Congress Passes the American Rescue Plan Act

Congress has passed, and President Biden has signed, the American Rescue Plan Act, 2021 (ARPA), the third COVID-19 stimulus bill.  This new $1.9 trillion stimulus package includes several health and welfare benefits-related provisions relevant to employers and plan sponsors, as summarized below. COVID-19 law

FFCRA Paid Leave Extended and Enhanced

While COVID-19 vaccines are starting to become more readily available, the pandemic continues. In recognition, Congress extended through September 30, 2021, the refundable payroll tax credits for emergency paid sick leave (EPSL) and extended family and medical leave (E-FMLA), which were enacted pursuant to the Families First Coronavirus Response Act.  As with the extension through March 31, 2021 under the second stimulus package (the Consolidated Appropriations Act, 2021), only the tax credits are extended, which means compliance with the EPSL or E-FMLA requirements is voluntary for employers after December 31, 2020.

The ARPA expands FFCRA leave in several ways for employers who choose to offer it from April 1, 2021 through September 30, 2021:

  • The 10-day limit for EPSL resets as of April 1, 2021. Employees were previously limited to 80 hours from April 1, 2020 through March 31, 2021.
    • Paid leave continues to be limited to $511 per day ($5,110 total) for an employee’s own illness or quarantine (paid at the employee’s regular rate), and $200 per day ($2,000 total) for leave to care for others (paid at two-thirds of the employee’s regular rate).
  • A new “trigger” is added under both the EPSL and E-FMLA provisions.  Employees qualify for leave if they are:
    • seeking or awaiting the results of a diagnostic test for, or a medical diagnosis of, COVID-19, and the employee has been exposed to COVID–19 or the employee’s employer has requested such test or diagnosis;
    • obtaining immunization related to COVID–19; or
    • recovering from any injury, disability, illness, or condition related to such immunization.
    • MBWL Note:  The ability of an employer to receive a tax credit for providing paid time off for an employee to receive the vaccine is a clear indication of the federal government’s desire to facilitate employees receiving a vaccine.
  • Leave under the E-FMLA provision is increased from $10,000 to $12,000, with $12,000 being the maximum an employer may claim for an employee in 2021.
  • Leave under the E-FMLA provision is expanded to be available for any EPSL-qualifying reason, which is when an employee is unable to work or telework because the employee:
    • is subject to a federal, state, or local quarantine or isolation order related to COVID-19;
    • has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
    • has COVID-19 symptoms and is seeking medical diagnosis;
    • is caring for an individual who is subject to a quarantine or isolation order;
    • is caring for a child if the school or day care center has been closed, or the child-care provider is unavailable, due to COVID-19 precautions; or
    • is experiencing any other substantially similar condition specified by the regulatory agencies.
  • E-FMLA leave taken on or after April 1, 2021 is not subject to the 10-day elimination period that applied previously under FFCRA.
    • An employee’s eligibility for E-FMLA may depend on when they used E-FMLA previously and how the employer establishes its 12-month FMLA period (e.g., calendar year, fixed period, measure-forward, or “rolling” 12 months).
  • For leave taken on or after April 1, 2021, the employers may take a credit against Medicare payroll tax only (1.45%); however, the credit continues to be refundable.
    • ESPL and E-FMLA credits are available for qualified health plan expenses and for the employer’s share of Medicare and Social Security taxes.
  • ARPA clarifies that refundable credits may be received by state and local governments that are tax exempt under Code 501(a).
  • ARPA adds a new nondiscrimination requirement that eliminates the credit for any employer that discriminates in favor of highly compensated employees, full-time employees, or employees based on tenure.

