Category: Legal Alerts

After several failed attempts by pharmacy benefit managers (“PBM”) to challenge state laws regulating PBMs, the 10^th Circuit Court of Appeals (in Pharmaceutical Care Management Association v. Mulready) handed down a big win for PBMs and, by extension, self-funded ERISA plans, when it held that provisions under an Oklahoma insurance law that established strict network adequacy standards and over-broad “any willing provider” requirements for PBMs were preempted by ERISA.  Certain provisions of the law were also successfully challenged as being preempted by Medicare Part D; however, the scope of this alert is limited to the portions of the 10^th Circuit’s opinion related to ERISA preemption.

The Oklahoma PBM law at issue in the case, (1) sets forth stringent geographic parameters for making brick-and-mortar pharmacies available to plan participants, (2) limits the use of mail-order pharmacies as a replacement for brick-and-mortar pharmacies, (3) bars PBMs from promoting in-network pharmacies by offering financial incentives such as copay or cost sharing reductions, (4) requires PBMs to admit any provider willing to accept the PBM’s preferred network terms and conditions, and (5) prohibits PBMs from refusing to allow pharmacies with pharmacists on probation with the state regulatory agency from being in the PBMs’ network. 

When challenged at the district court level, the lower court determined that none of these provisions impacted plan design or choices for plan administrators and upheld the law.  However, on appeal, the 10^th Circuit wholeheartedly disagreed, finding that these restrictions, among other things, infringe upon central matters of plan administration.  The court recognized that the Oklahoma PBM law network restrictions, “home in on PBM pharmacy networks – the structures through which plan beneficiaries access their drug benefits.  And they impede PBMs from offering plans some of the most fundamental network designs, such as preferred pharmacies, mail order pharmacies, and specialty pharmacies.”  Further, the court recognized that restricting PBMs from denying, limiting, or terminating a plan’s pharmacy contract because of licensure issues (i.e., allowing them to limit the network when a pharmacy has a pharmacist who is on probation with the state licensure agency) essentially forces the PBM to consider all pharmacies over any safety concerns the plan may choose to impose.

Thus, while the Oklahoma law does not directly regulate ERISA plans, but rather PBMs, the court recognized that ERISA plans are virtually compelled to use PBMs to administer their prescription drug benefits and, therefore, held that the Oklahoma law is preempted by ERISA as it impermissibly impacts and/or relates to ERISA plans by interfering with plan administrators’ ability to administer their plans uniformly.

Conclusion

PMBs have been a target of state regulation for some time, and we don’t anticipate that this decision will discourage them further, particularly in states outside the purview of the 10^th Circuit.  In the meantime, it’s possible the case could ultimately be appealed to the U.S. Supreme Court.  We will continue to monitor state PBM laws and the progress of this case.

_____________________________________

About the Author. This alert was prepared by Barrow Weatherhead Lent LLP, a national law firm with recognized experts on the Affordable Care Act. 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 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. © 2023 Barrow Weatherhead Lent LLP. All Rights Reserved.

The Internal Revenue Service (IRS) has released Rev. Proc. 2023-29, which contains the inflation-adjusted amounts for 2024 used to determine whether employer-sponsored coverage is “affordable” for purposes of the Affordable Care Act’s (ACA) employer-shared responsibility provisions and premium tax credit program. As shown in the table below, for plan years beginning in 2024, the affordability percentage for employer mandate purposes is indexed to 8.39%.  This is a significant decrease from 2023 and the lowest affordability threshold since the Affordable Care Act was implemented. Employer-shared responsibility payments are also indexed.

Code Section	4980H(a)	4980H(b)	36B(b)(3)(A)(i)
Description	Coverage not offered to 95% of (or all but 5) full-time employees.	Coverage offered, but unaffordable or is not minimum value.	Premium credits and affordability safe harbors.
2024	$2,970	$4,460	8.39%
2023	$2,880	$4,320	9.12%
2022	$2,750	$4,120	9.61%
2021	$2,700	$4,060	9.83%
2020	$2,570	$3,860	9.78%
2019	$2,500	$3,750	9.86%
2018	$2,320	$3,480	9.56%
2017	$2,260	$3,390	9.69%
2016	$2,160	$3,240	9.66%
2015	$2,080	$3,120	9.56%
2014*	$2,000	$3,000	9.50%

*No employer-shared responsibility penalties were assessed for 2014.

