Tackling employee benefits and third party risks

As seen in Captive International

The “new normal”, whether it feels normal or not, is not on the horizon, but at your doorstep. Cutting-edge businesses are taking a modern approach to address the challenging market conditions while still providing competitive benefits, retaining and attracting talent, and being risk-smart and mindful of their bottom lines.

Thinking holistically and reframing your strategy around medical stop-loss, life and disability, and voluntary benefits are just a few of the ways you can use your captive to stay ahead.

 

Harmonizing Your International Benefits

As Seen On Captive Insurance Company Reports

As organizations have grown and globalization has created an international workforce, a lot of employers are faced with challenges around the selection, administration, and management of their employee benefits across the globe. International benefits programs can be a complex maze to navigate, given the varying local cultures, business practices, and legislation.

We are seeing an uptick in organizations looking to harmonize their global programs. The COVID-19 pandemic has accelerated this need. With increasing globalization and limitations of travel, employees are spending more time online, virtually engaging with colleagues across the world. We have come to rely on digital connectivity, which makes it easier to share ideas and understand the experiences of others. As many organizations moved to a remote work environmeInternational Employee Benefitsnt, employees are wondering why they ever needed to be in a specific location every day, and relocation is on the rise. With all of this said, a siloed benefits program may not align with the upwards trend of globalization. As your international employees meet online, you will want them to find comparable policies and practices being followed, regardless of physical location.

Multinational corporations as employers are relying on businesses or consumers from other countries to drive business growth. It is important to understand how to appeal to a diverse customer and employee base—how to celebrate differences while bringing everyone together. Benefits and wellness programs can serve as a unifier, engrained in your culture as a way for employees to feel a sense of belonging. Creating and maintaining a strong culture are exceedingly difficult when you have an international workforce, and a synchronized benefits program is a great way to “unite” your people.

Traditionally, there have been two major schools of thought on international programs. One is to have a completely decentralized benefits program, where each country’s local teams have control over benefit offerings. This approach has the least resistance as local teams are able to make decisions in the best interest of the local employees. From a global perspective, this limits the benefits that accrue to the organization as there is no coordination of insurers, limiting the ability to get preferential pricing. From an employee’s perspective, moving from one country to another for short-term and long-term assignments can mean a complete overhaul of their benefits. Alternatively, the second approach is where the head office controls most major aspects of the benefit offerings globally—including the insurers and the benefit plan designs. This option usually generates savings for the company, as employers are negotiating for global contracts. However, local partners usually push back on this approach or require accommodations. Providing accommodations and carve-outs creates confusion and a lack of cohesiveness, eventually resulting in the slow disintegration of the global program.

One may wonder why creating such a program is the need of the hour. Most employers are interested in providing market competitive benefits in a cost-effective manner, while being able to leverage the scale of the company across the globe. A good benefits strategy also acknowledges and adjusts to local practices and cultural needs. Finally, employers are looking to ensure that the benefits they provide are valued by their employees, who represent a diverse population across the globe.

As you can see, both of the approaches mentioned have pros and cons, but most importantly, they do not provide a sustainable way to build a long-standing multinational employee benefits program. Luckily, there is a more advantageous option. Leveraging a captive can provide organizations with the ability to create a third kind of program structure, one which brings the positive aspects of the first two approaches and builds on them to create a framework that adds value to all stakeholders—employees, employer, local, and international human resources (HR) teams.

