health FSAs are disregarded (for both tests), and funds contributed to HSAs and Archer MSAs cannot be used in determining whether the related high deductible health plan meets the actuarial equivalence tests. While employers and sponsors cannot receive retiree drug subsidy payments for HSAs and Archer MSAs, it is important to note that a retiree can withdraw funds accumulated in an HSA or Archer MSA on a tax-free basis to pay for Part D prescription drug co-payments and have those funds counted towards the retiree’s $3,600 true out-of-pocket (also referred to as “TrOOP”) limit. (The $3,600 limit is effective for 2006 and will be adjusted in future years.) This is important because once a retiree has reached the $3,600 TrOOP limit, catastrophic coverage under Part D takes effect. In addition, retirees who are at least age 65 can withdraw funds from an HSA or Archer MSA on a tax-free basis to pay for Part D premiums (as well as employer-provided retiree health insurance premiums). These withdrawals also do not affect the retiree’s TrOOP calculations under Part D. Looking Forward Under the final MMA regulations, health plans are required to inform CMS whether the prescription drug coverage they provide is creditable coverage. CMS has yet to issue guidance on the form and manner of this notification, but CMS has indicated that additional guidance will be forthcoming. In addition, CMS also intends to issue sample language that can be used for Certificates for future plan years. The information contained in this Legal Alert is not intended as legal advice or as an opinion on specific facts. For more information about these issues, please contact Mark Wincek or Mark Stember in the Washington office (202) 508-5800, Bill Vesely or Jennifer Schumacher in the Atlanta office (404) 815-6500, Craig Wheaton or Martha Sewell in the Raleigh office (919) 420-1700, or Bill Wright in the Winston-Salem office (336) 607-7300. The invitation to contact the above individuals is not to be construed as a solicitation for legal work in any jurisdiction in which the individuals are not admitted to practice. There will be no charge for the initial contact. Any attorney/client relationship will be confirmed in writing. You can also contact us through our Web site at www.KilpatrickStockton.com
3. Prior to the effective date of coverage for any Part D eligible individual that joins the plan; 4. Whenever prescription drug coverage ends or changes so that it is no longer creditable or becomes creditable; and 5. At any time, upon request. If the Certificate is provided to all plan participants, CMS will consider the first two items above to be automatically satisfied. CMS has also clarified that “prior to” means that a Certificate must have been provided within the past 12 months before the time that an individual is required to receive a Certificate. Based upon the above two rules, if employers do not desire to specifically determine who is a Part D eligible individual, employers will need to send the Certificate on an annual basis to all plan participants. For this reason, employers should consider adding the Certificate to their plan enrollment materials and/or SPD (if it is distributed annually), bearing in mind the requirement discussed above to make the Certificate prominent and conspicuous. What is the Content of the Certificate? CMS has provided sample language that entities can (but are not required to) use when disclosing creditable coverage status to Part D eligible individuals. The current sample language only applies to the first initial open enrollment period – November 15, 2005 through May 15, 2006. CMS intends to provide additional sample language for use after May 15, 2006 and in future plan years. If an entity chooses not to use the sample language, the Certificate must include at least the following general information – (1) whether the entity has determined the prescription drug coverage to be creditable or not creditable, (2) the meaning of creditable coverage, (3) an explanation of why creditable coverage is important, and (4) if the coverage is not creditable, an explanation of the times that the individual can enroll in Part D. Therefore, plan sponsors are required to provide a Certificate even if the plan does not provide creditable coverage. Whether or not entities use the sample language, CMS also recommends that entities provide certain other statements in the Certificate as well, including an explanation of the individual’s right to a Certificate, and the options that individuals will have available when they are eligible to enroll in Part D (e.g., retain existing employer-provided coverage and delay Part D enrollment or enroll in Part D as a supplement to or in lieu of employer coverage). For those employers that also apply for the retiree drug subsidy, the Certificate will be an important “marketing” opportunity, because an employer only receives the subsidy for those Part D eligible individuals that retain employer-provided coverage and do not enroll in Part D. Therefore, these employers will want to convince their retirees to delay enrollment in Part D and retain employer-provided coverage. On this issue, CMS has informally indicated that employers could include in the Certificate statements that indicate the employer’s plan is as good as or better than Part D (based upon an average, actuarial basis) and that any Part D coverage would be duplicative of the employer-provided coverage. However, because Part D may cover certain drugs that the employer plan does not cover, CMS has cautioned that employers could not say that individuals should not (or could not) enroll in Part D. How to Determine Creditable Coverage. A health plan’s prescription drug coverage is creditable if the actuarial value of the coverage equals or exceeds the actuarial value of the standard Part D benefit, as demonstrated through the use of generally accepted actuarial principles and in accordance with CMS guidelines. This determination measures whether the expected amount of paid claims for Part D eligible individuals under the plan’s prescription drug coverage is at least as much as the expected amount of paid claims for the same individuals under the standard Part D benefit. This calculation does not take into account whether the coverage is financed by the participant or the employer – it is simply a gross test. (This test is also the same as the Gross Test for purposes of the retiree drug subsidy as discussed below.) In calculating the expected paid claims of the health plan, only prescription drugs that are Part D drugs can be considered (e.g., over-the-counter drugs, experimental, and cosmetic drugs covered by a plan cannot be included if Part D does not cover them). Conversely, in calculating the expected paid claims under the standard Part D benefit, all Part D drugs are included, including those that the employer’s plan does not cover. For plans that have multiple benefit options (i.e., a particular benefit design, category of benefits or cost sharing arrangement), Part D requires that the plan apply the above test separately for each benefit option. Unless the plan satisfies the safe harbor guidelines discussed below, the plan will likely need to hire an actuary to determine whether its coverage is creditable. (However, an official actuarial attestation by a qualified actuary is not required unless the employer is applying for the retiree drug subsidy.) Under these safe harbor guidelines, a plan will automatically be deemed to be providing creditable coverage if it – · Provides coverage for brand and generic prescriptions; · Provides reasonable access to retail providers and optionally, for mail order providers; · Is designed to pay on average at least 60% of participants’ prescription drug expenses; · For plans that have integrated health coverage, the integrated coverage has (i) no more than a $250 deductible per year, (ii) a maximum annual benefit payment of at least $25,000, and (iii) no less than a $1,000,000 lifetime maximum; and · For non-integrated plans, the prescription drug coverage has (i) a maximum annual benefit of at least $25,000, or (ii) an actuarial expectation that the amount payable by the plan will be at least $2,000 per Part D eligible individual in 2006. Although most employer health plans will satisfy at least the first two requirements of the safe harbor, some employer health plans will not satisfy the 60% requirement. Therefore, those employers will need to hire an actuary to determine whether their coverage is creditable. Although there does not appear to be any direct requirement that creditable coverage must be re-tested each year, in practice most employers will need to re-test each year. This is because the employer will need to provide a Certificate to individuals who are newly eligible for Part D coverage during the coming year or otherwise provide it to all participants, and the employer will need to know whether the coverage is still creditable. (If the employer is applying for the retiree drug subsidy, the employer is required to re-test each year for actuarial equivalence under the retiree drug subsidy requirements.) In recent guidance, CMS has clarified how the determination of creditable coverage affects account-based health plans. Specifically, a health FSA is disregarded for purposes of determining whether the individual has creditable coverage, and coverage under an HSA or Archer MSA cannot be taken into account in determining whether the related high deductible plan qualifies as creditable coverage. (This means that a Certificate is not required for a health FSA, or the account portion of an HSA or an Archer MSA.) Further, it is important to note that some high deductible health plan (“HDHP”) designs that are paired with HSAs may not satisfy the creditable coverage requirements. If the HDHP is not creditable coverage, those employees who are eligible to enroll in Part D will be forced to enroll (or otherwise pay the higher Part D premium when they enroll later). Those that then enroll in Part D will lose their eligibility to make HSA contributions. Alternatively, for purposes of an HRA, an employer can consider a portion of the amounts credited to the HRA in a given year as being used for prescription drug coverage. For HRAs that pay for both prescription drugs and other medical expenses (which is the norm), a portion of a year’s allocation should be reasonably estimated and allocated to prescription