Under the ACA, applicable large employers (ALEs) must offer affordable health insurance coverage to full-time employees. If the ALE does not offer affordable coverage, it may be subject to an employer-shared responsibility payment. An ALE is an employer that employed 50 or more full-time equivalent employees on average in the prior calendar year. Coverage is considered affordable if the employee’s required contribution for self-only coverage on the employer’s lowest-cost, minimum value plan does not exceed 8.39% of the employee’s household income in 2024 (prior years shown above). An ALE may rely on one or more safe harbors in determining if coverage is affordable: W-2, Rate of Pay, and Federal Poverty Level. 

If the employer’s coverage is not affordable under one of the safe harbors and a full-time employee is approved for a premium tax credit for Marketplace coverage, the employer may be subject to an employer-shared responsibility payment.

Since 2019, the individual mandate penalty imposed on individual taxpayers for failure to have qualifying health coverage was reduced to $0 under the Tax Cuts and Jobs Act, effectively repealing the federal individual mandate. A previous lawsuit challenging the constitutionality of the ACA due to this change to the individual mandate penalty was unsuccessful.  The employer mandate has not been repealed and the IRS continues to enforce it through Letter 226J. The IRS is currently enforcing employer-shared responsibility payments for tax years 2020 and 2021.

Next Steps for Employers

This is a significant adjustment in the affordability threshold.  Applicable large employers should be aware of the updated, reduced affordability percentage for plan years beginning in 2024, and should consider it along with all other relevant factors when setting contributions. 

On July 12, 2023, the IRS, DOL and HHS (collectively, “the Agencies”) released proposed regulations that modify the conditions for hospital indemnity and other fixed indemnity insurance to be considered an “excepted benefit.” Maintaining “excepted benefit” status is important for fixed indemnity plans, as it exempts them from having to comply with the ACA’s insurance mandates and market reforms, which is not feasible for these types of arrangements.

The proposed regulations also modify the definition of short-term limited-duration insurance (“STLDI”) and clarify the tax treatment of certain benefit payments in fixed amounts received under employer-provided accident and health plans. Lastly, the Agencies solicit comments regarding specified disease or illness coverage and level-funded plan arrangements.

The Agencies released the proposed regulations in response to multiple executive orders released by the President to, among other things, protect and strengthen the ACA, improve the comprehensiveness of coverage, protect consumers from low-quality coverage, and help reduce the burden of medical debt on households.

While these regulations are merely proposed at this time, once finalized they may significantly impact coverage offerings available to employers, particularly those who do not offer comprehensive medical coverage. Moreover, they signal that the Agencies have level-funded plans on their radar and may soon seek to define and regulate them differently than traditional self-funded plans.
The proposed changes are described in more detail below.

Fixed-Indemnity Insurance
Under current law and regulations, the ACA’s market reforms do not apply to individual or group health plan coverage that is an excepted benefit. For purposes of fixed indemnity and hospital indemnity coverage, to be an excepted benefit in the group market, the following requirements must be met: (1) the benefits are provided under a separate policy, certificate, or contract of insurance; (2) there is no coordination between these benefits and those under the employer’s group health plan (including any exclusions under the plan); (3) the individual can access the benefits under the plan regardless of whether they obtain coverage under any of the employer’s other group health plans (or by a policy issued by the same issuer for individual coverage); and (4) the plan must pay a fixed dollar amount per day (or other period) of hospitalization or illness and/or per service, regardless of the amount of expenses incurred. Different requirements apply in the individual market.

The Agencies expressed concern over whether the marketing for these benefits misleads individuals into believing they have comprehensive coverage and whether these plans are being used as a substitute for comprehensive coverage without individuals fully understanding the limitations of these plans.

