Self-Insurer Feb 2012 by SIPC

February 2012

www.sipconline.net

IrS poises to

Drop the

hammer captive Insurance

on of

Employer Medical risk

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FEBRUARY 2012 | Volume 40

February 2012 The Self-Insurer (ISSN 10913815) is published monthly by SelfInsurers’ Publishing Corp. (SIPC), Postmaster: Send address changes to The Self-Insurer, P.O. Box 1237, Simpsonville, SC 29681

FEAturES

ArtIclES 8

ArT gallery: has the time come for an “ArT Spring?”

From the Bench: The latest Twist in Subrogation-reimbursement Case law: When “equitable relief ” May Not Be “Appropriate”

IrS Issues Additional guidance on Form W-2 reporting for health Coverage Costs

Pharmacy Benefit, Wellness and Drugs Costs – how they all tie together

SIIA 4X4 gets Traction on 831(b) Captives

Editorial Staff PuBlIShINg DIreCTOr James A. Kinder MANAgINg eDITOr erica Massey SeNIOr eDITOr gretchen grote

DeSIgN/grAPhICS Indexx Printing

covering doctors’ prior Exposure Vexes Some healthcare rrGs by Hazel Becker

CONTrIBuTINg eDITOr Mike Ferguson DIreCTOr OF OPerATIONS Justin Miller DIreCTOr OF ADverTISINg Shane Byars Editorial and Advertising Office P.O. 1237, Simpsonville, SC 29681 (864) 962-2201

2012 Self-Insurers’ Publishing Corp. Officers James A. Kinder, CeO/Chairman

IrS poises to drop the hammer on captive Insurance of Employer Medical risk

InduStry lEAdErShIp 40 SIIA Chairman Speaks

by Randall Beckie

erica M. Massey, President lynne Bolduc, esq. Secretary

the litigation ride for 2012 by Adam V. Russo

The Self-Insurer

February 2012

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February 2012

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

2012 Board of directors CHAIRMAN OF THE BOARD* Alex giordano, vice President of Marketing elite underwriting Services Indianapolis, IN PRESIDENT* John T. Jones, Partner Moulton Bellingham PC Billings, MT VICE PRESIDENT OPERATIONS* les Boughner, executive vP & Managing Director Willis North American Captive + Consulting Practice Burlington, vT VICE PRESIDENT FINANCE/CHIEF FINANCIAL OFFICER/ CORPORATE SECRETARY* James e. Burkholder, President/CeO health Portal Solutions San Antonio, TX

committee chairs CHAIRMAN, ALTERNATIVE RISK TRANSFER Andrew Cavenagh, President Pareto Captive Services, llC Conshohocken, PA CHAIRMAN, GOVERNMENT RELATIONS Horace Garfield, vice President Transamerica Employee Benefits louisville, KY

CHAIRWOMAN, HEALTH CARE elizabeth Midtlien, Senior vice President, Sales Starline uSA, llC Minneapolis, MN CHAIRMAN, INTERNATIONAL greg Arms, Global Head, Employee Benefits Practice Marsh, Inc. New York, NY CHAIRMAN, WORKERS’ COMPENSATION Skip Shewmaker, vice President Safety National St. louis, MO

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

SIIA New Members regular Members company name/Voting representative David lubowitz, Managing Director, Assent Medical Cost Management, Miami, Fl Mary Seery, Manager Strategic Markets, Cancer Treatment Centers America, Schaumburg, Il Kenneth Page, President & CeO, healthSpan, llC, Cincinnati, Oh Marcus Doyle, CeO, veracity research Co., Argyle, TX

Employer Member company name/Voting representative Mike Naclerio, evP, The WorkPlace helpline, Boston, MA

Donald K. Drelich, Chairman & CeO D.W. van Dyke & Co. Wilton, CT Steven J. link, executive vice President Midwest employers Casualty Company Chesterfield, MO elizabeth D. Mariner, executive vice President re-Solutions, llC Wellington, Fl

The Self-Insurer

February 2012

covering doctors’

prior Exposure

veXeS

Some Healthcare RRGs

by Hazel Becker, Courtesy of the Risk Retention Reporter

February 2012

The Self-Insurer

change in the u.S. healthcare landscape is causing some risk retention group members to rethink the way they provide malpractice insurance to physicians whose practices have been acquired by or affiliated with hospital systems. The problem arises during the transition, when physicians with claims-made medical professional liability (MPl) policies become employed or affiliated with a hospital that provides coverage to medical personnel through a captive rrg. The question affects not only the physician, who becomes liable for any claims filed for events that occurred before the hospital affiliation, but also the hospital that provides his or her new MPl policy, according to larry Smith, vice president for risk management at Maryland-based MedStar health and president of MedStar liability limited Insurance Co., a risk retention group. Smith told a meeting of the Captive Insurance Council of the District of Columbia in October that the issue has become more prominent since passage of the Patient Protection and Affordable Care Act of 2010 as hospital systems bring in more physician practices to create accountable care organizations that qualify for special shared savings and other programs under Medicare (see rrr, October 2011). Smith cited data indicating that in 2013 an estimated 77% of all physicians will be employed by healthcare systems. “When the healthcare system brings these folks on as employees, we become responsible for their liability,” Smith said in an interview with the risk retention reporter. “Many healthcare systems are self-insured, and if we were to bring them in with their ‘tail’ exposure not bought, we would find ourselves responsible for their prior acts before they became our employees.” Previously MedStar bought insurance to cover the newly employed physician’s previous exposure, known as “tail coverage,” but as the pace of physician practice affiliations has picked up recently “this has caused us to experience a big cost.”