drugs. However, existing balances in the HRA that have been rolled-over from prior years cannot be used in valuing the arrangement. If the HRA is a stand alone HRA, then the HRA’s creditable coverage determination is made by treating the HRA as if it were a separate plan with no deductible and an annual limit equal to the amount of the credit for that year. Retiree Drug Subsidy The MMA provides employers and other plan sponsors of qualified retiree prescription drug plans the ability to receive tax-free drug subsidy payments for a portion of their plan’s prescription drug costs. In general, for each qualifying covered retiree, an employer or sponsor is eligible to receive payments of 28% of allowable drug costs that are within a certain cost threshold (for 2006 the threshold is between $250 and $5,000). Employers and sponsors who desire to claim the tax-free subsidy must apply each year, and for 2006 the deadline is September 30, 2005. Actuarial Attestation. Employers and sponsors who desire to apply for the subsidy must provide to CMS an attestation that the actuarial value of the retiree prescription drug coverage under their plan is at least equal to the actuarial value of the standard Part D benefit. In general, the attestation must be signed by a qualified actuary, must be based upon generally accepted actuarial principles and CMS actuarial guidelines and must include the following assurances – · The actuarial gross value of the retiree prescription drug coverage under the plan for the plan year is at least equal to the actuarial gross value of the standard Part D drug benefit for the plan year (the “Gross Test”); and · The actuarial net value of the retiree drug coverage under the plan for the plan year is at least equal to the actuarial net value of the standard Part D benefit for the plan year (the “Net Test”). The Gross Test is the same test that is used above in calculating whether a plan is providing creditable coverage. The Net Test, on the other hand, is an additional test that employers and sponsors must satisfy for purposes of the retiree drug subsidy, and is calculated by subtracting the retiree’s premium or contribution from the gross value of the employer’s or sponsor’s plan. For plans with multiple benefit options, each benefit option must separately pass the Gross Test, but the plan is allowed to pass the Net Test by either separately testing the benefit options or aggregating one or more options together into one option. Therefore, if some options fail the Net Test on an individual basis, employers will want to aggregate their options so that they can qualify for the subsidy on all their options. Account Based Health Plans. In its recent guidance, CMS clarified how account based health plans are treated under the actuarial equivalence tests of the retiree drug subsidy. For HRAs, claims paid from an HRA for Part D drugs will be eligible for retiree drug subsidy payments in the same manner as claims paid from any other non-account based health plan. Further, if a retiree participates in both an HRA and a related health plan and if the arrangement on a combined basis satisfies the Gross Test, then any contributions (e.g., after-tax contributions for COBRA beneficiaries) required under the HRA will be treated as any other retiree premium (and therefore excluded) under the Net Test. Alternatively, for purposes of determining eligibility and payments under the retiree drug subsidy, health FSAs are disregarded (for both tests), and funds contributed to HSAs and Archer MSAs cannot be used in determining whether the related high deductible health plan meets the actuarial equivalence tests. While employers and sponsors cannot receive retiree drug subsidy payments for HSAs and Archer MSAs, it is important to note that a retiree can withdraw funds accumulated in an HSA or Archer MSA on a tax-free basis to pay for Part D prescription drug co-payments and have those funds counted towards the retiree’s $3,600 true out-of-pocket (also referred to as “TrOOP”) limit. (The $3,600 limit is effective for 2006 and will be adjusted in future years.) This is important because once a retiree has reached the $3,600 TrOOP limit, catastrophic coverage under Part D takes effect. In addition, retirees who are at least age 65 can withdraw funds from an HSA or Archer MSA on a tax-free basis to pay for Part D premiums (as well as employer-provided retiree health insurance premiums). These withdrawals also do not affect the retiree’s TrOOP calculations under Part D. Looking Forward Under the final MMA regulations, health plans are required to inform CMS whether the prescription drug coverage they provide is creditable coverage. CMS has yet to issue guidance on the form and manner of this notification, but CMS has indicated that additional guidance will be forthcoming. In addition, CMS also intends to issue sample language that can be used for Certificates for future plan years. The information contained in this Legal Alert is not intended as legal advice or as an opinion on specific facts. For more information about these issues, please contact Mark Wincek or Mark Stember in the Washington office (202) 508-5800, Bill Vesely or Jennifer Schumacher in the Atlanta office (404) 815-6500, Craig Wheaton or Martha Sewell in the Raleigh office (919) 420-1700, or Bill Wright in the Winston-Salem office (336) 607-7300. The invitation to contact the above individuals is not to be construed as a solicitation for legal work in any jurisdiction in which the individuals are not admitted to practice. There will be no charge for the initial contact. Any attorney/client relationship will be confirmed in writing. You can also contact us through our Web site at www.KilpatrickStockton.com
4. Whenever prescription drug coverage ends or changes so that it is no longer creditable or becomes creditable; and 5. At any time, upon request. If the Certificate is provided to all plan participants, CMS will consider the first two items above to be automatically satisfied. CMS has also clarified that “prior to” means that a Certificate must have been provided within the past 12 months before the time that an individual is required to receive a Certificate. Based upon the above two rules, if employers do not desire to specifically determine who is a Part D eligible individual, employers will need to send the Certificate on an annual basis to all plan participants. For this reason, employers should consider adding the Certificate to their plan enrollment materials and/or SPD (if it is distributed annually), bearing in mind the requirement discussed above to make the Certificate prominent and conspicuous. What is the Content of the Certificate? CMS has provided sample language that entities can (but are not required to) use when disclosing creditable coverage status to Part D eligible individuals. The current sample language only applies to the first initial open enrollment period – November 15, 2005 through May 15, 2006. CMS intends to provide additional sample language for use after May 15, 2006 and in future plan years. If an entity chooses not to use the sample language, the Certificate must include at least the following general information – (1) whether the entity has determined the prescription drug coverage to be creditable or not creditable, (2) the meaning of creditable coverage, (3) an explanation of why creditable coverage is important, and (4) if the coverage is not creditable, an explanation of the times that the individual can enroll in Part D. Therefore, plan sponsors are required to provide a Certificate even if the plan does not provide creditable coverage. Whether or not entities use the sample language, CMS also recommends that entities provide certain other statements in the Certificate as well, including an explanation of the individual’s right to a Certificate, and the options that individuals will have available when they are eligible to enroll in Part D (e.g., retain existing employer-provided coverage and delay Part D enrollment or enroll in Part D as a supplement to or in lieu of employer coverage). For those employers that also apply for the retiree drug subsidy, the Certificate will be an important “marketing” opportunity, because an employer only receives the subsidy for those Part D eligible individuals that retain employer-provided coverage and do not enroll in Part D. Therefore, these employers will want to convince their retirees to delay enrollment in Part D and retain employer-provided coverage. On this issue, CMS has informally indicated that employers could include in the Certificate statements that indicate the employer’s plan is as good as or better than Part D (based upon an average, actuarial basis) and that any Part D coverage would be duplicative of the employer-provided coverage. However, because Part D may cover certain drugs that the employer plan does not cover, CMS has cautioned that employers could not say that individuals should not (or could not) enroll in Part D. How to Determine Creditable Coverage. A health plan’s prescription drug coverage is creditable if the actuarial value of the coverage equals or exceeds the actuarial value of the standard Part D benefit, as demonstrated through the use of generally accepted actuarial principles and in accordance with CMS guidelines. This determination measures whether the expected amount of paid claims for Part D eligible individuals under the plan’s prescription drug coverage is at least as much as the expected amount of paid claims for the same individuals under the standard Part D benefit. This calculation does not take into account whether the coverage is financed by the participant or the employer – it is simply a gross test. (This test is also the same as the Gross Test for purposes of the retiree drug subsidy as discussed below.) In calculating the expected paid claims of the health plan, only prescription drugs that are Part D drugs can be considered (e.g., over-the-counter drugs, experimental, and cosmetic drugs covered by a plan cannot be included if Part D does not cover them). Conversely, in calculating the expected paid claims under the standard Part D benefit, all Part D drugs are included, including those that the employer’s plan does not cover. For plans that have multiple benefit options (i.e., a particular benefit design, category of benefits or cost sharing arrangement), Part D requires that the plan apply the above test separately for each benefit option.