This approach allows for centralized decision-making as it relates to insurer selection. Most of the clients we work with choose to select one or two multinational insurers, creating flexibility for local teams. Due to a stronger employer negotiating position, the centralized insurer selection process ensures lower rates and pricing across benefit lines and geographies. The transaction is structured such that the risk associated with benefits is ceded by the insurers to the employer’s captive, where it is pooled across all lines of coverage and countries. This creates greater stability for the program as a whole and limits the possible rate increases for programs and countries due to one bad claims year. Using the captive also provides employers with the ability to go beyond what local insurers will provide. Since the risk of the plan is with the captive, the insurers operate as third-party administrators and are usually willing to provide better coverage terms than under traditional fully insured plans. In addition, in cases where employers are looking to go above and beyond to provide better-than-market benefits, the captive can help fund these elements at cost. For instance, we helped a major technology employer looking to provide HIV-related coverage for its employees across the globe, and they were able to have the benefit be administered by the insurers on a local basis and pay for it through the captive. Without a captive, funding for this coverage might be difficult as local insurers may not know how to price this coverage or may not want to cover it under their plan design at all. In addition to HIV, mental- and nervous-related benefits along with fertility programs are other popular coverage employers like our client mentioned are providing in this manner, as many countries do not offer these benefits as part of their standard offerings, but they are benefits yielding an increasing employee interest.

From a local HR perspective, such a program provides some flexibility for insurer selection while being able to control local plan offerings. The additional plan offerings that may not be provided on a local level create a huge value proposition, ensuring local HR buy-in for this program.

Captives and multinational benefits programs not only save money while providing better benefits, but they also provide a holistic view of the programs from a risk management perspective and lower the administrative burden. To recap, here are some advantages that make such a program extremely attractive.

  • Fill gaps in critical coverage. Cultural norms and market availability play a huge role in what your employees across the globe want and what they can access. A benefit available in the United States may not be available through commercial insurers in Brazil. A captive allows for customized coverage and can help even the playing field for your international employees. For instance, COVID-19 has heightened the need for covered mental health assistance as a component of a health plan. A lot of international plans do not provide this essential benefit. A captive is a cost-effective way of obtaining this coverage for all of your employees.
  • Obtain higher limits. Using multinational pooling programs and captives allows employers to increase the coverage limits available to local employees. For instance, most insurers have filed local policies allowing for life insurance benefits of up to $5 million in most countries. However, they offer guaranteed issue limits of around $500,000 in international markets. Using this approach, we have seen insurers increase guaranteed issue limits.
  • Improve your reporting. A captive allows the parent organization to be one step closer to claims and plan activity. With fewer intermediaries than a traditional insurance structure, a captive leads to greater transparency and faster access to data. As a result, captive owners have enhanced data management and tracking capabilities they can use to inform decisions in real-time. This way, you can follow your investment closely and understand your return or where changes need to be made. With a global workforce, this becomes critical.
  • Gain flexibility. In traditional fully insured programs, there are limitations on the plan designs you can create. A captive creates an opportunity to customize your plans according to your unique workforce, and with a range of international needs, this will become even more valuable. COVID-19 has shed light on the importance of such flexibility, with organizations seeing changes in exposures and gaps they did not know existed.
  • Lessen your administrative burden. By eliminating conflicts and engagements with local brokers, employers reduce the time spent on administration as these needs are met by a centralized team of support staff who have all your plan information and do not need to be brought up to speed on the cultural nuances of the programs and geographies. Also, captives eliminate the need for bidding exercises and negotiations on both the central and local levels. Due to the transparency of a captive program, there is almost no need for the bidding of insurers to get lower pricing. The captive is capturing any surplus in pricing and using it to provide improved benefits to the employees.
  • Answer to a hardening market. We saw markets starting to harden last renewal season, which is a phenomenon caused by a culmination of regulatory changes and financial markets. These, along with a global pandemic, have caused insurance markets to harden at a faster rate. Today, insurers are dealing with poor investment income. With most being public companies, insurers are facing pressure to keep their share prices buoyant, requiring higher profit margins. This series of challenging circumstances is likely to result in an increase in premiums. Globalization means that no region is isolated from such conditions, and by harmonizing your international benefits, you will have more leverage to negotiate based on economies of scale. A captive is a tactical response to a hardening market with their ability to customize the coverage and fund unique expenses such as those related to COVID-19.