One model the company is considering is to have Medstar rrg insure newly affiliated or employed physicians with previous claims-made policies, giving them $1M per-claim coverage through the rrg and covering additional liability in greenspring Financial Insurance limited, Inc. of Cayman, MedStar’s offshore captive. This plan would give MedStar companies complete control over how to handle any claims that arises, Smith explained. The alternative is to have a commercial carrier take on the first $1M of exposure and cover the additional risk in the captive. That way, Smith said, “I don’t have to worry about the prior acts, I don’t have to manage the claims<197>I don’t need to be involved.” The downside to this approach is that “if the commercial carrier wants to manage it differently than is in our best interest, I don’t have control over it.” Not all big healthcare systems are approaching the issue this way. harvardaffiliated medical institutions are handling coverage for newly affiliated physician

practices on a case-by-case basis, with the physicians picking up the tab for insurance covering their previous practice, according to garrett Parker, chief financial officer of Controlled Risk Insurance Company of vermont, Inc. (A risk retention group) (CrICO), which covers members of The risk Management Foundation of the harvard Medical Institutions, Inc. and their affiliated physicians. Parker said the harvard rrg’s “new member program” includes elective “nose” coverage along with a risk management component designed to ensure that “there’s some alignment with the group of physicians coming in and our organization’s patient safety approach.” As part of the underwriting process, the rrg requires newly affiliated physician practices to provide quotes for tail coverage from the carriers they are leaving. however, he noted that some groups coming into a harvard medical institution still have occurrence coverage and would not need to purchase tail or nose coverage.

Emerging trends. Market opportunities. Loss scenarios. Risk management strategies. Medical costs and health care reform. The clues add up in the alternative markets.

The Self-Insurer

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February 2012

CrICO has criteria in place to protect itself from “adverse selection,” Parker said, noting that the company requires a certain number of doctors in each practice to sign up for nose coverage through the rrg. he stressed that the program is elective, “and if they meet the underwriting criteria then they still have the option of getting coverage outside or internally. My sense is that our pricing is attractive more than half the time.” The physicians have other factors to consider in deciding how to cover their prior liabilities. For example, Parker said, “We generally write a larger limit than what physicians have externally, so that factors into their analysis.” CrICO’s policies have $5M limits. According to Smith, MedStar continues to look at options for covering newly affiliated physicians’ prior exposures and has not decided what avenue to choose. using the commercial carriers’ utilities, such as underwriting and customer-service functions, is attractive and would address the highly competitive nature of the MPl marketplace, which is going through a transition period as physicians go to work for healthcare systems and no longer seek coverage independently. “Now’s the time to think through what this new employment of physicians means<197>to establish partnerships that will allow us to utilize the best of both worlds. The options are multiple and healthcare organizations that are bringing in physicians in large quantities have to think creatively.” One change is that Smith expects to pool the exposure of physicians covered by these tail policies rather than buying individual $1M or $3M policies. This transition period offers opportunities for new solutions that blend the alternative risk and commercial markets, making use of the advantages of both. “My sense is that this is the time for the alternative market (service providers, brokers, actuaries as well as owners and operators) to really think through the advantages of the alternative market to the commercial market,” Smith said.

“I see the rrg structure may be different<197>some kind of risk sharing with a commercial carrier, where they pick up prior acts and I pick up the current coverage, or maybe a quotashare with a commercial carrier. I don’t have all the answers for what all the options are, but . . . we need to figure out what’s going to be sustainable in the long run. If commercial insurers say their biggest competitors right now are the hospital systems, we need to be talking about new ways to look at it.” n The Risk Retention Reporter (RRR) has been the leading publication oriented specifically towards Risk Retention Groups and Purchasing Groups since 1987. The flagship monthly newsletter, the RRR, covers news and developments in the industry with detailed analysis and 24 years of historical data. Four quarterly publications and one annual directory compliment the RRR’s coverage of the risk retention marketplace. For more information about the RRR and its sister publications, visit www.rrr.com.