5. At any time, upon request. If the Certificate is provided to all plan participants, CMS will consider the first two items above to be automatically satisfied. CMS has also clarified that “prior to” means that a Certificate must have been provided within the past 12 months before the time that an individual is required to receive a Certificate. Based upon the above two rules, if employers do not desire to specifically determine who is a Part D eligible individual, employers will need to send the Certificate on an annual basis to all plan participants. For this reason, employers should consider adding the Certificate to their plan enrollment materials and/or SPD (if it is distributed annually), bearing in mind the requirement discussed above to make the Certificate prominent and conspicuous. What is the Content of the Certificate? CMS has provided sample language that entities can (but are not required to) use when disclosing creditable coverage status to Part D eligible individuals. The current sample language only applies to the first initial open enrollment period – November 15, 2005 through May 15, 2006. CMS intends to provide additional sample language for use after May 15, 2006 and in future plan years. If an entity chooses not to use the sample language, the Certificate must include at least the following general information – (1) whether the entity has determined the prescription drug coverage to be creditable or not creditable, (2) the meaning of creditable coverage, (3) an explanation of why creditable coverage is important, and (4) if the coverage is not creditable, an explanation of the times that the individual can enroll in Part D. Therefore, plan sponsors are required to provide a Certificate even if the plan does not provide creditable coverage.
If the Certificate is provided to all plan participants, CMS will consider the first two items above to be automatically satisfied. CMS has also clarified that “prior to” means that a Certificate must have been provided within the past 12 months before the time that an individual is required to receive a Certificate. Based upon the above two rules, if employers do not desire to specifically determine who is a Part D eligible individual, employers will need to send the Certificate on an annual basis to all plan participants. For this reason, employers should consider adding the Certificate to their plan enrollment materials and/or SPD (if it is distributed annually), bearing in mind the requirement discussed above to make the Certificate prominent and conspicuous.
What is the Content of the Certificate?
CMS has provided sample language that entities can (but are not required to) use when disclosing creditable coverage status to Part D eligible individuals. The current sample language only applies to the first initial open enrollment period – November 15, 2005 through May 15, 2006. CMS intends to provide additional sample language for use after May 15, 2006 and in future plan years. If an entity chooses not to use the sample language, the Certificate must include at least the following general information – (1) whether the entity has determined the prescription drug coverage to be creditable or not creditable, (2) the meaning of creditable coverage, (3) an explanation of why creditable coverage is important, and (4) if the coverage is not creditable, an explanation of the times that the individual can enroll in Part D. Therefore, plan sponsors are required to provide a Certificate even if the plan does not provide creditable coverage.
Whether or not entities use the sample language, CMS also recommends that entities provide certain other statements in the Certificate as well, including an explanation of the individual’s right to a Certificate, and the options that individuals will have available when they are eligible to enroll in Part D (e.g., retain existing employer-provided coverage and delay Part D enrollment or enroll in Part D as a supplement to or in lieu of employer coverage). For those employers that also apply for the retiree drug subsidy, the Certificate will be an important “marketing” opportunity, because an employer only receives the subsidy for those Part D eligible individuals that retain employer-provided coverage and do not enroll in Part D. Therefore, these employers will want to convince their retirees to delay enrollment in Part D and retain employer-provided coverage. On this issue, CMS has informally indicated that employers could include in the Certificate statements that indicate the employer’s plan is as good as or better than Part D (based upon an average, actuarial basis) and that any Part D coverage would be duplicative of the employer-provided coverage. However, because Part D may cover certain drugs that the employer plan does not cover, CMS has cautioned that employers could not say that individuals should not (or could not) enroll in Part D.
How to Determine Creditable Coverage.
A health plan’s prescription drug coverage is creditable if the actuarial value of the coverage equals or exceeds the actuarial value of the standard Part D benefit, as demonstrated through the use of generally accepted actuarial principles and in accordance with CMS guidelines. This determination measures whether the expected amount of paid claims for Part D eligible individuals under the plan’s prescription drug coverage is at least as much as the expected amount of paid claims for the same individuals under the standard Part D benefit. This calculation does not take into account whether the coverage is financed by the participant or the employer – it is simply a gross test. (This test is also the same as the Gross Test for purposes of the retiree drug subsidy as discussed below.) In calculating the expected paid claims of the health plan, only prescription drugs that are Part D drugs can be considered (e.g., over-the-counter drugs, experimental, and cosmetic drugs covered by a plan cannot be included if Part D does not cover them). Conversely, in calculating the expected paid claims under the standard Part D benefit, all Part D drugs are included, including those that the employer’s plan does not cover. For plans that have multiple benefit options (i.e., a particular benefit design, category of benefits or cost sharing arrangement), Part D requires that the plan apply the above test separately for each benefit option.