Maintaining an international benefits program that is comparable in value across your diverse workforce is no small feat. With globalization, digitization, and relocation on the rise, your employees are not siloed within their geography, and an integrated benefits program can serve to bring your employees together and improve your corporate culture. We have seen great success with multinational corporations moving toward a more centralized approach, where the same robust set of benefits can be offered to employees across the globe. By pairing this strategy with a captive, you can offer enhanced benefits, additional coverage, and plan designs customized for your population, all while generating savings, improving your data and reporting, and “future-proofing” your benefits program. If you have questions about how to get started on harmonizing your international benefits or are not convinced why you should, please get in touch.

Leveraging A Captive to Finance Your Employee Benefits Risk

For most companies today, its people are one of the largest investments its makes. COVID-19 accentuated this point and further showed us how the health of a company depends in large part on the health and wellbeing of its workforce. Providing competitive benefits is not just the right thing to do, but a sound business decision. Employee benefits usually account for one of the largest expense line items on an income statement for organizations. In a world where employee benefits consistently become both more important and more expensive, businesses of all types are looking for an affordable mechanism to finance these risks.  One solution that has become central to discussions about employee benefits has been captive insurance.

To provide some background, a captive is an insurance or reinsurance company – which can help insure or reinsure the risks of its owners, the parent company (or companies).

Employee Benefits & Captives

Over the past decade as healthcare and benefit costs have been rising, captives have become the go-to solution for organizations looking to bend the healthcare cost curve as well as create a more efficient employee benefits program.  More recently, however, organizations are recognizing the many qualitative advantages of a captive that can help attract and retain employees – a company’s most important asset. As we enter a new decade, these qualitative advantages or “soft costs” of human capital will drive the next iteration of captive insurance.

Traditionally, captives have been viewed as purely a funding mechanism for employee benefits that provides the following advantages:

  • Improved cost savings
    • Better control of premium costs
    • Reduce frictional costs (commissions, taxes, insurer profit, administration)
    • Capture underwriting savings
    • Earn investment returns
    • Improve cash flow for parent organizations
  • Improved risk management & increased control
    • Enhanced reporting – captive programs not only provide data transparency, but they also provide reporting in a more timely manner allowing stakeholders to make decisions regarding potential plan design changes for the upcoming year.
    • Centralized risk pool – from an organizational risk perspective, leveraging a captive allows risk managers to have a more complete understanding of the risks associated with the programs. Also, life and disability lines are usually considered to be third party risks and have a positive impact on the captive’s risk distribution.
    • Non-correlated risk – employee benefits usually add non-corelated risk for existing captive programs, thereby reducing the risk exposure to the captive.
    • Quantification of loss prevention programs and wellness initiatives – by utilizing a captive, the organization has the ability to implement data analytics programs, that provide actionable insights on the effectiveness of existing programs and the current cost drivers.
    • Design coverages and provisions for programs that are unique to the parent company – every organization has a unique set of risks and captives can be used to fill in gaps in the existing benefit programs.

While captives are a long-term financial strategy, in our view, the next generation of captive insurance will have a sharper focus on the soft costs of human capital, such as:

  • Attracting and retaining employees through innovative techniques and forward-thinking tools
    • While employee benefits account for large costs for employers, they are running a significant risk by not providing the right benefits. A comprehensive benefits package that’s meaningful to employees is consistently ranked at the top of the list when employees are deciding on a new position.
    • Owner vs. Passive buyer: A captive allows for customized benefits programs to meet the needs of your unique demographic. Employees at a technology company will have different priorities and expectations than, for example, those that work in manufacturing. With a captive you can understand those unique needs and meet them better than you could as a passive buyer with a commercial carrier, in a cost-effective manner. Addressing these specialized needs will go a long way in terms of retention and engagement.
    • By establishing a captive, employers can open doors to focus on human capital and the more qualitative aspects of a program
      • By creating a profit center, captives create cost savings that companies can then allocate towards preventative, wellness, or engagement programs.
    • A captive enables the parent organization enhanced data analytics. This data comes in months sooner than it would with a commercial carrier, meaning you can analyze your programs and make real-time decisions to yield better claims results. For example, if you know one of your biggest population health issues is diabetes, you can establish programs to address diabetes before your renewal is up. As a passive buyer with commercial carriers, the information typically comes in too late to make any relevant changes for that plan year.