Dependent Care Assistance Program Limit Increase

In February, the IRS released Notice 2021-15, which provides guidance related to the relief for health FSAs and dependent care assistance programs (DCAPs) contained in the second stimulus bill. Unfortunately, the Notice failed to clarify with any certainty whether an employee may be taxed on any DCAP reimbursements in excess of $5,000 for the calendar year.  That issue is now settled by the ARPA, which increases the DCAP exclusion from $5,000 to $10,500 (from $2,500 to $5,250 in the case of a separate return filed by a married individual) for 2021. This relief is only available for calendar year 2021; however, it also implies that an employee could elect to increase their DCAP election to the newly available $10,500 limit for 2021 (based on the relief in Notice 2021-15).  A DCAP must be amended by the end of the 2021 plan year to take advantage of the increased exclusion limit.

Temporary Premium Tax Credit Enhancements

The Affordable Care Act’s premium tax credit program is significantly enhanced for 2021 and 2022. The existing income limit of 400% of the federal poverty level, after which individuals will no longer qualify for a premium tax credit, is lifted for 2021 and 2022. In addition, the applicable percentage of household income that individuals must pay for Marketplace coverage has been reduced at all income levels.  Special rules also apply to those individuals receiving unemployment compensation during 2021.

MBWL Note: The increased eligibility for premium tax credits makes it ever more important for applicable large employers (ALEs) to offer affordable, minimum value coverage to their full-time employees to avoid potential penalty exposure.

Temporary PTC Percentages Under ARPA
In the case of household income (expressed as a % of poverty line) within the following income tier: The initial premium percentage is— The final premium percentage is—
Up to 150.0% 0% 0%
150% to 200% 0% 2%
200% to 250% 2% 4%
250% to 300% 4% 6%
300% to 400% 6% 8.5%
400% and up 8.5% 8.5%

 

2021 PTC Percentages (Pre-ARPA)
In the case of household income (expressed as a % of poverty line) within the following income tier: The initial premium percentage is— The final premium percentage is—
Up to 133.0% 2.07% 2.07%
133% to 150% 3.10% 4.14%
150% to 200% 4.14% 6.52%
200% to 250% 6.52% 8.33%
250% to 300% 8.33% 9.83%
300% to 400% 9.83% 9.83%
400% and up Ineligible for PTC

COBRA Subsidy

The ARPA provides significant assistance to employees and their families who are eligible for COBRA (or state mini-COBRA) due to an involuntary termination of employment or reduction in hours.  The law provides a 100% subsidy for COBRA premiums from April 1, 2021 through September 30, 2021. The subsidy applies to group health plans other than health FSAs.

Employers who are subject to COBRA under ERISA (private employers) or the PHS Act (state and local governmental employers) are responsible for complying with the COBRA subsidy provisions.  Insurance companies are responsible for complying with the COBRA subsidy provisions for insured group health plans that are not subject to federal COBRA (e.g., when state “mini-COBRA” requirements apply to small plans that are not subject to federal COBRA, or to large group plans after federal COBRA is exhausted).  Additional highlights include:

  • The subsidy applies to an “assistance eligible individual” (AEI) who is any COBRA qualified beneficiary who is eligible for, and elects, COBRA during the period of April 1, 2021 through September 30, 2021, due to an involuntary termination of employment or reduction in hours.  (The reduction in hours is not required to be involuntary.)
  • AEIs must be offered at least a 60-day window within which to elect COBRA coverage.
    • The 60-day period begins April 1, 2021 and ends 60 days after the date the notice is provided to the individual.
    • AEIs include individuals in their COBRA election period, and individuals who would be AEIs but whose COBRA coverage lapsed due to non-payment prior to April 1, 2021.
    • MBWL Note: Many AEIs will still be within their COBRA election period as a result of the Department of Labor’s disaster relief (Notice 2021-01).
  • COBRA coverage elected during the subsidy period will be effective April 1, 2021; employees are not required to elect retroactive to the date of their qualifying event or any other date prior to April 1, 2021, nor are they required to pay outstanding premiums for prior periods of coverage in order to secure subsidized coverage.
  • Employers will be entitled to an advanceable, refundable tax credit against Medicare payroll taxes (1.45%) to pay for coverage during the subsidy period. The DOL will provide forms and instructions for employers to apply for the credit.
    • Additional guidance is expected for multiemployer (union) plans and professional employer organizations (PEOs).
  • The subsidy is available until the first to occur of:
    • the qualified beneficiary becoming eligible for other group health plan coverage (other than coverage consisting only of excepted benefits, such as dental or vision, coverage under a health FSA, or coverage under a qualified small employer health reimbursement arrangement (QSEHRA));
    • the qualified beneficiary becoming eligible for Medicare;
    • the end of the qualified beneficiary’s maximum COBRA duration; or
    • September 30, 2021.
  • Qualified beneficiaries who fail to notify the plan that they are no longer assistance-eligible can be liable for a $250 penalty, which may be waived if the failure was due to reasonable cause and not willful neglect. An intentional failure can result in a penalty of $250 or 110% of the amount of premium assistance received, if greater.
  • Employers may allow currently enrolled AEIs to select new plans.  An individual has 90 days from the date they are notified of the enrollment option to elect a different plan.  This option is available only if:
    • the premium for such different coverage does not exceed the premium for coverage in which such individual was enrolled at the time such qualifying event occurred;
    • the different coverage in which the individual elects to enroll is coverage that is also offered to similarly situated active employees; and
    • the different coverage is not coverage consisting only of excepted benefits, such as dental or vision, coverage under a health FSA, or coverage under a QSEHRA.
  • Required Notices to Individuals
    • General Notice / Notice of Subsidy Availability. Individuals who become eligible to elect COBRA during the subsidy period (April 1, 2021 – September 30, 2021) must be provided a notice that describes the availability of the premium assistance. The notice requirement may be satisfied by amending existing notices or by including a separate attachment. The notice must include:
      • the forms necessary for establishing eligibility for premium assistance;
      • the name, address, and telephone number to contact the plan administrator and any other person maintaining relevant information in connection with such premium assistance;
      • a description of the extended election period;
      • a description of the obligation of the qualified beneficiary to notify the plan when they are no longer eligible for a subsidy and the associated penalty for failure to do so;
      • a description, displayed in a prominent manner, of the right to a subsidized premium and any conditions thereon; and
      • a description of the option to enroll in different coverage if the employer so permits.
    • Notice of Extended Election Period. AEIs must be offered at least a 60-day window within which to elect COBRA coverage.
      • The 60-day period begins April 1, 2021 and ends 60 days after the date the notice is provided to the individual.
      • This includes:
        • individuals terminated on or after April 1, 2021;
        • individuals in their COBRA election period on April 1, 2021 (including any COVID-19-related extensions); and
        • individuals who would be AEIs but whose COBRA coverage lapsed due to non-payment prior to April 1, 2021.
    • Notice of Subsidy Expiration. Informs AEIs that the subsidy period is ending.
    • The notice must disclose that:
      • premium assistance for the individual will expire soon and the date of such expiration;
      • the individual may be eligible for coverage without any premium assistance through COBRA or coverage under a group health plan.
    • The subsidy expiration notice is not required if the subsidy is ending due to the individual becoming eligible for another group health plan or Medicare.
    • This notice must be provided not more than 45 days but no less than 15 days before the premium assistance ends.
    • Model Notices. The DOL must issue model notices of subsidy availability and extended election period within 30 days of enactment, and a model notice of subsidy expiration within 45 days of the law’s enactment.

What Does This Mean For Employers?

Employers and plan sponsors should consider whether they will adopt the extended FFCRA leave provisions and/or use them to incentivize employees to receive a COVID-19 vaccine. They should also ensure their COBRA vendors are prepared to assist in identifying and notifying assistance eligible individuals within 60 days of April 1, 2021.  The DOL also plans to provide outreach consisting of public education and enrollment assistance relating to premium assistance. Their outreach will target employers, group health plan administrators, public assistance programs, States, insurers, and other entities as the DOL deems appropriate. The outreach will include an initial focus on those individuals eligible for an extended election period. We also expect the DOL and other agencies to issue guidance on various issues related to the subsidy in the coming weeks.