To address these concerns, the proposed rules modify the basis under which hospital indemnity or other fixed indemnity insurance will be considered excepted benefits. Essentially, these benefits will not be excepted unless they pay benefits in a fixed dollar amount per day (or per other time period) of hospitalization or illness (for example, $100/day) regardless of the actual or estimated amount of expenses incurred, services or items received, severity of illness or injury experienced by a covered participant or beneficiary, or other characteristics particular to a course of treatment received by a covered participant or beneficiary, and not on any other basis (such as on a per item or per-service basis).

Further, the proposed regulations clarify in the examples how current regulations in the group market, which prohibit fixed indemnity insurance from coordinating between the provision of benefits and any exclusion of benefits under any other health coverage maintained by the same plan sponsor, may negate the ability of fixed indemnity coverage to maintain excepted benefit status. For example, coordination between fixed indemnity coverage and other coverage sometimes offered by employers, such as minimum essential coverage (MEC) plans ( i.e., a plan that only covers ACA-recommended preventive care) will cause fixed indemnity coverage to lose its excepted benefit status as it would be considered to coordinate with the exclusions under the MEC plan, regardless of whether there is a formal coordination of benefits arrangement between the fixed indemnity insurance and the other coverage.
New notices have also been proposed for current and future plans or policies issued, though the content and form of the notice is not yet finalized.

Once the final rules are issued, these excepted benefits requirements will be effective at different times depending on the effective date of the policies. If the policy was sold prior to 75 days after the publication of the final rule, the new requirements will not apply until coverage periods beginning on or after January 1, 2027. If the policy is sold on or after 75 days after the date of publication of the final rule, it will apply at the time the policy is effective. Regardless of when the policy is sold, the notice requirements will be effective for any plan years beginning on or after the effective date of the final rule.

Taxation of Hospital Indemnity and Fixed Indemnity Insurance
The proposed rule clarifies that benefits paid from employer-provided hospital indemnity or other fixed indemnity benefits are not excluded from an employee’s gross income if they are payable regardless of whether the covered individual incurs medical expenses or regardless of whether the plan has substantiated that the individual incurred qualified medical care expenses.

This will generally result in benefits under fixed indemnity policies being taxable to employees when premiums are paid pre-tax or the plan does not substantiate that the benefits are paid only for qualified medical expenses actually incurred.

These requirements will be effective on the later of: (a) the date the final rules are published, or (b) January 1, 2024.

Level-Funded Plans
In the preamble to the proposed rules, the Agencies recognize that many employers are utilizing level-funded plan arrangements. While “level-funded” is currently not a defined term under ERISA or other applicable federal law, the preamble describes these benefits as arrangements where the plan sponsor makes set monthly payments to a service provider to cover estimated claims costs, administrative costs, and premiums for stop-loss insurance for claims that surpass a maximum dollar amount beyond which the plan sponsor is no longer responsible for paying claims. The Agencies believe that a number of employers with level-funded plans utilize stop-loss insurance to limit the plan sponsor’s financial responsibility.

The proposed regulations do not make any changes regarding level-funded plans but pose a number of questions about level-funded plans for which they are seeking comments or information, some of which question how sponsors of level-funded plans are complying with applicable laws and regulations, including ACA filing requirements, consumer protection requirements under the ACA through stop-loss insurance, how refunds from stop loss providers are determined and distributed (to participants and/or the plan sponsor), and why these arrangements are becoming increasingly popular.

The goal appears primarily focused on information gathering so that the government may determine how and when to begin regulating these plans in the future.

STLDI
STLDI is a type of health insurance coverage primarily designed to fill a gap in coverage that occurs when someone transitions from one plan or coverage to another. It is typically not employer sponsored. STLDI has been the subject of prior regulations, including HIPAA portability regulations finalized in 2016 (which limited the duration of STLDI to a maximum coverage period of three months, which could be extended by participants, and required employers and issuers to provide certain notices to members, participants, and beneficiaries). In 2018 regulations, the maximum STLDI duration was extended to less than twelve months after the original date of the contract and allowed individual participants to elect to extend coverage for up to 36 months.