Which Benefits Can I Fund Through a Captive?

A wide range of employee benefits may be funded through a captive – the most common coverages are Medical, Life, Disability, Retiree Medical and Voluntary Benefits.

Captives can be used to fund Employee Retirement Income Security Act (ERISA), or non-ERISA benefits. ERISA benefits are primarily the benefit plans sponsored by and contributed to by employers. Life and Disability plans are usually ERISA in nature. These plans are subject to federal oversight, under the auspices of the Department of Labor (DOL) and require express approval from the DOL to fund them in a captive. Approval from the DOL is subject to meeting certain criteria – using an A rated fronting carrier, not paying any more than market rates for the coverages, no direct commissions as part of the contract, requirement for an indemnity contract, to name a few.

Medical stop-loss is usually not considered to be subject to ERISA and has become an extremely popular benefit to add to a captive. The reason for this has been two-fold. Firstly, the rising cost of catastrophic claims. Self-insured organizations are increasingly concerned about the financial impact of high cost claims – unfortunately seeing $1M or $2M claims is becoming commonplace. One such large claim could have a material impact on the financial sustainability of the program. Second, the hardening insurance market is driving employers of all sizes towards a captive based stop-loss solution, as it reduces the opaqueness of the pricing process and helps employers get a much clearer understanding of their premiums and cost drivers. Usually a captive stop-loss program involves the employer creating an annual aggregate limit, and purchasing excess coverage from the commercial markets above the captive’s aggregate retention,, protecting the captive from most catastrophic claims.

Long-tail benefits such as group universal life insurance and long-term disability are ideal captive candidates. Benefits that pay out over multiple years (e.g. long-term disability and retiree medical), provide cash flow stability and loss predictability.

Using a captive for voluntary benefits has recently risen in popularity. This is a cost-efficient way of offering benefits that your employees can choose to participate in, or not. More and more employers are turning to this strategy as healthcare becomes more expensive, as a way to supplement benefits and lessen both their financial burden and the financial burden faced by their employees. One of the most attractive elements of writing voluntary benefits into your captive is that voluntary benefits typically have a very low loss ratio, which means they can generate a lot of savings within a captive. Those savings can then be leveraged to reduce premiums for employees or expand the coverage offered. An example of a prime voluntary benefit often offered in a captive structure is hospital indemnity, which can be critically helpful coverage, but one that is often otherwise too expensive to fund.

 

Retirement

How it Works

Unlike property and casualty lines of coverage, employee benefit lines have a unique value proposition. They allow organizations to recapture dollars that would have otherwise gone to an insurance carrier. Both life and disability coverages use a fronted carrier, i.e. a commercial carrier stands in front of the captive so that from an employee perspective there is no change in the way they interact with the insurance company. On the back end, the carrier cedes risk and premiums to the captive.

The illustration to the right shows how a typical fronted captive program works.Employee benefits captive

 

Under such an arrangement the fronting insurer continues to administer the program. The employer pays the fronting insurer an annual fee for its services, allowing the captive to retain underwriting profit (if any) from the program. Depending on the risk appetite of the organization and the results of the actuarial modeling, the employer may choose to buy reinsurance for the program.

 

In Closing

The typical steps involved in adding benefits to an existing captive or forming a new captive are a feasibility study which outlines qualitative and quantitative factors for consideration, such as potential savings, program structures, design alternatives, insurance considerations, and implementation requirements.