About the Author.  This alert was prepared for Alera Group by Marathas Barrow Weatherhead Lent LLP, a national law firm with recognized experts on ERISA-governed and non-ERISA-governed retirement and welfare plans, executive compensation and employment law.  Contact Stacy Barrow or Nicole Quinn-Gato at sbarrow@marbarlaw.com or nquinngato@marbarlaw.com.

The information provided in this alert is not, is not intended to be, and shall not be construed to be, either the provision of legal advice or an offer to provide legal services, nor does it necessarily reflect the opinions of the agency, our lawyers or our clients.  This is not legal advice.  No client-lawyer relationship between you and our lawyers is or may be created by your use of this information.  Rather, the content is intended as a general overview of the subject matter covered.  This agency and Marathas Barrow Weatherhead Lent LLP are not obligated to provide updates on the information presented herein.  Those reading this alert are encouraged to seek direct counsel on legal questions.

© 2021 Marathas Barrow Weatherhead Lent LLP.  All Rights Reserved.

9 Areas of Focus for HR Right Now – Parts 8 and 9

We are wrapping up our thoughts on key issues industry professionals are still up against as a result of the pandemic. We appreciate you taking the time to tune in, and we hope you numbers 1-7 provided some useful insights, or at least reassured you that you’re not alone. Here are our final thoughts (for now), numbers 8 and 9.Remote Corporate Culture

 

  1. Benefits & Culture

No matter where you work, things looked markedly different this year. HR professionals have been tasked with maintaining a culture virtually. Benefits professionals are wondering if what they offer is what is needed. Employees are facing so many challenges that engaging with their organization might be the last thing on their mind – they just want to do their jobs and get by. Some employers are implementing outside-the-box ideas for fringe benefits, such as:

  • Childcare assistance
  • Caregiver benefits
  • Paying for Netflix or other streaming services
  • Money toward grocery delivery
  • Fitness app subscriptions
  • Virtual classes on meditation, cooking, or language learning
  • Sharing recipes
  • Start a virtual book club
  • Anything that can boost mental, physical, social and financial health

In addition, telehealth services are obviously more pertinent than ever, and employers need to be sure they have some sort of telehealth option. If you have employees that aren’t wild about the idea of telehealth, have conversations about why, or share your own experiences.

Another new trend we noticed popping up was that some organizations have taken “flexibility pledges”, where meetings are prohibited during certain hours, employees are encouraged to decline meetings they truly don’t need to attend, etc.

Something that has stuck with me and should stick with employers is that employees will remember what kind of support they received from their company during this time. When the dust settles, that will impact their loyalty. So, whatever you do, do something. Don’t pretend that nothing has changed.

When it comes to leadership, executives and managers need to be talking the talk. If you want to encourage work-life balance, maybe avoid sending emails at 9PM. Schedule calls that all parties take while on a walk outside. Say thank you on a regular basis for all of the hard work being put in.

  1. Beyond COVID

As employers and employees alike get more comfortable with what is more like the “normal” now, versus the “new normal”, it’s important for us to look to the future, one that hopefully does not involve COVID-19. Regardless of any changes made by the Biden administration, the consensus seems to be that we’ve all seen the value and importance of having paid leave options, and we expect this to be more than passing trend. We are starting to see a movement for caregiver leave specifically, and there was discussion around possible changes to the Fair Labor Standards Act (FLSA) to accommodate more flexible work schedules. We definitely expect state leave laws to continue to develop at an increasing rate and to encompass a gamut of areas: sick leave, caregiver leave, paid family and medical leave, parental leave, etc.

While we are still in the thick of the pandemic, there are positive signs ahead – treatments are improving, vaccines being administered, and we’ve figured out to some degree what safe behavior looks like. Once COVID-19 passes, testing and treatment of other viruses, like the flu or strep throat, might change when it comes to the workplace, and you can bet employees will think twice before showing up to work when sick.