Unless the plan satisfies the safe harbor guidelines discussed below, the plan will likely need to hire an actuary to determine whether its coverage is creditable. (However, an official actuarial attestation by a qualified actuary is not required unless the employer is applying for the retiree drug subsidy.) Under these safe harbor guidelines, a plan will automatically be deemed to be providing creditable coverage if it –
· Provides coverage for brand and generic prescriptions; · Provides reasonable access to retail providers and optionally, for mail order providers; · Is designed to pay on average at least 60% of participants’ prescription drug expenses; · For plans that have integrated health coverage, the integrated coverage has (i) no more than a $250 deductible per year, (ii) a maximum annual benefit payment of at least $25,000, and (iii) no less than a $1,000,000 lifetime maximum; and · For non-integrated plans, the prescription drug coverage has (i) a maximum annual benefit of at least $25,000, or (ii) an actuarial expectation that the amount payable by the plan will be at least $2,000 per Part D eligible individual in 2006. Although most employer health plans will satisfy at least the first two requirements of the safe harbor, some employer health plans will not satisfy the 60% requirement. Therefore, those employers will need to hire an actuary to determine whether their coverage is creditable. Although there does not appear to be any direct requirement that creditable coverage must be re-tested each year, in practice most employers will need to re-test each year. This is because the employer will need to provide a Certificate to individuals who are newly eligible for Part D coverage during the coming year or otherwise provide it to all participants, and the employer will need to know whether the coverage is still creditable. (If the employer is applying for the retiree drug subsidy, the employer is required to re-test each year for actuarial equivalence under the retiree drug subsidy requirements.) In recent guidance, CMS has clarified how the determination of creditable coverage affects account-based health plans. Specifically, a health FSA is disregarded for purposes of determining whether the individual has creditable coverage, and coverage under an HSA or Archer MSA cannot be taken into account in determining whether the related high deductible plan qualifies as creditable coverage. (This means that a Certificate is not required for a health FSA, or the account portion of an HSA or an Archer MSA.) Further, it is important to note that some high deductible health plan (“HDHP”) designs that are paired with HSAs may not satisfy the creditable coverage requirements. If the HDHP is not creditable coverage, those employees who are eligible to enroll in Part D will be forced to enroll (or otherwise pay the higher Part D premium when they enroll later). Those that then enroll in Part D will lose their eligibility to make HSA contributions. Alternatively, for purposes of an HRA, an employer can consider a portion of the amounts credited to the HRA in a given year as being used for prescription drug coverage. For HRAs that pay for both prescription drugs and other medical expenses (which is the norm), a portion of a year’s allocation should be reasonably estimated and allocated to prescription drugs. However, existing balances in the HRA that have been rolled-over from prior years cannot be used in valuing the arrangement. If the HRA is a stand alone HRA, then the HRA’s creditable coverage determination is made by treating the HRA as if it were a separate plan with no deductible and an annual limit equal to the amount of the credit for that year. Retiree Drug Subsidy The MMA provides employers and other plan sponsors of qualified retiree prescription drug plans the ability to receive tax-free drug subsidy payments for a portion of their plan’s prescription drug costs. In general, for each qualifying covered retiree, an employer or sponsor is eligible to receive payments of 28% of allowable drug costs that are within a certain cost threshold (for 2006 the threshold is between $250 and $5,000). Employers and sponsors who desire to claim the tax-free subsidy must apply each year, and for 2006 the deadline is September 30, 2005. Actuarial Attestation. Employers and sponsors who desire to apply for the subsidy must provide to CMS an attestation that the actuarial value of the retiree prescription drug coverage under their plan is at least equal to the actuarial value of the standard Part D benefit. In general, the attestation must be signed by a qualified actuary, must be based upon generally accepted actuarial principles and CMS actuarial guidelines and must include the following assurances – · The actuarial gross value of the retiree prescription drug coverage under the plan for the plan year is at least equal to the actuarial gross value of the standard Part D drug benefit for the plan year (the “Gross Test”); and · The actuarial net value of the retiree drug coverage under the plan for the plan year is at least equal to the actuarial net value of the standard Part D benefit for the plan year (the “Net Test”). The Gross Test is the same test that is used above in calculating whether a plan is providing creditable coverage. The Net Test, on the other hand, is an additional test that employers and sponsors must satisfy for purposes of the retiree drug subsidy, and is calculated by subtracting the retiree’s premium or contribution from the gross value of the employer’s or sponsor’s plan. For plans with multiple benefit options, each benefit option must separately pass the Gross Test, but the plan is allowed to pass the Net Test by either separately testing the benefit options or aggregating one or more options together into one option. Therefore, if some options fail the Net Test on an individual basis, employers will want to aggregate their options so that they can qualify for the subsidy on all their options. Account Based Health Plans. In its recent guidance, CMS clarified how account based health plans are treated under the actuarial equivalence tests of the retiree drug subsidy. For HRAs, claims paid from an HRA for Part D drugs will be eligible for retiree drug subsidy payments in the same manner as claims paid from any other non-account based health plan. Further, if a retiree participates in both an HRA and a related health plan and if the arrangement on a combined basis satisfies the Gross Test, then any contributions (e.g., after-tax contributions for COBRA beneficiaries) required under the HRA will be treated as any other retiree premium (and therefore excluded) under the Net Test. Alternatively, for purposes of determining eligibility and payments under the retiree drug subsidy, health FSAs are disregarded (for both tests), and funds contributed to HSAs and Archer MSAs cannot be used in determining whether the related high deductible health plan meets the actuarial equivalence tests. While employers and sponsors cannot receive retiree drug subsidy payments for HSAs and Archer MSAs, it is important to note that a retiree can withdraw funds accumulated in an HSA or Archer MSA on a tax-free basis to pay for Part D prescription drug co-payments and have those funds counted towards the retiree’s $3,600 true out-of-pocket (also referred to as “TrOOP”) limit. (The $3,600 limit is effective for 2006 and will be adjusted in future years.) This is important because once a retiree has reached the $3,600 TrOOP limit, catastrophic coverage under Part D takes effect. In addition, retirees who are at least age 65 can withdraw funds from an HSA or Archer MSA on a tax-free basis to pay for Part D premiums (as well as employer-provided retiree health insurance premiums). These withdrawals also do not affect the retiree’s TrOOP calculations under Part D. Looking Forward Under the final MMA regulations, health plans are required to inform CMS whether the prescription drug coverage they provide is creditable coverage. CMS has yet to issue guidance on the form and manner of this notification, but CMS has indicated that additional guidance will be forthcoming. In addition, CMS also intends to issue sample language that can be used for Certificates for future plan years. The information contained in this Legal Alert is not intended as legal advice or as an opinion on specific facts. For more information about these issues, please contact Mark Wincek or Mark Stember in the Washington office (202) 508-5800, Bill Vesely or Jennifer Schumacher in the Atlanta office (404) 815-6500, Craig Wheaton or Martha Sewell in the Raleigh office (919) 420-1700, or Bill Wright in the Winston-Salem office (336) 607-7300. The invitation to contact the above individuals is not to be construed as a solicitation for legal work in any jurisdiction in which the individuals are not admitted to practice. There will be no charge for the initial contact. Any attorney/client relationship will be confirmed in writing. You can also contact us through our Web site at www.KilpatrickStockton.com