Today those in the insurance industry are facing difficult circumstances on a variety of fronts. The recent pandemic has led to hardening of markets. We are seeing substantial rate increases for clients. Captives offer a solution to mitigate these increasing costs in a sustainable manner. In addition, captives provide access to additional data and insights that can help organizations get a clearer understanding of claims drivers and therefore allow for implementation of solutions and tools that reduce claims costs. Further, captives provide organizations the ability to impact the soft costs of human capital by identifying and crafting unique solutions to meet their employees’ needs, more important now as the pandemic shed light on gaps in coverage many did not realize existed.

Captives are useful and versatile risk financing tools, especially for employee benefits. They provide significantly better cash management than can be provided through a trust and can produce impressive cost savings as compared to fully insured guaranteed cost plans.

Large Companies and Medical Stop-Loss

Medical stop-loss coverage protects self-insured groups from catastrophic medical claims. Medical stop-loss has long been used as risk management tool by small- and medium-sized organisations to limit their exposure to medical claims above their desired retention levels. This strategy has been used by single parent programs as well as group captive programs.

The reason this strategy has been more popular in the mid-market is because of two primary reasons. First, businesses have wanted to insulate themselves from catastrophic claims risk, as one large claim could have a material impact on the financial sustainability of the program. Second, the relatively small size of the groups means greater variability from an actuarial perspective. In comparison, large companies have stronger balance sheets allowing them to take on a more aggressive risk management strategy and reduce third party spend with insurers.medical stop-loss captives

As I write this in April of 2020, there are a myriad of unprecedented challenges facing both small and large employers and medical stop-loss can help mitigate some of these concerns. Recently, we have seen a shift in the market where large employers are increasingly becoming interested in reviewing the possibility of leveraging a captive to provide medical stop-loss coverage. I anticipate this trend to continue. Here’s why:

  1. Hardening markets

This past renewal season, we saw that markets are starting to harden, and given the current Covid-19 pandemic and the financial and economic climate, this is bound to continue. A variety of factors have contributed to this including regulatory changes (ACA and healthcare reform) and many recent natural disasters (Hurricane Harvey, California wildfires, etc.). Insurers for a large part of the past decade have benefited from the favorable financial markets world over, thereby reducing their need to increase rates to continue to make their target earnings per share (EPS).

As we stare towards the possibility of a recession and reduced economic output, poor investment income will have an adverse impact on insurance company financials. Further, as markets tighten, access to inexpensive cash is becoming harder. Since most insurance companies are public, the increased pressure to keep their share prices buoyant is going to result in them wanting to beat their expected EPS – which requires higher profit margins. Finally, as reserves balances diminish due to market conditions, principles of conservatism are going to require them to shore up financials, and the easiest way to do this is by increasing premiums.

These factors coupled with the ongoing pandemic, which will likely result in an increase in aggregate claims, led me to believe hardening insurance markets are upon us. This is likely to result in an increase to reinsurance costs for employers who are currently self-insured. A well-structured medical stop-loss solution can help employers navigate these market conditions by providing them greater control over the program and creating an alternate avenue for reinsurance.

Hardening markets make captives more favorable, as they allow for customized coverage otherwise unavailable in the commercial market. Employers currently using captives have been provided an opportunity to leverage the captive program to fund for Covid-19-related expenses. For non-captive employers, this impact is felt directly on their financial statements.

  1. Cashflow volatility due to higher claims costs

Claims costs have been increasing at an aggressive pace. The US has long been criticized for poor population health management, with rising chronic conditions like diabetes that are expensive to treat. In addition, the pricey cost of medication has made extremely high cost claims a reality of healthcare. Claims in excess of $1m are becoming commonplace. For large employers, who are traditionally self-insured, such claims cause volatility from a cashflow perspective, making it harder for finance teams to budget and build expected proformas. Using a medical stop-loss program eliminates this volatility as claims above the self-insured retention level are funded in the captive, creating a level funded premium plan.