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February 2012

The Self-Insurer

February 2012

Bench From the

by Steven T. Polino

the latest twist in Subrogation-reimbursement case law: When “Equitable relief” May not Be “Appropriate”

y now we all know that Plan fiduciaries can obtain reimbursement of benefits the Plan pays for injury suffered by a Plan beneficiary as result of negligence, misconduct, or other actions of a third party. The plan need only satisfy two requirements. The Plan’s Subrogation-reimbursement language must identify a particular fund, distinct from the beneficiary’s personal assets, from which the beneficiary obtains recovery and a particular share of that fund in the possession or under the control of the beneficiary. Sereboff v. Mid-Atlantic Medical Services, Inc., 547 u.S. 356, 363-64 (S.Ct. 2006). The Plan Administrator’s right to obtain reimbursement arises from

February 2012

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section 502(a)(3)(B) of erISA. Section 502(a)(3)(B) provides, in relevant part, that a fiduciary may bring a civil action “to obtain other appropriate equitable relief … to enforce … the terms of the plan.” 29 u.S.C. §1132(a)(3)(B). however, the cases decided heretofore have expressly reserved the question whether the term “appropriate” which modifies the phrase “equitable relief ” would make equitable principles and defenses applicable to a claim under Section 502(a)(3)(B).This question was recently decided by the Third Circuit Court of Appeals in the case of u.S. Airways, Inc. v. James McCutchen; rosen louik and Perry, P.C., No. 10-3836 (3d Ct. No. 16, 2011). In that case, James McCutchen was

involved in a tragic car accident when a young, unnamed driver lost control of her car, crossed the median of the road and struck McCutchen’s car. A second vehicle, a truck traveling behind McCutchen, also slammed into his car. One person was killed; two others were left with severe brain injuries. McCutchen himself survived only after emergency surgery. u.S. Airways paid $66,866.00 in medical expenses on McCutchen’s behalf. McCutchen, through his attorneys Rosen Louik and Perry, P.C. filed an action against the driver that caused the accident. The driver had limited insurance coverage and three other people made a claim on her policy. Therefore, McCutchen settled with the

driver for only $10,000.00. however, McCutchen and his wife received another $100,000.00 in underinsured motorist coverage from his own insurance company. Total third party recovery was $110,000.00. After paying a 40% contingency fee and expenses, McCuthen’s net recovery was less than $66,000.00. rosen louik and Perry placed $41,500.00 in a trust account. u.S. Airways in its capacity as Plan Administrator filed suit under section 502(a)(3)(B) seeking “appropriate equitable relief ” in the form of a constructive trust or equitable lien on the $41,500.00 held in trust and the remaining $25,366.00 personally from McCutchen. The Summary Plan Description describing the U.S. Airways benefits plan covering McCutchen contained the following paragraph entitled “Subrogation and right of reimbursement”: The purpose of the Plan is to provide coverage for qualified expenses that are not covered by a third party. If the Plan pays benefits for any claim you incur as the result of negligence, willful misconduct, or other actions of a third party, the Plan will be subrogated to all you rights of recovery. You will be required to reimburse the Plan for amounts paid for claims out of any monies recovered from a third party, including, but not limited to, your own insurance company as the result of judgment, settlement, or otherwise. In addition you will be required to assist the administrator of the Plan in enforcing theses rights and may not negotiate any agreements with a third party that would undermine the subrogation rights of the Plan. u.S. Airways claimed that the phrase “any monies recovered” permitted u.S. Airways to recoup the $66,866.00 the Plan provided for McCutchen’s medical care out of the $110,000.00 total that he recovered regardless of his legal costs. Specifically, U.S. Airways argued

that “[t]he Plan language specifically authorized reimbursements in the amount of benefits paid, out of any recovery”. U.S. Airways, Inc., No. 10-3836 at 2. McCutchen claimed that it would be unfair and inequitable to reimburse u.S. Airways in full when he had not been fully compensated for his injuries, including pain and suffering. he argued that u.S. Airways, which made no contribution to his attorney’s fees and expenses, would be unjustly enriched if it were now permitted to recover from him without any allowance for those costs. The District Court rejected McCutchen’s arguments and granted summary judgment to u.S. Airways, requiring McCutchen to sign over the $41,500.00 held in trust and to pay $25,366.00 from his own funds. McCutchen appealed to the Third Circuit Court of Appeals. The Third Circuit determined that the case squarely presented the question left open in Sereboff: whether Section 502(a)(3)’s requirement that equitable relief be “appropriate” means that a fiduciary is limited in its recovery by equitable defenses and principles “typically available in equity.” u.S. Airways, Inc., No. 10-3836 at 3. In other words, as stated in great-West life and Annuity Insurance Co. v. Knudson, 534 u.S. 204, 211 (S.Ct. 1993), an equitable remedy must be “deemed to contain the limitations upon its availability that equity typically imposes.” McCutchen argued that u.S. Airways claim must be limited by the equitable principle of unjust enrichment. legal sources consulted by the Third Circuit Court supported McCutchen’s position that the defense of unjust enrichment is applicable to claims for equitable relief. In prior decisions, the Supreme Court has explained that the term “appropriate” is not meaningless Mertens v. hewitt Assocs., 508 u.S. 248, 257-58 (1993), and that “equitable relief must be something less than all relief.” Knudson, 534 u.S. at 209.