· Provides reasonable access to retail providers and optionally, for mail order providers; · Is designed to pay on average at least 60% of participants’ prescription drug expenses; · For plans that have integrated health coverage, the integrated coverage has (i) no more than a $250 deductible per year, (ii) a maximum annual benefit payment of at least $25,000, and (iii) no less than a $1,000,000 lifetime maximum; and · For non-integrated plans, the prescription drug coverage has (i) a maximum annual benefit of at least $25,000, or (ii) an actuarial expectation that the amount payable by the plan will be at least $2,000 per Part D eligible individual in 2006. Although most employer health plans will satisfy at least the first two requirements of the safe harbor, some employer health plans will not satisfy the 60% requirement. Therefore, those employers will need to hire an actuary to determine whether their coverage is creditable. Although there does not appear to be any direct requirement that creditable coverage must be re-tested each year, in practice most employers will need to re-test each year. This is because the employer will need to provide a Certificate to individuals who are newly eligible for Part D coverage during the coming year or otherwise provide it to all participants, and the employer will need to know whether the coverage is still creditable. (If the employer is applying for the retiree drug subsidy, the employer is required to re-test each year for actuarial equivalence under the retiree drug subsidy requirements.) In recent guidance, CMS has clarified how the determination of creditable coverage affects account-based health plans. Specifically, a health FSA is disregarded for purposes of determining whether the individual has creditable coverage, and coverage under an HSA or Archer MSA cannot be taken into account in determining whether the related high deductible plan qualifies as creditable coverage. (This means that a Certificate is not required for a health FSA, or the account portion of an HSA or an Archer MSA.) Further, it is important to note that some high deductible health plan (“HDHP”) designs that are paired with HSAs may not satisfy the creditable coverage requirements. If the HDHP is not creditable coverage, those employees who are eligible to enroll in Part D will be forced to enroll (or otherwise pay the higher Part D premium when they enroll later). Those that then enroll in Part D will lose their eligibility to make HSA contributions. Alternatively, for purposes of an HRA, an employer can consider a portion of the amounts credited to the HRA in a given year as being used for prescription drug coverage. For HRAs that pay for both prescription drugs and other medical expenses (which is the norm), a portion of a year’s allocation should be reasonably estimated and allocated to prescription drugs. However, existing balances in the HRA that have been rolled-over from prior years cannot be used in valuing the arrangement. If the HRA is a stand alone HRA, then the HRA’s creditable coverage determination is made by treating the HRA as if it were a separate plan with no deductible and an annual limit equal to the amount of the credit for that year. Retiree Drug Subsidy The MMA provides employers and other plan sponsors of qualified retiree prescription drug plans the ability to receive tax-free drug subsidy payments for a portion of their plan’s prescription drug costs. In general, for each qualifying covered retiree, an employer or sponsor is eligible to receive payments of 28% of allowable drug costs that are within a certain cost threshold (for 2006 the threshold is between $250 and $5,000). Employers and sponsors who desire to claim the tax-free subsidy must apply each year, and for 2006 the deadline is September 30, 2005. Actuarial Attestation. Employers and sponsors who desire to apply for the subsidy must provide to CMS an attestation that the actuarial value of the retiree prescription drug coverage under their plan is at least equal to the actuarial value of the standard Part D benefit. In general, the attestation must be signed by a qualified actuary, must be based upon generally accepted actuarial principles and CMS actuarial guidelines and must include the following assurances – · The actuarial gross value of the retiree prescription drug coverage under the plan for the plan year is at least equal to the actuarial gross value of the standard Part D drug benefit for the plan year (the “Gross Test”); and · The actuarial net value of the retiree drug coverage under the plan for the plan year is at least equal to the actuarial net value of the standard Part D benefit for the plan year (the “Net Test”). The Gross Test is the same test that is used above in calculating whether a plan is providing creditable coverage. The Net Test, on the other hand, is an additional test that employers and sponsors must satisfy for purposes of the retiree drug subsidy, and is calculated by subtracting the retiree’s premium or contribution from the gross value of the employer’s or sponsor’s plan. For plans with multiple benefit options, each benefit option must separately pass the Gross Test, but the plan is allowed to pass the Net Test by either separately testing the benefit options or aggregating one or more options together into one option. Therefore, if some options fail the Net Test on an individual basis, employers will want to aggregate their options so that they can qualify for the subsidy on all their options. Account Based Health Plans. In its recent guidance, CMS clarified how account based health plans are treated under the actuarial equivalence tests of the retiree drug subsidy. For HRAs, claims paid from an HRA for Part D drugs will be eligible for retiree drug subsidy payments in the same manner as claims paid from any other non-account based health plan. Further, if a retiree participates in both an HRA and a related health plan and if the arrangement on a combined basis satisfies the Gross Test, then any contributions (e.g., after-tax contributions for COBRA beneficiaries) required under the HRA will be treated as any other retiree premium (and therefore excluded) under the Net Test. Alternatively, for purposes of determining eligibility and payments under the retiree drug subsidy, health FSAs are disregarded (for both tests), and funds contributed to HSAs and Archer MSAs cannot be used in determining whether the related high deductible health plan meets the actuarial equivalence tests. While employers and sponsors cannot receive retiree drug subsidy payments for HSAs and Archer MSAs, it is important to note that a retiree can withdraw funds accumulated in an HSA or Archer MSA on a tax-free basis to pay for Part D prescription drug co-payments and have those funds counted towards the retiree’s $3,600 true out-of-pocket (also referred to as “TrOOP”) limit. (The $3,600 limit is effective for 2006 and will be adjusted in future years.) This is important because once a retiree has reached the $3,600 TrOOP limit, catastrophic coverage under Part D takes effect. In addition, retirees who are at least age 65 can withdraw funds from an HSA or Archer MSA on a tax-free basis to pay for Part D premiums (as well as employer-provided retiree health insurance premiums). These withdrawals also do not affect the retiree’s TrOOP calculations under Part D. Looking Forward Under the final MMA regulations, health plans are required to inform CMS whether the prescription drug coverage they provide is creditable coverage. CMS has yet to issue guidance on the form and manner of this notification, but CMS has indicated that additional guidance will be forthcoming. In addition, CMS also intends to issue sample language that can be used for Certificates for future plan years. The information contained in this Legal Alert is not intended as legal advice or as an opinion on specific facts. For more information about these issues, please contact Mark Wincek or Mark Stember in the Washington office (202) 508-5800, Bill Vesely or Jennifer Schumacher in the Atlanta office (404) 815-6500, Craig Wheaton or Martha Sewell in the Raleigh office (919) 420-1700, or Bill Wright in the Winston-Salem office (336) 607-7300. The invitation to contact the above individuals is not to be construed as a solicitation for legal work in any jurisdiction in which the individuals are not admitted to practice. There will be no charge for the initial contact. Any attorney/client relationship will be confirmed in writing. You can also contact us through our Web site at www.KilpatrickStockton.com
· Is designed to pay on average at least 60% of participants’ prescription drug expenses; · For plans that have integrated health coverage, the integrated coverage has (i) no more than a $250 deductible per year, (ii) a maximum annual benefit payment of at least $25,000, and (iii) no less than a $1,000,000 lifetime maximum; and · For non-integrated plans, the prescription drug coverage has (i) a maximum annual benefit of at least $25,000, or (ii) an actuarial expectation that the amount payable by the plan will be at least $2,000 per Part D eligible individual in 2006. Although most employer health plans will satisfy at least the first two requirements of the safe harbor, some employer health plans will not satisfy the 60% requirement. Therefore, those employers will need to hire an actuary to determine whether their coverage is creditable. Although there does not appear to be any direct requirement that creditable coverage must be re-tested each year, in practice most employers will need to re-test each year. This is because the employer will need to provide a Certificate to individuals who are newly eligible for Part D coverage during the coming year or otherwise provide it to all participants, and the employer will need to know whether the coverage is still creditable. (If the employer is applying for the retiree drug subsidy, the employer is required to re-test each year for actuarial equivalence under the retiree drug subsidy requirements.) In recent guidance, CMS has clarified how the determination of creditable coverage affects account-based health plans. Specifically, a health FSA is disregarded for purposes of determining whether the individual has creditable coverage, and coverage under an HSA or Archer MSA cannot be taken into account in determining whether the related high deductible plan qualifies as creditable coverage. (This means that a Certificate is not required for a health FSA, or the account portion of an HSA or an Archer MSA.) Further, it is important to note that some high deductible health plan (“HDHP”) designs that are paired with HSAs may not satisfy the creditable coverage requirements. If the HDHP is not creditable coverage, those employees who are eligible to enroll in Part D will be forced to enroll (or otherwise pay the higher Part D premium when they enroll later). Those that then enroll in Part D will lose their eligibility to make HSA contributions. Alternatively, for purposes of an HRA, an employer can consider a portion of the amounts credited to the HRA in a given year as being used for prescription drug coverage. For HRAs that