  1. Upwards healthcare trend

According to studies by , while medical cost trend has been flat for a couple years, it is expected to increase from 5.7% to 6% in 2020. This rise in healthcare costs is attributable to an increase in the utilization rates. Medical trend increases are outpacing those of inflation, which was 2.07% in 2018 and 1.55% in 2019.

As a result, employers have had to leverage solutions such as high deductible health plans and other forms of cost sharing to bend the healthcare cost curve. The crux of the issue is that now organisations are having to combat both rising medical trends as well as increasing claims costs, while still needing to retain talent and provide competitive benefits.

A well-crafted medical stop-loss solution can help ease the burden for employers and provide them a sustainable way to bend the healthcare cost curve. Development of a formal reserve mechanism is an efficient way for employers to set aside dollars to mitigate large cost increases in the future. While an employer cannot control what happens in the insurance and healthcare markets, they can make the decision to put themselves in a position to be able to navigate the landscape more efficiently. We are seeing an increasing number of CFOs drive conversations around better managing employee benefits spend as it is becoming one of the largest expense items for organisations.

  1. Control

By writing stop-loss into a captive, an employer can leverage captive savings to focus on initiatives most useful for its employee demographic. We have seen employers use the captive savings for wellbeing initiatives as well as cost control programs focused on disease management for conditions like diabetes or musculoskeletal problems. This kind of structure can then be tied with programs dedicated to population health management, wellness and health advocacy for a robust, employee-first package aimed at gradually reducing claims costs.

Using a captive provides employers access to data in a timely manner, allowing them to better analyse and review drivers of claims, in turn providing them an opportunity to implement measures that would focus on addressing those drivers. While this is possible without a captive, we have seen employers are more engaged when using a captive — meaning they are more likely to create a structured approach to claims and cost management leveraging the captive. In my view, this is because of lack of funds for such initiatives and the lack of a structured risk framework in some cases. Using a captive to underwrite medical stop-loss addresses both of these aspects.

Transparency is one of the core benefits of a captive. Once organisations begin to use a captive funding solution for its medical spend, they usually begin to expand their horizons for other cost reduction initiatives. One such initiative has been carving out drugs (Rx). Using a pharmacy benefit management (PBM) solution can generate additional savings ranging between 15% to 30% of Rx spend. These savings are in addition to those that an employer may recognize by restructuring their funding approach. Further, these savings have a multi layered benefit, reducing the overall medical trend and generating additional reserves for the program to offset possible cost increases in the future.

In general, large employers are more accustomed to customization and retaining control, so a captive program for medical stop-loss aligns with their needs and enhances their ability to control their healthcare programs. Better data analytics and understanding of claims also provides employers the ability to be more reactive and make necessary changes quickly, in a much more agile setup. A captive provides monthly and quarterly reports which are usually much more detailed and timelier than those provided by a commercial insurer. Finally, adding additional risk to the captive also helps the risk managers develop a more comprehensive understanding of enterprise risk at large.

Medical stop-loss coverage in a captive continues to be a prudent business strategy for companies of all types and sizes. It creates multi-layered protection. Large employers are beginning to realize the attractiveness of such a program, whose advantages have been especially highlighted lately due to market and global economic shifts and conditions.

COVID-19 Update Employee Terminations, Furloughs, and Lay-offs: COBRA, Reinstatement, and Closed Businesses

As much of the country is locked-down due to coronavirus 19 (COVID-19), employers have concerns regarding their employee benefit programs. This may stem from a reduction in hours and, unfortunately, from terminating, furloughing, or laying-off employees – at least temporarily. The following are considerations for employers when addressing employees’ benefits during a layoff or other temporary separation from employment.