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February 2012

u.S. Airways next tried to argue that cases from other Courts of Appeals decided after Sereboff supported the position that equitable doctrines are not applicable under Section 502(a)(3). The Third Circuit rejected such argument. Neither plan language nor federal common law can trump the clear statutory language of Section 502(a)(3). “Congress purposefully limited the relief available to fiduciaries under §502(a)(3) to ‘appropriate equitable relief.’ ” U.S. Airways, Inc., No. 10-3836 at 4. The Court concluded that requiring McCutchen to provide full reimbursement to u.S. Airways would be inappropriate and in equitable. As part of its reasoning, the Third Circuit noted that if legal costs and full payment for medical bills are not taken into account, U.S. Airways would “effectively be reaching into its beneficiary’s pocket, putting him in a worse position than if he had not pursued a third-party recovery at all.” Id. at 2. The Court was of the view that such a result would undermine the purpose of the Plan and amount to a windfall for u.S. Airways.The Court was particularly unsympathetic to u.S. Airways position because it failed to exercise its subrogation rights or contribute to the cost of obtaining McCutchen’s third- party recovery. The case was remanded to the District Court for Western District of Pennsylvania, Pittsburg Division, to engage in additional fact finding and consider factors such as the distribution of third-party recovery between McCutchen and his attorneys, the nature of the attorney-client agreement, the work performed and the allocation of risks between the parties. Although the case was decided in November of last year, the Court of Appeals Mandate vacating the District Court Order was not issued until January 12, 2012. Thus, at the time this article went to press, the District Court had not yet had

IntroducIng

an opportunity to perform any fact finding much less fashion “appropriate equitable relief.” Judging from the factors listed by the Third Circuit for the District Court to consider, I would be surprised if the District Court did not, among other things, reduce the 40% contingency fee obtained by McCutchen’s attorneys. n Steven T. Polino is the Managing Member of the Law Offices of Steven T. Polino, P.L.L.C. Mr. Polino performs a wide variety of regulatory compliance, contract review, preparation, consultation, Plan document preparation and compliance, ERISA consultation, litigation and managed care litigation. He was formerly National Coordinating Counsel in more than twenty-six states concerning medical stop-loss and excess workers compensation litigation. Mr. Polino can be reached at (817) 992-6359 or stplaw@ sbcglobal.net.

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February 2012

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The Self-Insurer

February 2012

IrS poises to

Drop the

hammer captive Insurance

on of

Employer Medical risk by Randall Beckie

February 2012

The Self-Insurer

n a reversal of longstanding tax interpretation, the IrS is developing a position that when a captive insurance company insures an affiliated employer’s accident & health (A&h) risk, the risk is related-party risk, not constructively unrelated-party risk. If captive insurance of employer A&h risk has risk distribution in effect built-in, as existing tax authority suggests, then many more employers might want to transfer their self-insured A&h risk to their wholly-owned captive insurance affiliates (for potential advantages explained further below). On the other hand, if the IrS’ emerging position were correct, a captive that insures an affiliated employer’s A&H risk would not pass muster as an insurance company for tax purposes unless the captive demonstrates risk distribution in some other way – such as by either (A) receiving premiums from literally unrelated parties or (B) insuring risks of several (twelve or seven or fewer?) legal entities. This turn in the IrS’ thinking is a major development that deserves more attention and analysis. The IrS’ emerging view aligns with the IrS’ litigating posture in ten docketed court cases that are addressing the IrS’ stringent definition of risk distribution. Central to the IrS’ view is the notion (as per revenue ruling 2005-40) that risk distribution presupposes a pooling of risk among more than one insured. A corollary of this notion is that risk distribution is undermined where one insured accounts for more than 15% of a captive’s premiums or exposure to loss (see revenue ruling 2002-90). This notion –the “multiple policyholder requirement” – is the IrS’ primary tool for challenging captive insurance arrangements. As Abraham Maslow observed, “It is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.” Thus, the IrS can forestall the proliferation of A&h captive insurance arrangements by positing that captive insurance of single employer A&h risk amounts to

one risk – the employer’s budget risk – not multiple risks of the many employees whose health is ultimately insured by the premiums paid to a captive directly by their employer. But what if the better tax interpretation runs opposite to the IrS’ emerging view?