 

At the end of the day, employers should remember that, above all else, we need to be extra human right now. This may manifest in different ways depending on the organization, but I hope these reflections on COVID challenges have given you some food for thought, and some ideas to take back to your company.

Understanding the Impacts of Massachusetts’ New Healthcare Law

Massachusetts has long been a leader in the provision of quality, affordable and accessible healthcare. At the beginning of this year, Governor Charlie Baker signed off on ‘Laura’s Law’ which addresses a range of healthcare issues highlighted as a result of the COVID-19 pandemic.Massachusetts Healthcare Law

  • Telehealth: the law mandates equal coverage for virtual visits, including for behavioral health. It also provides a short-term model for how these services should paid. This should provide Massachusetts residents to expanded access to safe, virtual healthcare.
  • COVID-19: Laura’s Law states that treatment and testing for COVID-19 must be covered by insurance companies, including MassHealth. This applies to all inpatient, emergency and cognitive rehab services as well as necessary outpatient services related to the virus. Testing for the asymptomatic is also covered in this provision.
  • Surprise Billing: the new law states that providers must tell patients in advance of anything out-of-network, and Massachusetts plans to recommend a default rate for out-of-network billing later this year.
  • Expansion of Care for MassHealth Members: Laura’s Law eliminates referral requirements so that MassHealth subscribers can access urgent care facilities more easily.
  • Medicaid: under the new legislation, community hospitals will receive two years of enhanced Medicaid reimbursements, a 5% bump in the average monthly Medicaid payment at a collective cost of up to $35 million per year.
  • Scope of Practice: the pandemic necessitated an increase in scope of service for certain healthcare workers to meet the surging demand for care. Under Laura’s Law, this increase in scope will remain permanent for Advanced Practice Nurses and Optometrists.

Lastly, the state is calling for the undergoing of a study to examine the impact of COVID-19 on the healthcare system, especially in Massachusetts.

Governor Baker referenced a silver lining upon rollout of this law, wherein the pandemic garnered the momentum needed for policymakers to support changes, and the collective healthcare experience of Massachusetts residents in 2020 informed the legislation, so it should be effective in addressing the gaps in healthcare that became obvious. We won’t be surprised if other states being to issue similar policies.

11 Essential Pieces of the Stimulus Bill for Employers

The $900 billion COVID-19 relief bill passed by Congress at the end of 2020 is robust and nuanced. It covers a lot of ground, and can be confusing to navigate. As professionals in the insurance and benefits field, we went ahead and summarized the key points most relevant to our clients and colleagues.

 

  1. FFCRA Paid Leave

The COVID-19 pandemic continues and the vaccine is unlikely to be available on a wide-scale basis in the next several months. In light of this, the refundable payroll tax credits for emergency paid sick leave (EPSL) and extended family and medical leave (E-FMLA), which were enacted pursuant to the Families First Coronavirus Response Act, are extended through March 31, 2021.  Notably, only the tax credits are extended, which means compliance with the EPSL or E-FMLA requirements is voluntary for employers after December 31, 2020.

COVID Relief Bill

 

The policy behind this may have been to incentivize employers to continue allowing employees in the middle of FFCRA leave as of January 1, 2021 to finish out, and be paid for, any remaining leave to which they would have otherwise been entitled.  The tax credit is only available for leave that would otherwise satisfy the FFCRA, had it remained in effect, i.e., if employees for whom the employer provides paid leave would otherwise meet the eligibility requirements under the FFCRA and did not use the full amount of EPSL or E-FMLA leave between April 1, 2020 and December 31, 2020.