Plan Documents and Termination vs. Furlough vs. Lay-Off

Termination, furlough, and lay-off are not defined terms under ERISA or the Affordable Care Act. A furlough is generally considered to be a mandatory leave with limited or no pay, with the expectation that employees return to work once regular business resumes. A termination and a lay-off are more similar, but an employee who is temporarily laid off will likely be asked to return to work.  The problem from an employee benefits perspective is that plan documents do not usually differentiate between an employee who is terminated versus one who is laid off versus one who is furloughed. For benefits purposes, eligibility is generally described as an active full-time employee or an employee who works at least a minimum number of hours per week (e.g., 30). If an employee is under protected leave—such as FMLA—benefits continue during leave. This means that any employee who is not meeting the hours requirement or is not actively at work (work from home is considered actively at work) based on being terminated, furloughed, or laid off–even temporarily—will generally have their benefits terminated and receive an offering of COBRA, state continuation, or no offer of continuation depending on the employer’s size and state in which they are located.

It is important to review the plan documents from the carrier to determine whether it’s relevant whether leave is paid or unpaid, and to determine how long benefits may continue during a furlough or layoff. It is also important to determine if the carrier will allow coverage to continue as long as premiums continue to be paid, during a public health emergency.  For a self-funded/self-insured plan, the employer should look at its own summary plan description, plan document, and the stop-loss policy to determine if there how coverage is affected during a furlough or layoff.

A reduction in hours, which includes a temporary lay-off and furlough, is considered a COBRA qualifying event if it results in a loss of coverage. If an employer has fewer than 20 employees, state continuation law (“mini-COBRA”) may apply.  The IRS COBRA regulations provide that a reduction in hours for a qualifying employee occurs when there is a decrease in hours an employee is required to work or actually works, and is not accompanied by an immediate termination of employment. If a group health plan eligibility depends on number of hours worked in a given period—such as 30 hours per week—and the employee is not working or has not worked those hours, it is considered a reduction in hours.

If there is no difference in the plan documents for furloughed, laid-off, or terminated employees and the carrier will not grant a concession, then a reduction in hours or no longer working is a qualifying event and employees should be terminated from the group health plan. We understand this can be hardship and difficult decision to make during a public health emergency.

Also keep in mind that loss of coverage opens a HIPAA special enrollment period for an employee to enroll in a spouse’s plan, if one is available.

COBRA Offering and Assistance

If an employee is eligible for COBRA, an employer must follow COBRA requirements including sending election notices and allowing grace periods. One concern for employers is whether employees will be able to afford COBRA while not working during a public health emergency. An employer does have options in regards to offering COBRA payment assistance to employees.

COBRA sets the premium limit at 102% of the cost of coverage; however, an employer is not required to charge the full 102%. An employer can set a COBRA rate to reflect the amount an active employee pays for benefits and the employer can continue to pay their portion. Employers should consider applicable nondiscrimination requirements when deciding whether to change the contribution for all COBRA participants or just those who have a reduction in hours due to a public health emergency. One caveat is, of course, that the payments made by the employee during unpaid leave will be paid post-tax. This may also pose an issue for employees that may not be able to afford their portion of a premium while not receiving a paycheck.

As mentioned, an employer may subsidize all or a portion of the COBRA premium while employees are laid off or on furlough. An employer could also set up a repayment plan, where employees repay an employer for a portion of the COBRA premium when they return to work. Employers may wish to have employees agree to repayment terms and a schedule before providing subsidized COBRA. Employers should consult with benefits counsel when drafting a repayment agreement.

Applicable Large Employer and Stability Periods

Another situation is when an employee is in a stability period as full-time, meaning they should be treated as full-time for purposes of the ACA’s employer shared responsibility provision (ESRP) and continue to be offered health coverage even if they are not working full-time. Under the “look-back” measurement method, an employee that worked full-time hours during the measurement period generally must be treated as full-time for their entire stability period unless they are terminated. An employer may design its plan to terminate coverage (and offer COBRA) to employees who are in a stability period but have experienced a recent reduction in hours. If an employer chooses to terminate health benefits for an employee in a stability period (but the employee is still employed), the employer may be exposed to the “affordability” penalty if an employee receives a premium tax credit for Marketplace coverage (as COBRA coverage is unlikely to be “affordable” in these situations). One way to help with potential exposure is to subsidize COBRA, to make sure that the offering still meets affordability under the ACA.