Advantages of captive insurance of employer A&h risk let’s review the reasons why it matters whether an employer transfers its A&h risk to a captive, as compared to simply self-insuring. Our discussion distinguishes between employer A&h risk vs. employee A&h risk. here, the term “employer A&h risk” means the employer’s budget risk pertaining to the uncertainty of amount and timing of employer contributions to an employee health benefits plan (ehBP). “employee A&h risk” refers to risk for which insurance coverage is purchased with assets that belong to employees – either their own money or plan assets of an ehBP. A premium paid by an employer to a captive for insurance coverage of employer A&h risk generally is not a prohibited transaction under erISA, whereas an erISA prohibited transaction generally would arise where an employee’s money or plan assets of an ehBP are used to pay a premium to a captive that is an affiliate of the employer. Also regarding ERISA, when an EHBP is the buyer of A&h coverage, state commercial insurance regulation (e.g., mandated benefits) applies, whereas when an employer buys A&H coverage from a captive, generally state commercial insurance regulation does not apply and the ehBP remains preempted by erISA from state insurance regulation. Captive insurance of employer A&H risk may create efficiencies similarly as self insurance. In addition, a captive may buy medical stop loss insurance less expensively than an employer can because employer-paid premiums to a commercial insurer would be subject to commercial insurance premium tax in the employer’s state (e.g., 2%), but that would not apply if a captive first insures the employer (incurring, say, 0.2% premium tax) and then cedes the premium to a commercial reinsurer. Also, a captive’s legal status as an insurance company may give the captive better access to claims information than a self-insurance overseer has. Furthermore, if a captive earns a profit by doing business with an affiliate, the affiliate would earn correspondingly less net income that is subject to state income tax. Federal tax planning opportunities surrounding captive insurance of employer A&h risk include tax deferral and tax exemption. Tax deferral results from a captive’s recognition of reserves – not only IBNr reserves but also unearned premium reserves; premium stabilization reserves; and (depending on design) reserves for future medical cost escalation. Tax exemption (wholly or partially) is available insofar as an insurance company qualifies for its tax treatment to fall under one of the following provisions of the tax code: 1. Section 806: The small life insurance company deduction offsets 60% of the insurer’s first $3 million of regular taxable income (but not alternative minimum taxable income). This benefit phases out as net income approaches $15 million. To be eligible, assets cannot exceed $500 million within the controlled group of corporations that includes the insurance company. 2. Section 831(b): Net underwriting income is entirely excluded from a nonlife insurance company’s taxable income recognition in a tax year for which written premiums do not exceed $1.2 million. Investment income remains taxable. 3. Section 501(c)(15): Both underwriting income and investment income are excluded from a non-life insurance company’s recognition of taxable income if gross receipts for the year do not exceed $600,000 for the insurance company and other C corporations within a controlled group. A controlled

The Self-Insurer

February 2012

group includes C corporations the overlapping ownership is more than 50% controlled by five or fewer persons. Commentators lament that captive insurance of A&h risk, by itself, does not confer compelling tax benefits because the only advantage lies in a captive’s ability to deduct an A&h IBNr reserve (Incurred but Not reported). This lament is misplaced: captive insurance of A&h risk is potentially advantageous for other, more significant reasons. Furthermore, captive insurance of employer A&h risk offers potentially some of the above-mentioned advantages without the disadvantage of triggering an erISA prohibited transaction.

Cost/benefit analysis of a dOl prohibited transaction exemption Since 2000, the Department of labor has granted approximately 20

February 2012

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prohibited transaction exemptions (PTes) regarding captive insurance of employee A&h risk, generating headlines in the captive insurance industry news. The newsworthiness of PTes has fostered a widespread impression that a PTe is instrumental to putting A&h risk in a captive – an impression that unfortunately overlooks other, potentially less cumbersome ways to put A&h risk in a captive. An employer’s usual impetus to incur the administrative and transactional costs of obtaining and complying with a PTe has been to demonstrate a source of unrelated party risk within the risk portfolio of the employer’s captive insurance affiliate, thereby imbuing the captive with sufficient risk distribution to merit tax characterization as an insurance company under a rationale described in revenue ruling 2002-89. By and large, the tax planning with captive insurance of employee A&h risk (via a PTe) has

involved enabling the captive to deduct unpaid loss reserves for risks other than A&h risks – such as workers’ compensation loss reserves. The curious aspect of obtaining a PTe is that, arguably, captive insurance of employer A&h risk would give rise to constructively unrelated party risk even without designing the premium to precipitate an erISA prohibited transaction. under the constructive compensation theory (discussed below), arguably unrelated party risk can arise the easy way – by letting the captive cover employer A&h risk, as distinguished from employee A&h risk. If that argument succeeds, the question becomes: Compared to the fronting costs (etc.) incurred with a PTe, would it not be less expensive to defend against potential IrS challenge an arrangement whereby the captive issues an A&h policy to the employer rather than to the ehBP? From the employer’s tax planning perspective, the difficulty has been that