  1. FSAs and DCAPs

  • Employers offering a Dependent Care Assistance Program (DCAP) or health FSA may allow participants to carry over all unused DCAP and health FSA contributions or benefits remaining at the end of the 2020 plan year to the 2021 plan year.
  • Employers offering a DCAP or health FSA may extend the grace period for using any benefits or contributions remaining at the end of a plan year ending in 202
    0 or 2021 to 12 months after the end of the applicable plan year.
  • Similar to DCAPs, employers offering a health FSA may allow participants who cease participation during the 2020 or 2021 plan year to continue to be
  • reimbursed from any unused benefits through the end of the plan year (and applicable grace period) in which participation ceased.  This is often referred to as a “spend down” provision when included in a traditional DCAP.
  • Employers offering DCAPs may reimburse employees for dependent care expenses for children who turned 13 during the pandemic.  The relief applies to plan years with open enrollments that ended on or before January 31, 2020 (e.g., calendar year 2020 plans).  It also applies for the subsequent plan year (e.g., calendar year 2021 plans
    ) to the extent the employee has a balance at the end of the 2020 plan year after any relief adopted by the employer, such as an extended grace period or carry over.  The relief allows the employer to substitute “age 14” for “age 13” for purposes of determining eligibility for reimbursement of a child’s expenses.  In general, DCAP eligibility ends at age 13, except in cases of mental or physical incapacity.
  • Employers offering a health FSA or DCAP may allow employees to make prospective election changes (subject to annual limitations) to their 2021 contributions without experiencing a change in status event.
  1. Surprise Billing

A hot topic of late, surprise billing will be banned starting in 2022. This includes a ban on the consideration of reimbursement rates by Medicare, Medicaid, CHIP, or TRICARE, as well as a ban on “usual and customary charges” which should prevent providers from suggesting higher rates.

 

More specifically, healthcare consumers won’t get balance bills when they seek emergency care, are transported by air ambulance, or upon receiving nonemergency care at an in-network facility but from an out-of-network physician or laboratory. Instead, they will pay the deductibles and copays outlines in their in-network plans, and the insurer and the provider will use arbitration to come to an agreement on acceptable payments, leaving the patient out of the process. For those without insurance, the secretary of the Department of Health and Human Services will create a provider-patient bill dispute resolution process.

 

  1. Direct Economic Relief

While not quite as generous as the last wave, this $286 billion portion of the latest stimulus bill allows for:

  • Direct payments of $600 for individuals making up to $75,000 per year, and $1,200 for couples making up to $150,000 per year, as well as a $600 payment for each dependent child
  • An additional $300 per week for all workers receiving unemployment benefits will be provided through March 14, 2021
  • An extension of the Pandemic Unemployment Assistance (PUA) program, with expanded coverage to the self-employed, gig workers, and others with nontraditional work engagements
  • The Pandemic Emergency Unemployment Compensation (PEUC) program, giving additional weeks of federally-funded unemployment benefits to individuals who exhaust their regular state benefits
  • An increase in the maximum number of weeks an individual can claim benefits through state employment, the PEUC program, or the PUA program, to 50 weeks

 

  1. Small Business Relief

As the Amazons of the world rake in revenue, small businesses have been left in a tough spot throughout the pandemic. The $325 billion piece of the bill includes the following relief for small businesses:

  • Over $284 billion for first and second forgivable Paycheck Protection Program (PPP) loans
  • Lending options
  • Expanded PPP eligibility for 501(c(6) nonprofits
  • $20 billion in grants for small businesses in low-income communities
  • $3.5 billion worth of continued small business administration (SBA) relief
  • Enhancements for SBA lending
  • $15 billion allocated toward live venues, independent movie theaters, and cultural institutions

 

  1. COVID-19 Testing, Treatment & Prevention

As the US grapples to keep up with the demand for testing and treatment as cases continue to surge, Congress has set aside $69 billion to address this dire situation. This section includes funding for the procurement of vaccines and therapeutics as well as for vaccine distribution. $300 million of this will be reserved for high risk and/or underserved areas. $22 billion will go to states for testing, tracing and mitigation programs. Mental health, support for healthcare providers, and COVID-19 research are all accounted for within this bucket.