The new proposed regulations reduce the maximum duration of STLDI coverage from 12 months back to a contract term of no more than 3 months, and taking into account any renewals or extensions, a maximum duration of no more than 4 months. Moreover, only one policy can be issued by a carrier within the same 12-month period, which is intended to prevent “stacking” of multiple policies to avoid the duration limit.

Once finalized, the rule will not impact STLDI policies, certificates, or contracts of insurance sold or issued before the effective date of the final rule and will apply to all new STLDI policies sold on or after the effective date of the final rule, which will be 75 days after the date the final rule is publicized.

Both new and existing policies will have new notice requirements to inform participants that STLDI is not comprehensive coverage and is intended to be for a limited duration. The content of the revised notices will be released with the final rules, though a template proposed notice and potential, alternative notice were included in the proposed regulations.

Conclusion
At this time, employers are not required to take any action. Comments to the proposed rules are due on or before September 10, 2023; however, the final rules will not be released until sometime after that date. Once regulations are finalized, employers with employer sponsored fixed indemnity plans should review their programs to confirm their status as an “excepted benefit.”

The tax changes for hospital indemnity and other fixed indemnity benefits may be effective sooner, as they apply on the effective date of the final rules (or January 1, 2024 if the final rules are released before then).

---

About the Author. This alert was prepared for [Agency Name] by Barrow Weatherhead Lent LLP, a national law firm with recognized experts on the Affordable Care Act. 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 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.
© 2023 Barrow Weatherhead Lent LLP. All Rights Reserved.}

On June 9, 2023, the IRS released OCC Memo 202323006, which advises that wellness indemnity payments under a fixed indemnity insurance policy are wages for purposes of Federal Insurance Contributions Act (FICA) taxes, Federal Unemployment Tax Act (FUTA) taxes, and federal income tax withholding (FITW) (collectively, “employment taxes”) if the employee has no unreimbursed medical expenses related to the payment.

The memo, drafted by the IRS Office of Chief Counsel (OCC), provides guidance on programs marketed to employers that purport to significantly reduce the employer’s FICA obligation.  While OCC memos are not law or regulations, they provide authoritative legal advice to IRS personnel to assist them on industry-wide issues.  They are a good indication of how the IRS will pursue the matter upon audit. 

Under the latest iteration of these so-called FICA-reduction programs, employees make a pre-tax salary reduction to pay for a fixed indemnity insurance policy.  Each month, most of the employee’s contribution is reimbursed as a non-taxable claim payment under the indemnity policy after the employee participates in certain health or wellness activities, which typically do not result in any out-of-pocket cost to the employee.  The vendor’s promotional materials show employees receiving the same (or more) take-home pay than before joining the program. This is due to the fact that premiums are paid pre-tax, and the wellness indemnity payments are non-taxable (or so the vendor claims).  The programs are also marketed as no-cost to the employer, with the vendor being compensated by part of the FICA savings. 

If these programs sound too good to be true, it’s because they are.  In its memo, the IRS describes a FICA-reduction program that includes the following elements:

• The employer offers employees the ability to enroll in a fixed-indemnity health insurance policy. 
• The premiums are $1,200 per month, paid by employee salary reduction through a § 125 cafeteria plan.  
• The policy makes a benefit payment of $1,000 per month if an employee participates in certain health or wellness activities.
  • For example, the use of no-cost preventive care under the employee’s traditional health plan qualifies the employee for the payment that month.
• The policy also provides wellness counseling, nutrition counseling, and telehealth benefits at no additional cost.
• Benefits under the policy are paid from the insurance company to the employer, which then pays the wellness benefit to employees via its payroll system.

The IRS concludes that wellness indemnity payments under the program are includible in the gross income of the employee when the employee has no unreimbursed medical expenses related to the payment.  This is because the tax exclusion for medical reimbursements does not apply to amounts which the taxpayer would be entitled to receive irrespective of whether expenses for medical care are incurred.  In other words, the employee cannot receive a tax-free reimbursement for a medical expense when the employee has no out-of-pocket expense, either because the activity that triggers the payment does not cost the employee anything or because the cost of the activity is reimbursed by other coverage. 