the IRS has been unwilling to confirm that constructively unrelated party risk arises where a captive insures merely employer A&h risk. For want of certainty of this tax interpretation, since 2000 approximately 20 employers have designed captive A&h insurance arrangements that purposely create erISA prohibited transactions and accordingly have sought PTes from the DOl.. The conditions of compliance with a PTe include interposing a commercial insurance carrier between the employer and the captive. The carrier (a.k.a. the fronting company) earns a fronting fee (e.g., 3% or more of premium); incurs state premium tax at commercial insurance premium tax rates (roughly 2%, plus or minus); and requires collateral to back the reserves for unpaid losses. The collateral requirement effectively imposes a cost of capital that is borne by the insured. Furthermore, the PTe requires the employer to have enhanced the employees’ fringe benefits; also pay an independent fiduciary; and pay professional fees and consulting fees that come with the territory of implementing an administratively complicated solution. Taken together, the cost of having a PTe could be approximately 10% of the amount of A&h premiums that fall within the exemption. Compared with the time value of tax deferral planning for a large employer, the frictional cost of having a PTe may be barely worthwhile, if costeffective at all. For a small or mediumsized employer, a PTe generally would be prohibitively expensive.

the genesis of the IrS’ new view According to the Treasury Department’s 2011-2012 Priority guidance Plan, the IrS intends to issue a revenue ruling addressing the application of rev. rul. 2005-40 or rev. rul. 92-93 to health insurance arrangements that are issued by a single employer. In a comment letter

from May 2011, on behalf of The Coca Cola Company, groom law group asked the IrS to issue such a revenue ruling. groom had requested a private letter ruling (Plr) on behalf of Coca Cola two years earlier, which the IrS has not issued. Coca Cola’s veBA bought retiree medical insurance from Coca Cola’s captive. Coca Cola obtained a prohibited transaction exemption (PTe) from the Department of labor. A PTe is not tax guidance; a Plr is. groom’s letter suggests that where a captive insures an employee health benefits plan (e.g., Coca Cola’s veBA), rev. rul. 92-93 should apply to construe the risk as unrelated party risk in the captive’s hands. In contrast, per groom’s letter, where a captive insures an employer’s risk of funding employee health benefits, the captive takes on relatedparty risk, similarly as in rev. rul. 2005-40. In rev. rul. 2005-40, where a captive insures (without more) the risks arising from 10,000 trucks belonging to one business, arrangement is not insurance, due to lack of multiple insureds (therefore insufficient risk distribution). In contrast, if the captive insures 12 subsidiaries that collectively own 10,000 trucks, then risk distribution would suffice to qualify the captive as an insurance company, says Rev. Rul. 2005-40. rev. rul. 92-93 provides that where a captive insures employer A&h risk, the employer may deduct the premium as compensation expense, as if the premium payment constituted constructive compensation to the employees. rev. rul. 92-93 is widely interpreted to mean that captive insurance of employer A&h risk has risk distribution constructively built-in by looking through to the underlying risk of the employees. In the IrS’ new thinking, where a captive issues an A&h policy to an employer rather than to employees (or their ehBP), the analysis in rev. rul. 2005-40 applies rather than the construction compensation theory that underpins rev. rul. 92-93. From perspective of rev. rul. 2005-40, if the employer is the policyholder of an A&H policy issued by a captive, the employer must be also the beneficiary. This interpretation departs from the traditional meaning of a “beneficiary,” which refers to one who keeps the money. For example, when an employer holds a corporateowned life insurance policy, the employer is the beneficiary because potential insurance proceeds would remain with the employer. See rev. rul. 72-25. A&h insurance is different: when an employer receives A&h insurance proceeds, such proceeds merely reimburse an employee medical cost that the employer must otherwise fund. To view A&h risk of 10,000 employees the same as 10,000 trucks is to regard employees as if they were objects of property of their employer. That notion was invalidated by the 13th Amendment (abolishing slavery). A business owning 10,000 trucks need not worry that a truck might quit its job because another employer offers more attractive medical benefits; employees are different that way. When an employer budgets for repairing a truck, the employer makes a promise to itself. When an employer budgets (and buys insurance for) medical cost, the employer has given something away as fringe benefit compensation, at least as the tax law traditionally has construed the premium. regardless of whether the captive’s contractual relationship is with the employer or the employees, typically the employer bears most of the cost of employee medical care. From the captive’s perspective, the characteristics of the risk are the same whether insurance policy runs to the employer or the employees. To distinguish between employer A&h risk vs. employee A&h risk is to elevate the legal formalities of the captive insurance arrangement above its economic substance. having looked to the DOl for tax guidance about A&h captives, the captive insurance industry is about to get what it asked for: namely, IrS acquiescence that if a captive insures employee A&h risk in a way that requires a PTe, the risk is unrelated party risk. While this development may satisfy the few employers that have sought to put A&h risk into their captives in a cumbersome way, this

The Self-Insurer

February 2012

development is a setback for the many employers whose captives could insure A&h risk moreeasily by insuring the employer. At least, it is a setback if one lets the IrS have the final say. However, the IRS does not make the law; Congress and the courts do. What Congress and the courts have said seems to contradict the IrS’ new view.