  1. Schools

As schools of all types and levels struggle with remote learning and protection from the virus, the bill includes $82 billion to assist, including allowances for states, K-12 schools, and higher education institutions that have been significantly impacted.

  1. Child Care

Child care has become one of the biggest struggles for working parents throughout COVID-19. How can they mind their children at home while doing their jobs? Or, how can child care centers keep children and their families safe? As such, $10 billion has been allocated for the child care sector through the Child Care and Development Block Grant (CCDBG) program. The funds can be used to provide child care assistance to families, as well as to aid child care businesses with their new challenges. Of this, $250 million will be set aside for the Head Start providers for low-income children and families.

 

  1. Coronavirus Relief Fund Extension

The bill includes a provision that extends the availability of funds provided to states and localities by the Coronavirus Relief Fund in the CARES Act from 12/30/20 to 12/31/21.

 

  1. Employee Retention Tax Credit

The bill extends and expands the refundable Employee Retention Tax Credit (ERTC), part of the CARES Act, helping to keep more employees on payroll and more small businesses and nonprofits afloat.

  1. Student Loans

    The student loan provision of the original bill was been extended, so through the end of 2025, employers can make payments toward employees’ student loans – up to $2,500 annually – and have that amount be excluded from workers’ taxable income.

 

 

In addition, the bill expanded the lifetime learning credit, a tax break worth up to $2,000 per return can be used to offset the cost of undergrad, grad, or professional degrees.

There are also two important, miscellaneous tax issues we wanted to mention:

  • You are able to deduct qualifying expenses that exceed 7.5% of adjusted gross income on your federal income tax return, as long as you itemize your return. This is now permanent.
  • Workers whose payroll taxes have been deferred since September now have until 12/31/21 to pay back the government (extended from 4/30/21).

On top of our abbreviated list of must-knows, the bill also includes sections pertaining to Private Mortgage Insurance (PMI), environmental tax credits, broadband, transportation, farming and agriculture, and more. What the bill does not include is state and local aid funding, liability protection from COVID-19 lawsuits, and relief for the restaurant industry, among other areas.

 

If you have questions about what you’ve read or need help bringing your health, benefits, or leave programs up to speed, please get in touch (insight@springgroup.com).

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.

9 Areas of Focus for HR Right Now – Part 7

Thanks for joining us on this nice little reflective exercise. There has been so much news to keep up with this year, that we thought it would be helpful to put pen to paper on our key COVID takeaways. We hope our numbers 1 through 6 provided some food for thought, and also some helpful advice. We are back this week with number 7, and it’s a big one.

 

  1. Leave & Accommodations

Leave laws are always front and center for us at Spring, but this year we had different considerations. While this topic interplays with many of the other themes on this list, I thought it important to reiterate some key legislative items we’ve been dealt this year.leave management covid

 

Currently there are very few legal parameters for supporting working parents during the pandemic, and no protections for employees worried about exposing people in their household. Any accommodations allowed here are largely based on the discretion of the employer. For working parents, consider flexible hours and different shifts. Further, companies should think about whether teleworking could work more permanently, you are likely to face some employee hesitancy to return to the office. This will be especially important depending on your office location and the case rates in that area.

 

As we think about traditional ADA accommodations processes and try to carry them out in a COVID world, we pose the following questions:

  • If an employee self-identifies themselves as high-risk, should an employer be asking for proof?
  • If an employee states they cannot wear a mask due to a disability, but cannot provide documentation, what does the employer do?
  • If an employee is asking for leave but is not eligible under ADA or FMLA, what other options are available?

I recently presented at DMEC where we suggested implementing short-term accommodations trials, especially when there is difficulty obtaining documentation, which there has been due to closing of medical offices to non-emergency patients and reluctance to visit medical offices out of fear. So if an employee asks for accommodation without documentation, try something that you find reasonable for 3 or 6 months without asking for medical information, and then revisit the trial at that point. Further, exhaust all return to work options (whether in-person or remote) first, and use leaves as a last resort.