pay for both prescription drugs and other medical expenses (which is the norm), a portion of a year’s allocation should be reasonably estimated and allocated to prescription drugs. However, existing balances in the HRA that have been rolled-over from prior years cannot be used in valuing the arrangement. If the HRA is a stand alone HRA, then the HRA’s creditable coverage determination is made by treating the HRA as if it were a separate plan with no deductible and an annual limit equal to the amount of the credit for that year. Retiree Drug Subsidy The MMA provides employers and other plan sponsors of qualified retiree prescription drug plans the ability to receive tax-free drug subsidy payments for a portion of their plan’s prescription drug costs. In general, for each qualifying covered retiree, an employer or sponsor is eligible to receive payments of 28% of allowable drug costs that are within a certain cost threshold (for 2006 the threshold is between $250 and $5,000). Employers and sponsors who desire to claim the tax-free subsidy must apply each year, and for 2006 the deadline is September 30, 2005. Actuarial Attestation. Employers and sponsors who desire to apply for the subsidy must provide to CMS an attestation that the actuarial value of the retiree prescription drug coverage under their plan is at least equal to the actuarial value of the standard Part D benefit. In general, the attestation must be signed by a qualified actuary, must be based upon generally accepted actuarial principles and CMS actuarial guidelines and must include the following assurances – · The actuarial gross value of the retiree prescription drug coverage under the plan for the plan year is at least equal to the actuarial gross value of the standard Part D drug benefit for the plan year (the “Gross Test”); and · The actuarial net value of the retiree drug coverage under the plan for the plan year is at least equal to the actuarial net value of the standard Part D benefit for the plan year (the “Net Test”). The Gross Test is the same test that is used above in calculating whether a plan is providing creditable coverage. The Net Test, on the other hand, is an additional test that employers and sponsors must satisfy for purposes of the retiree drug subsidy, and is calculated by subtracting the retiree’s premium or contribution from the gross value of the employer’s or sponsor’s plan. For plans with multiple benefit options, each benefit option must separately pass the Gross Test, but the plan is allowed to pass the Net Test by either separately testing the benefit options or aggregating one or more options together into one option. Therefore, if some options fail the Net Test on an individual basis, employers will want to aggregate their options so that they can qualify for the subsidy on all their options. Account Based Health Plans. In its recent guidance, CMS clarified how account based health plans are treated under the actuarial equivalence tests of the retiree drug subsidy. For HRAs, claims paid from an HRA for Part D drugs will be eligible for retiree drug subsidy payments in the same manner as claims paid from any other non-account based health plan. Further, if a retiree participates in both an HRA and a related health plan and if the arrangement on a combined basis satisfies the Gross Test, then any contributions (e.g., after-tax contributions for COBRA beneficiaries) required under the HRA will be treated as any other retiree premium (and therefore excluded) under the Net Test. Alternatively, for purposes of determining eligibility and payments under the retiree drug subsidy, health FSAs are disregarded (for both tests), and funds contributed to HSAs and Archer MSAs cannot be used in determining whether the related high deductible health plan meets the actuarial equivalence tests. While employers and sponsors cannot receive retiree drug subsidy payments for HSAs and Archer MSAs, it is important to note that a retiree can withdraw funds accumulated in an HSA or Archer MSA on a tax-free basis to pay for Part D prescription drug co-payments and have those funds counted towards the retiree’s $3,600 true out-of-pocket (also referred to as “TrOOP”) limit. (The $3,600 limit is effective for 2006 and will be adjusted in future years.) This is important because once a retiree has reached the $3,600 TrOOP limit, catastrophic coverage under Part D takes effect. In addition, retirees who are at least age 65 can withdraw funds from an HSA or Archer MSA on a tax-free basis to pay for Part D premiums (as well as employer-provided retiree health insurance premiums). These withdrawals also do not affect the retiree’s TrOOP calculations under Part D. Looking Forward Under the final MMA regulations, health plans are required to inform CMS whether the prescription drug coverage they provide is creditable coverage. CMS has yet to issue guidance on the form and manner of this notification, but CMS has indicated that additional guidance will be forthcoming. In addition, CMS also intends to issue sample language that can be used for Certificates for future plan years. The information contained in this Legal Alert is not intended as legal advice or as an opinion on specific facts. For more information about these issues, please contact Mark Wincek or Mark Stember in the Washington office (202) 508-5800, Bill Vesely or Jennifer Schumacher in the Atlanta office (404) 815-6500, Craig Wheaton or Martha Sewell in the Raleigh office (919) 420-1700, or Bill Wright in the Winston-Salem office (336) 607-7300. The invitation to contact the above individuals is not to be construed as a solicitation for legal work in any jurisdiction in which the individuals are not admitted to practice. There will be no charge for the initial contact. Any attorney/client relationship will be confirmed in writing. You can also contact us through our Web site at www.KilpatrickStockton.com
· For plans that have integrated health coverage, the integrated coverage has (i) no more than a $250 deductible per year, (ii) a maximum annual benefit payment of at least $25,000, and (iii) no less than a $1,000,000 lifetime maximum; and · For non-integrated plans, the prescription drug coverage has (i) a maximum annual benefit of at least $25,000, or (ii) an actuarial expectation that the amount payable by the plan will be at least $2,000 per Part D eligible individual in 2006. Although most employer health plans will satisfy at least the first two requirements of the safe harbor, some employer health plans will not satisfy the 60% requirement. Therefore, those employers will need to hire an actuary to determine whether their coverage is creditable. Although there does not appear to be any direct requirement that creditable coverage must be re-tested each year, in practice most employers will need to re-test each year. This is because the employer will need to provide a Certificate to individuals who are newly eligible for Part D coverage during the coming year or otherwise provide it to all participants, and the employer will need to know whether the coverage is still creditable. (If the employer is applying for the retiree drug subsidy, the employer is required to re-test each year for actuarial equivalence under the retiree drug subsidy requirements.) In recent guidance, CMS has clarified how the determination of creditable coverage affects account-based health plans. Specifically, a health FSA is disregarded for purposes of determining whether the individual has creditable coverage, and coverage under an HSA or Archer MSA cannot be taken into account in determining whether the related high deductible plan qualifies as creditable coverage. (This means that a Certificate is not required for a health FSA, or the account portion of an HSA or an Archer MSA.) Further, it is important to note that some high deductible health plan (“HDHP”) designs that are paired with HSAs may not satisfy the creditable coverage requirements. If the HDHP is not creditable coverage, those employees who are eligible to enroll in Part D will be forced to enroll (or otherwise pay the higher Part D premium when they enroll later). Those that then enroll in Part D will lose their eligibility to make HSA contributions. Alternatively, for purposes of an HRA, an employer can consider a portion of the amounts credited to the HRA in a given year as being used for prescription drug coverage. For HRAs that pay for both prescription drugs and other medical expenses (which is the norm), a portion of a year’s allocation should be reasonably estimated and allocated to prescription drugs. However, existing balances in the HRA that have been rolled-over from prior years cannot be used in valuing the arrangement. If the HRA is a stand alone HRA, then the HRA’s creditable coverage determination is made by treating the HRA as if it were a separate plan with no deductible and an annual limit equal to the amount of the credit for that year. Retiree Drug Subsidy The MMA provides employers and other plan sponsors of qualified retiree prescription drug plans the ability to receive tax-free drug subsidy payments for a portion of their plan’s prescription drug costs. In general, for each qualifying covered retiree, an employer or sponsor is eligible to receive payments of 28% of allowable drug costs that are within a certain cost threshold (for 2006 the threshold is between $250 and $5,000). Employers and sponsors who desire to claim the tax-free subsidy must apply each year, and for 2006 the deadline is September 30, 2005. Actuarial Attestation. Employers and sponsors who desire to apply for the subsidy must provide to CMS an attestation that the actuarial value of the retiree prescription drug coverage under their plan is at least equal to the actuarial value of the standard Part D benefit. In general, the attestation must be signed by a qualified actuary, must be based upon generally accepted actuarial principles and CMS actuarial guidelines and must include the following assurances – · The actuarial gross value of the retiree prescription drug coverage under the plan for the plan year is at least equal to the