the basis of the constructive compensation theory The notion that an employer’s payment of A&h premium is constructively fringe benefit compensation expense, as Rev. Rul. 92-93 says, stems from in U.S. Supreme Court decisions (including haynes v. u.S., 353 u.S. 81 (1957)), treasury regulations, and tax legislative history. After the 1969 Tax Act, treasury regulations were amended to make a veBA not an insurance company, but the regulations accommodate the notion that an insurance company could be captive that covers A&h risk of a single employer (without more). Moreover, where there a medical cost incurred by an employee is the proximate cause of the loss that the insurer ultimately reimburses – whether via an employer or not – the Origin of Claim doctrine applies to characterize the insurer’s loss in the same way as the employee characterizes it. See rev. rul. 80-95; also united States v. gilmore, 372 u.S. 39 (1963) and subsequent jurisprudence that characterizes an insured loss according to the proximate cause of the loss event. There is a statutory basis for the constructive compensation theory. under the 1939 Internal revenue Code, employees were allowed to exclude from individual income recognition the receipt of insurance proceeds for sickness, accident or disability. The 1954 Code amended the 1939 Code to allow this exclusion regardless of whether the employee received such proceeds from an insurance company or from an employer’s self-insurance plan. The 1954 amendment eliminated the need for an insurance company to be involved in the delivery of A&H “insurance” benefits to employees. The employer’s self-insurance plan may be unfunded (pay-as-you-go) or funded (as where the employer purchases an insurance policy). Thus, the presence or absence of an insurance company’s involvement in an A&h plan is, since 1954, irrelevant to whether an employee receives A&H insurance benefits. To similar effect, Haynes v. U.S. held that an employee’s health benefits were as if from an insurance company even though provided by a self-insured employer. From this idea, the captive insurance argument is: Considering that the employees are deemed to have received insurance by virtue of the employer paying a premium to an insurance company, the insurer should be deemed to be insuring risks of employees. under section 106, as added by the 1954 Code, when an employer pays a health insurance premium to an insurer (which could include a captive insurer), the premium payment is excluded from the employee’s individual income tax recognition -- meaning that the premium is constructive compensation (fringe benefit income) that is a tax-exempt type of compensation. under section 105, when the insurance company reimburses the employee’s doctor bill, the reimbursement is not taxable income to the employee. Which raises the question: Which event is the compensatory event to the individual employee: is it (A) the employer’s payment of premium to the insurer or (B) the insurer’s payment of medical cost reimbursement to the employee? The question is made more confusing by the fact that the constructive compensation, wherever it arises, is of a nontaxable character. The IrS’ answer to this question (since the 1990s) has been that neither (A) nor (B) is correct. Instead, constructive compensation consists of being covered by a

February 2012

The Self-Insurer

group health insurance policy (whether insured or self-insured by the employer, and regardless of the attributes of an employee health benefits plan). Constructive compensation is earned day by day for each day during which group health insurance coverage applies to the individual employee. But regardless of confusion as to when constructive compensation occurs, for purposes of determining whether a captive demonstrates risk distribution, the relevant issue is whether, not when, constructive compensation occurs. Once the IrS issues a revenue ruling to say that captive insurance of employer A&h risk constitutes related party risk, it would take a fight to rely on arguments to the contrary, even if such arguments are winnable. The topic is complex, and authority in support of the favorable argument requires some reading between the lines of tax legislative history and court decisions that arose before erISA was enacted. even so, the argument that captive insurance of employer A&h risk has risk distribution built-in deserves more discussion and analysis within the captive insurance industry than has been devoted to that topic in recent years. It took twelve years before the IrS’ economic family theory per rev. rul. 77-316 was rejected in Humana v. Commissioner, 881 F.2d 247 (6th Cir. 1989), and it took another twelve years before the IrS acquiesced to Humana in rev. rul. 2001-31. The basis of the humana decision was the Moline Properties doctrine from a u.S. Supreme Court case decided nearly half a century earlier. likewise with captive insurance of employer A&h risk, the controlling tax doctrine arguably derives from another u.S. Supreme Court case: Haynes v. U.S., the importance of which is by now so ancient that it may take another decade of revisiting it before captive insurance tax interpretation is settled in its light. n

Randall Beckie, CPA, brings to captive insurance companies the insurance tax insights accumulated from two decades of problem solving inside Big 4 CPA firms as director/senior manager and captive insurance thought leader. As an independent tax adviser based in New York City since 2008, Randy heads Frontrunner Captive Management, which combines leading-edge captive tax planning with follow-through services, including captive management on a program-specific basis and fill-in-the-gap technical support for captives that choose to self-manage. Several private tax rulings from the IRS that he has drafted/obtained are landmarks in captive insurance tax interpretation. His articles appear regularly in Captive Review. Comments and questions always welcome at rbeckie@frontrunnercaptive.com.