The fixed indemnity health insurance policy pays $1,000 per month without regard to whether the employee has any out-of-pocket expenses. Thus, the payment is included in the employee’s gross income. Because the payment is provided in connection with the employee’s employment, it is also treated as “wages” for employment tax purposes. The exclusions from “wages” for medical expenses would not apply because the payments are not for medical expenses.

Thus, under the facts described above, when the insured plan pays $1,000 because the employee used a wellness benefit, the $1,000 is included in the employee’s income and wages. Accordingly, they are wages for purposes of FICA, FUTA, and FITW when made as described above.

Have you been pitched a FICA-reduction program recently?  If so, it’s a run-don’t-walk situation.  An employer sponsoring a FICA-reduction arrangement is exposed to under-reporting, under-withholding, and interest penalties, as well as incorrect W-2 penalties.  Employers may also be responsible for any employee FICA taxes they cannot collect. 

Note that some FICA reduction programs purport not to involve indemnity payments.  For example, under one program, an employee’s pre-tax premiums for a wellness plan are reimbursed when the employee engages in certain participatory activities.  As with wellness indemnity payments, cash reimbursements under this program would also be considered wages if the employee has no unreimbursed medical expenses related to the payment.

Employers that have a FICA reduction program in place or who are considering one should consult with qualified benefits counsel.  They aren’t employee benefit programs in the traditional sense, and they do not work as advertised. 

In Rev. Proc. 2023-23, the IRS released the inflation-adjusted amounts for 2024 relevant to Health Savings Accounts (HSAs) and high deductible health plans (HDHPs). The table below summarizes those adjustments and other applicable limits.

	2024	2023	Change
Annual HSA Contribution Limit (employer and employee)	Self-only: $4,150 Family: $8,300	Self-only: $3,850 Family: $7,750	Self-only: +$300 Family: +$550
HSA catch-up contributions (age 55 or older)	$1,000	$1,000	No change
Minimum Annual HDHP Deductible	Self-only: $1,600 Family: $3,200	Self-only: $1,500 Family: $3,000	Self-only: +$100 Family: +$200
Maximum Out-of-Pocket for HDHP (deductibles, co-payment & other amounts except premiums)	Self-only: $8,050 Family: $16,100	Self-only: $7,500 Family: $15,000	Self-only: +$550 Family: +$1,100

Out-of-Pocket Limits Applicable to Non-Grandfathered Plans

The ACA’s out-of-pocket limits for in-network essential health benefits have also been announced and have increased for 2024. 

	2024	2023	Change
ACA Maximum Out-of-Pocket	Self-only: $9,450 Family: $18,900	Self-only: $9,100 Family: $18,200	Self-only: +$350 Family: +$700

Note that all non-grandfathered group health plans must contain an embedded individual out-of-pocket limit within family coverage if the family out-of-pocket limit is above $9,450 (2024 plan years) or $9,100 (2023 plan years). Exceptions to the ACA’s out-of-pocket limit rule have been available for certain non-grandfathered small group plans eligible for transition relief (referred to as “Grandmothered” plans) since policy years renewed on or after January 1, 2014.  Each year, CMS has extended this transition relief for any Grandmothered plans that have been continually renewed since on or after January 1, 2014.  However, in its March 23, 2022 Insurance Standards Bulletin, CMS announced that the limited nonenforcement policy will remain in effect until CMS announces that such coverage must come into compliance with relevant requirements.   Thus, we will no longer see annual transition relief announced.

Next Steps for Employers

As employers prepare for the 2024 plan year, they should keep in mind the following rules and ensure that any plan materials and participant communications reflect the new limits: 

All non-grandfathered plans (whether HDHP or non-HDHP) must cap out-of-pocket spending at $9,450 for any covered person. A family plan with an out-of-pocket maximum in excess of $9,450 can satisfy this rule by embedding an individual out-of-pocket maximum in the plan that is no higher than $9,450. This means that for the 2024 plan year, an HDHP subject to the ACA out-of-pocket limit rules may have a $8,050 (self-only) / $18,900 (family) out-of-pocket limit (and be HSA-compliant) so long as there is an embedded individual out-of-pocket limit in the family tier no greater than $9,450 (so that it is also ACA-compliant).