actuarial gross value of the standard Part D drug benefit for the plan year (the “Gross Test”); and · The actuarial net value of the retiree drug coverage under the plan for the plan year is at least equal to the actuarial net value of the standard Part D benefit for the plan year (the “Net Test”). The Gross Test is the same test that is used above in calculating whether a plan is providing creditable coverage. The Net Test, on the other hand, is an additional test that employers and sponsors must satisfy for purposes of the retiree drug subsidy, and is calculated by subtracting the retiree’s premium or contribution from the gross value of the employer’s or sponsor’s plan. For plans with multiple benefit options, each benefit option must separately pass the Gross Test, but the plan is allowed to pass the Net Test by either separately testing the benefit options or aggregating one or more options together into one option. Therefore, if some options fail the Net Test on an individual basis, employers will want to aggregate their options so that they can qualify for the subsidy on all their options. Account Based Health Plans. In its recent guidance, CMS clarified how account based health plans are treated under the actuarial equivalence tests of the retiree drug subsidy. For HRAs, claims paid from an HRA for Part D drugs will be eligible for retiree drug subsidy payments in the same manner as claims paid from any other non-account based health plan. Further, if a retiree participates in both an HRA and a related health plan and if the arrangement on a combined basis satisfies the Gross Test, then any contributions (e.g., after-tax contributions for COBRA beneficiaries) required under the HRA will be treated as any other retiree premium (and therefore excluded) under the Net Test. Alternatively, for purposes of determining eligibility and payments under the retiree drug subsidy, health FSAs are disregarded (for both tests), and funds contributed to HSAs and Archer MSAs cannot be used in determining whether the related high deductible health plan meets the actuarial equivalence tests. While employers and sponsors cannot receive retiree drug subsidy payments for HSAs and Archer MSAs, it is important to note that a retiree can withdraw funds accumulated in an HSA or Archer MSA on a tax-free basis to pay for Part D prescription drug co-payments and have those funds counted towards the retiree’s $3,600 true out-of-pocket (also referred to as “TrOOP”) limit. (The $3,600 limit is effective for 2006 and will be adjusted in future years.) This is important because once a retiree has reached the $3,600 TrOOP limit, catastrophic coverage under Part D takes effect. In addition, retirees who are at least age 65 can withdraw funds from an HSA or Archer MSA on a tax-free basis to pay for Part D premiums (as well as employer-provided retiree health insurance premiums). These withdrawals also do not affect the retiree’s TrOOP calculations under Part D. Looking Forward Under the final MMA regulations, health plans are required to inform CMS whether the prescription drug coverage they provide is creditable coverage. CMS has yet to issue guidance on the form and manner of this notification, but CMS has indicated that additional guidance will be forthcoming. In addition, CMS also intends to issue sample language that can be used for Certificates for future plan years. The information contained in this Legal Alert is not intended as legal advice or as an opinion on specific facts. For more information about these issues, please contact Mark Wincek or Mark Stember in the Washington office (202) 508-5800, Bill Vesely or Jennifer Schumacher in the Atlanta office (404) 815-6500, Craig Wheaton or Martha Sewell in the Raleigh office (919) 420-1700, or Bill Wright in the Winston-Salem office (336) 607-7300. The invitation to contact the above individuals is not to be construed as a solicitation for legal work in any jurisdiction in which the individuals are not admitted to practice. There will be no charge for the initial contact. Any attorney/client relationship will be confirmed in writing. You can also contact us through our Web site at www.KilpatrickStockton.com
· For non-integrated plans, the prescription drug coverage has (i) a maximum annual benefit of at least $25,000, or (ii) an actuarial expectation that the amount payable by the plan will be at least $2,000 per Part D eligible individual in 2006. Although most employer health plans will satisfy at least the first two requirements of the safe harbor, some employer health plans will not satisfy the 60% requirement. Therefore, those employers will need to hire an actuary to determine whether their coverage is creditable. Although there does not appear to be any direct requirement that creditable coverage must be re-tested each year, in practice most employers will need to re-test each year. This is because the employer will need to provide a Certificate to individuals who are newly eligible for Part D coverage during the coming year or otherwise provide it to all participants, and the employer will need to know whether the coverage is still creditable. (If the employer is applying for the retiree drug subsidy, the employer is required to re-test each year for actuarial equivalence under the retiree drug subsidy requirements.) In recent guidance, CMS has clarified how the determination of creditable coverage affects account-based health plans. Specifically, a health FSA is disregarded for purposes of determining whether the individual has creditable coverage, and coverage under an HSA or Archer MSA cannot be taken into account in determining whether the related high deductible plan qualifies as creditable coverage. (This means that a Certificate is not required for a health FSA, or the account portion of an HSA or an Archer MSA.) Further, it is important to note that some high deductible health plan (“HDHP”) designs that are paired with HSAs may not satisfy the creditable coverage requirements. If the HDHP is not creditable coverage, those employees who are eligible to enroll in Part D will be forced to enroll (or otherwise pay the higher Part D premium when they enroll later). Those that then enroll in Part D will lose their eligibility to make HSA contributions. Alternatively, for purposes of an HRA, an employer can consider a portion of the amounts credited to the HRA in a given year as being used for prescription drug coverage. For HRAs that pay for both prescription drugs and other medical expenses (which is the norm), a portion of a year’s allocation should be reasonably estimated and allocated to prescription drugs. However, existing balances in the HRA that have been rolled-over from prior years cannot be used in valuing the arrangement. If the HRA is a stand alone HRA, then the HRA’s creditable coverage determination is made by treating the HRA as if it were a separate plan with no deductible and an annual limit equal to the amount of the credit for that year. Retiree Drug Subsidy
Although most employer health plans will satisfy at least the first two requirements of the safe harbor, some employer health plans will not satisfy the 60% requirement. Therefore, those employers will need to hire an actuary to determine whether their coverage is creditable. Although there does not appear to be any direct requirement that creditable coverage must be re-tested each year, in practice most employers will need to re-test each year. This is because the employer will need to provide a Certificate to individuals who are newly eligible for Part D coverage during the coming year or otherwise provide it to all participants, and the employer will need to know whether the coverage is still creditable. (If the employer is applying for the retiree drug subsidy, the employer is required to re-test each year for actuarial equivalence under the retiree drug subsidy requirements.)
In recent guidance, CMS has clarified how the determination of creditable coverage affects account-based health plans. Specifically, a health FSA is disregarded for purposes of determining whether the individual has creditable coverage, and coverage under an HSA or Archer MSA cannot be taken into account in determining whether the related high deductible plan qualifies as creditable coverage. (This means that a Certificate is not required for a health FSA, or the account portion of an HSA or an Archer MSA.) Further, it is important to note that some high deductible health plan (“HDHP”) designs that are paired with HSAs may not satisfy the creditable coverage requirements. If the HDHP is not creditable coverage, those employees who are eligible to enroll in Part D will be forced to enroll (or otherwise pay the higher Part D premium when they enroll later). Those that then enroll in Part D will lose their eligibility to make HSA contributions.
Alternatively, for purposes of an HRA, an employer can consider a portion of the amounts credited to the HRA in a given year as being used for prescription drug coverage. For HRAs that pay for both prescription drugs and other medical expenses (which is the norm), a portion of a year’s allocation should be reasonably estimated and allocated to prescription drugs. However, existing balances in the HRA that have been rolled-over from prior years cannot be used in valuing the arrangement. If the HRA is a stand alone HRA, then the HRA’s creditable coverage determination is made by treating the HRA as if it were a separate plan with no deductible and an annual limit equal to the amount of the credit for that year.
The MMA provides employers and other plan sponsors of qualified retiree prescription drug plans the ability to receive tax-free drug subsidy payments for a portion of their plan’s prescription drug costs. In general, for each qualifying covered retiree, an employer or sponsor is eligible to receive payments of 28% of allowable drug costs that are within a certain cost threshold (for 2006 the threshold is between $250 and $5,000). Employers and sponsors who desire to claim the tax-free subsidy must apply each year, and for 2006 the deadline is September 30, 2005.