With the expiration of the FFCRA, Emergency Paid Sick Leave (EPSL) and Emergency Family and Medical Leave (EFMLA) is no longer required, but the tax credit has been extended. Click here for more details on that. All of these complexities are making the case for federal leave law, in which we could avoid this patchwork of different leaves, but speakers remarked that while the desire is there, there are too many challenges to get it going during this economic climate.

Several states have implemented their own leave policies related to COVID: California, New York, New Jersey, Colorado, Washington D.C., with pending legislation in Massachusetts. Employers in these states will need to weave these into their programs.

Further, while there is no leave currently for those afraid to return to the workplace, employers should be cautious as it is possible for debilitating anxiety to occur in these cases, which could trigger a leave.

 

At the end of the day, while employers often worry about misuse of programs, research shows that less than 5% of individuals taking leave are abusing it. Further, as engrained in our culture, people are generally shamed of needing time of work to take care of themselves or others. To this end, we need to take a caring lens when it comes to leave and accommodations. Lastly, communicate your policies often, be proactive, make it easy for employees to find available resources, check in on  your colleagues, and be sure to have formal Stay and Work and Return to Work programs in place and updated.

 

Don’t miss our series wrap-up, numbers 8 and 9, coming to your inbox next week!

9 Areas of Focus for HR Right Now: Parts 5 and 6

Thanks for tuning back in as we share our most noteworthy reflections around how priorities have changed for folks in this industry. We hope you caught numbers 1-4 (link). After over six months of combatting COVID-19, we have figured a lot out, but questions remain. Here we are with numbers 5 and 6 on our list.Women in the workforce COVID

 

  1. Women in the Workforce

Policies like maternal leave and breastfeeding accommodations have long been debated, but this year women are facing even more pressure. For one, it’s been reported that women continue to shoulder the burden of having children while working at home. I am sure there are plenty of involved dads out there, but it does seem to be women who are largely being tasked with homeschooling, activities, meals, etc. and who are being interrupted by children during the workday. They may be struggling to keep up with the demands of work and home, and feeling like they have to choose. We hope that once we start seeing consistent success in education during the pandemic, and eventually vaccines, women will gain back their confidence. However, employers should be thinking about how to be flexible with working mothers so that they don’t have to take leave, as reengagement will be difficult.

Another hot topic related to women is the issue of pregnancy during these COVID times. Many pregnant women have extra fear of being exposed to the virus and are likely to err on the side of caution, meaning they may be reluctant to return to the workplace. Things get tricky here, as pregnancy is not a disability in the eyes of the ADA and therefore does not offer an accommodation to pregnant women. Further, because of the Pregnancy Discrimination Act, employers cannot single out pregnant employees. This conundrum has several states trying to fill this pregnancy gap in upcoming legislation. Finally, let us not forget, as employers, about single women lacking a support system at home.

 

  1. EAPs

I got a lot of value out of one DMEC session focused on Employee Assistance Programs (EAPs) and I thought I would share. EAPs are a severely under-utilized tool. This is due to lack of awareness, stigma around mental health and addiction, company culture, confidentiality concerns, and accessibility or time constraints. Many employees don’t realize the amount of free or discounted services associated with EAPs, with costs being another barrier.  However, as we saw, mental and behavioral health problems are rising at an unprecedented rate, and EAPs could be a critical mitigating factor, but only if they are leveraged.

When it comes to EAPs, you should:

  • Ensure managers are adequately trained on the program(s) offered
  • Partner with your provider to increase communications and remove obstacles
  • Link EAP access to other HR programs such as wellness initiatives
  • Monitor program effectiveness through regular surveys and performance checks
  • Check in with employees before, during and after an EAP request – did they find the resources they were looking for?

We may see EAPs transform from a “nice to have” to a “must have” in the future. If that’s the case, all of us in this industry need to understand how to better drive utilization, because it’s clearly not enough to simply provide one. Spring can help with this!

 

We’ll be back soon with our #7 and beyond.