Return to Work and Reinstatement of Benefits

For group health plans, the ACA requires that benefits be reinstated, if the employee was enrolled prior to leave, and the unpaid leave did not extend for more than 13 consecutive weeks (26 for educational institutions). If an employee was not enrolled in benefits at the time they left (i.e., because they previously waived an offer of coverage), they are not required under the ACA to be reinstated on benefits. If an employee was in a waiting period, then their time on the waiting period is usually added to whatever remains upon their return. For example, assume an employer’s waiting period is first of the month following 60 days. An employee is temporarily laid off on day 31, due to COVID-19. Upon return to work, 30 days are credited towards the waiting period and the employee should be able to enroll the first of the month following 30 days (because he served 30 days previously).  The facts and circumstances, along with terms of the plan should be reviewed to confirm how waiting periods and reinstatement works in specific situations.  If leave extends for a longer duration, the waiting period may reset.

Non-COBRA Eligible Benefits

For benefits that are not COBRA eligible, such as disability and life insurance, an employer should discuss options with its carrier and broker. A carrier may allow temporary continuation of coverage for employees that are furloughed, laid-off, terminated, or not meeting hour requirements for eligibility if the premiums continue to be paid.

Public Health Emergency as Qualifying Event to Enroll

Carriers should be contacted to determine if they will allow the public health emergency to be considered a qualifying event to allow employees to enroll on a plan. Some carriers are allowing this. New state regulations and emergency declarations should also be reviewed, to determine if fully-insured plans are required to allow enrollment or if the Marketplace Exchange is allowing a special enrollment onto an individual plan during this time. If an employer has a self-funded plan, it should review its own plan documents if it is considering amending to allow a special enrollment to occur during public health emergencies.  The employer should ensure their stop-loss carrier agrees, and they should also consider any potential section 125 issues (employee contributions may need to be after-tax for the remainder of the plan year, if mid-year enrollment is not pursuant to a change in status event).  Note that section 125 permits employees to make a new election to participate upon a return from unpaid leave that lasts more than 30 days.

Employees Paying Premiums

If an employer has terminated, furloughed, or laid-off employees but has allowed them to continue benefits, the employer needs to determine if and how they want employees on unpaid leave to pay for their premium contribution. An employer can require a weekly or monthly check to be sent in for any benefit offering—including medical, dental, vision, disability, life, etc., as long as coverage continues. It also includes voluntary products that an employee wants to continue. Pay-as-you-go should be offered as an option to employees, although an employer could also set-up a repayment plan with employees where the employer subsidizes the entire premium and the employee repays a portion on return to work. Counsel should be consulted to help write a repayment agreement and employers should ensure that employees understand what it entails.

Closed Business- What Now?

Some employers are having to close down their entire businesses and no longer operate at all. When a business closes, benefits also end. This is for businesses that are completely closed—not just temporarily. Without any active employees, the insurance carriers may not be willing to maintain coverage.  There may be options for employees to convert certain policies into an individual policy, and carriers should be contacted to help make this determination. If conversion is possible, this should be communicated to former employees so they are aware of their choice. If COBRA and state continuation does not have to be offered because the group health plan has ceased altogether, an unavailability of COBRA notice should be provided. For those who are experiencing this, a business closing its doors and employees—as well as owners—no longer working (and losing coverage) is a qualifying event to enroll for individual coverage or other employer-sponsored coverage (such as if an employee’s spouse has employer coverage). If the business reopens, it can start a new group health plan as well as other benefits.

What Employers Should Do

If an employer has questions, they should ask their broker and carrier to see what options are available to continue to maintain employees’ or former employees’ benefits, as well as if they want to terminate coverage. During a public health crisis, there are options to help elevate concerns with benefit offerings. There may also be tax credit and financial assistance available for some employers at the state level, as well as potentially the federal level.