Actuarial Attestation. Employers and sponsors who desire to apply for the subsidy must provide to CMS an attestation that the actuarial value of the retiree prescription drug coverage under their plan is at least equal to the actuarial value of the standard Part D benefit. In general, the attestation must be signed by a qualified actuary, must be based upon generally accepted actuarial principles and CMS actuarial guidelines and must include the following assurances –
· The actuarial gross value of the retiree prescription drug coverage under the plan for the plan year is at least equal to the actuarial gross value of the standard Part D drug benefit for the plan year (the “Gross Test”); and · The actuarial net value of the retiree drug coverage under the plan for the plan year is at least equal to the actuarial net value of the standard Part D benefit for the plan year (the “Net Test”). The Gross Test is the same test that is used above in calculating whether a plan is providing creditable coverage. The Net Test, on the other hand, is an additional test that employers and sponsors must satisfy for purposes of the retiree drug subsidy, and is calculated by subtracting the retiree’s premium or contribution from the gross value of the employer’s or sponsor’s plan. For plans with multiple benefit options, each benefit option must separately pass the Gross Test, but the plan is allowed to pass the Net Test by either separately testing the benefit options or aggregating one or more options together into one option. Therefore, if some options fail the Net Test on an individual basis, employers will want to aggregate their options so that they can qualify for the subsidy on all their options. Account Based Health Plans. In its recent guidance, CMS clarified how account based health plans are treated under the actuarial equivalence tests of the retiree drug subsidy. For HRAs, claims paid from an HRA for Part D drugs will be eligible for retiree drug subsidy payments in the same manner as claims paid from any other non-account based health plan. Further, if a retiree participates in both an HRA and a related health plan and if the arrangement on a combined basis satisfies the Gross Test, then any contributions (e.g., after-tax contributions for COBRA beneficiaries) required under the HRA will be treated as any other retiree premium (and therefore excluded) under the Net Test. Alternatively, for purposes of determining eligibility and payments under the retiree drug subsidy, health FSAs are disregarded (for both tests), and funds contributed to HSAs and Archer MSAs cannot be used in determining whether the related high deductible health plan meets the actuarial equivalence tests. While employers and sponsors cannot receive retiree drug subsidy payments for HSAs and Archer MSAs, it is important to note that a retiree can withdraw funds accumulated in an HSA or Archer MSA on a tax-free basis to pay for Part D prescription drug co-payments and have those funds counted towards the retiree’s $3,600 true out-of-pocket (also referred to as “TrOOP”) limit. (The $3,600 limit is effective for 2006 and will be adjusted in future years.) This is important because once a retiree has reached the $3,600 TrOOP limit, catastrophic coverage under Part D takes effect. In addition, retirees who are at least age 65 can withdraw funds from an HSA or Archer MSA on a tax-free basis to pay for Part D premiums (as well as employer-provided retiree health insurance premiums). These withdrawals also do not affect the retiree’s TrOOP calculations under Part D. Looking Forward
· The actuarial net value of the retiree drug coverage under the plan for the plan year is at least equal to the actuarial net value of the standard Part D benefit for the plan year (the “Net Test”). The Gross Test is the same test that is used above in calculating whether a plan is providing creditable coverage. The Net Test, on the other hand, is an additional test that employers and sponsors must satisfy for purposes of the retiree drug subsidy, and is calculated by subtracting the retiree’s premium or contribution from the gross value of the employer’s or sponsor’s plan. For plans with multiple benefit options, each benefit option must separately pass the Gross Test, but the plan is allowed to pass the Net Test by either separately testing the benefit options or aggregating one or more options together into one option. Therefore, if some options fail the Net Test on an individual basis, employers will want to aggregate their options so that they can qualify for the subsidy on all their options. Account Based Health Plans. In its recent guidance, CMS clarified how account based health plans are treated under the actuarial equivalence tests of the retiree drug subsidy. For HRAs, claims paid from an HRA for Part D drugs will be eligible for retiree drug subsidy payments in the same manner as claims paid from any other non-account based health plan. Further, if a retiree participates in both an HRA and a related health plan and if the arrangement on a combined basis satisfies the Gross Test, then any contributions (e.g., after-tax contributions for COBRA beneficiaries) required under the HRA will be treated as any other retiree premium (and therefore excluded) under the Net Test. Alternatively, for purposes of determining eligibility and payments under the retiree drug subsidy, health FSAs are disregarded (for both tests), and funds contributed to HSAs and Archer MSAs cannot be used in determining whether the related high deductible health plan meets the actuarial equivalence tests.
The Gross Test is the same test that is used above in calculating whether a plan is providing creditable coverage. The Net Test, on the other hand, is an additional test that employers and sponsors must satisfy for purposes of the retiree drug subsidy, and is calculated by subtracting the retiree’s premium or contribution from the gross value of the employer’s or sponsor’s plan. For plans with multiple benefit options, each benefit option must separately pass the Gross Test, but the plan is allowed to pass the Net Test by either separately testing the benefit options or aggregating one or more options together into one option. Therefore, if some options fail the Net Test on an individual basis, employers will want to aggregate their options so that they can qualify for the subsidy on all their options.
Account Based Health Plans.
In its recent guidance, CMS clarified how account based health plans are treated under the actuarial equivalence tests of the retiree drug subsidy. For HRAs, claims paid from an HRA for Part D drugs will be eligible for retiree drug subsidy payments in the same manner as claims paid from any other non-account based health plan. Further, if a retiree participates in both an HRA and a related health plan and if the arrangement on a combined basis satisfies the Gross Test, then any contributions (e.g., after-tax contributions for COBRA beneficiaries) required under the HRA will be treated as any other retiree premium (and therefore excluded) under the Net Test. Alternatively, for purposes of determining eligibility and payments under the retiree drug subsidy, health FSAs are disregarded (for both tests), and funds contributed to HSAs and Archer MSAs cannot be used in determining whether the related high deductible health plan meets the actuarial equivalence tests.
While employers and sponsors cannot receive retiree drug subsidy payments for HSAs and Archer MSAs, it is important to note that a retiree can withdraw funds accumulated in an HSA or Archer MSA on a tax-free basis to pay for Part D prescription drug co-payments and have those funds counted towards the retiree’s $3,600 true out-of-pocket (also referred to as “TrOOP”) limit. (The $3,600 limit is effective for 2006 and will be adjusted in future years.) This is important because once a retiree has reached the $3,600 TrOOP limit, catastrophic coverage under Part D takes effect. In addition, retirees who are at least age 65 can withdraw funds from an HSA or Archer MSA on a tax-free basis to pay for Part D premiums (as well as employer-provided retiree health insurance premiums). These withdrawals also do not affect the retiree’s TrOOP calculations under Part D.
Under the final MMA regulations, health plans are required to inform CMS whether the prescription drug coverage they provide is creditable coverage. CMS has yet to issue guidance on the form and manner of this notification, but CMS has indicated that additional guidance will be forthcoming. In addition, CMS also intends to issue sample language that can be used for Certificates for future plan years.
The information contained in this Legal Alert is not intended as legal advice or as an opinion on specific facts. For more information about these issues, please contact Mark Wincek or Mark Stember in the Washington office (202) 508-5800, Bill Vesely or Jennifer Schumacher in the Atlanta office (404) 815-6500, Craig Wheaton or Martha Sewell in the Raleigh office (919) 420-1700, or Bill Wright in the Winston-Salem office (336) 607-7300. The invitation to contact the above individuals is not to be construed as a solicitation for legal work in any jurisdiction in which the individuals are not admitted to practice. There will be no charge for the initial contact. Any attorney/client relationship will be confirmed in writing. You can also contact us through our Web site at www.KilpatrickStockton.com
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