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The Self-Insurer

February 2012

Art gAllerY by Dick Goff

has the time come for an “Art Spring?”

ven before randy Beckie agreed to write an article for The Self-Insurer on current challenges of captives with the IrS, I was pretty steamed about the inconsistencies the ArT world encounters with our national tax collector. The gist of randy’s article seems to be that the tax law and the IrS view of captives for employee benefits are seemingly at odds. While tax law suggests that employer-sponsored benefits captives have built-in risk distribution, the IRS appears reluctant to concede that point. I think it was that “Off with their heads!” queen in the wonderful fable “Alice in Wonderland” who said something like “The facts are just what we say they are, no more and no less.” Now I know where the IrS got that attitude. The agency doesn’t even follow its own laws as it sits in judgment on individual captive insurance companies. There has never been a better instance to employ the sports cliché of seeking a level playing field. Picture your favorite baseball team having difficulty adjusting to an umpire’s vague notion of the strike zone – this happens all the time. But then stretch the analogy to rotating the four umpires, so a new strike zone would confound the players each inning. Who could pitch? Who could hit? Or in football, what if the whole crew of officials was substituted each time a team advanced 10 yards or more, and the new ones brought their own set of rules to enforce? Where’s the level playing field for either team? That’s no more absurd than the way the IRS conducts its business with field offices and the Washington, DC headquarters all providing interpretations that must each be accepted as gospel. The ArT industry and many would-be insured organizations are losing millions of dollars because of scattered or aberrant application of the tax laws. And along that line, a cottage industry has developed among consultants who have found a lucrative practice in advising about, and managing, voluntary Employees’ Beneficiary Association (VEBA) trusts that they say are necessary for captives to hold benefit contributions to self-insured employee group medical plans from both employers and employees. The consultants say this will assure approval of the captive by the IrS, but the dagger in the back is that once employer money is commingled with employee contributions and locked up in a veBA trust it is gone for good, not available to the employer at any time in the future, as I wrote in this space last May. We believe a captive may rather follow a strategy of identification and segregation: Identify whose money is being held in trust and segregate employee contributions for greater corporate flexibility in managing cash flow. But no one can guarantee that such an approach – or any other selffunding structure now available – will be sanitized in the next IrS review. That’s the crux of the challenge now facing the ArT world – and one which could ultimately destroy it.

February 2012

The Self-Insurer

If ever there were a time for the industry and its trade association to form an action plan to require consistent application of federal tax laws, this would seem to be that time. We’re not “anti-IrS.” We understand that tax laws as passed by Congress must be enforced, and taxes collected for the general benefit. No problem. All we would ask is that IrS personnel follow the laws on the books without freelance interpretations. If a law must be changed, so be it. But in the meantime, let us work within the laws that exist. I would be very interested to see a sample of comments and opinions on this issue including reactions to randy Beckie’s more technical and learned findings, along with the possibility of concerted protest. We’ve got marvelous new tools for that discussion, including the linkedIn website and the new discussionstimulating features of SIIA’s “Positively SIIA” movement. last year the Arab Spring revolutions brought about a seismic shift in the fortunes of tyrants in several countries – of course, the end result of those movements is not yet fully apparent, but the point of the many throwing off the tyranny of the few is valid. Could an “ArT Spring” movement accomplish that kind of freedom from bureaucratic tyranny here in the u.S.? I’m ready to storm the barricades. n Dick Goff is managing member of The Taft Companies LLC, a captive insurance management firm and Bermuda broker at dick@taftcos.com.

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The Self-Insurer

February 2012

PPACA, HIPAA and Federal Health Beneﬁt Mandates:

Practical

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

Q&A

IrS Issues Additional Guidance on Form W-2 reporting for health coverage costs

he IrS has issued more guidance, IrS Notice 2012-9 (“2012 Notice”), on the W-2 reporting of certain employer sponsored health coverage that is required under the Patient Protection and Affordable Care Act (PPACA). You can find the 2012 Notice at www.irs.gov/pub/irs-drop/n-12-09.pdf

The 2012 Notice follows the guidance issued by the IrS in 2011, Notice 201128 (“2011 Notice”), and like the 2011 Notice, the 2012 Notice provides much needed clarification for plan sponsors with regard to the new requirement. The notice is timely as the reporting requirement first begins with respect to coverage provided in 2012. Practice Pointer: Plan sponsors are required to report the “aggregate reportable cost” of “applicable employer sponsored coverage” on an employee’s W-2 for informational purposes only. The tax status of employer provided health coverage is not affected by this new requirement. For those of you who are familiar with the guidance in the 2011 Notice and want to know what is different in the 2012 Notice, we summarize the clarifications made in the 2012 Notice below. however, for everyone else, we follow this short summary with a comprehensive overview of the new reporting requirement as reflected in both the 2011 Notice and the 2012 Notice.

February 2012

The Self-Insurer

Overview of the Clarifications and Modifications in the 2012 Notice The 2012 Notice provides the following new clarification. • Tribally chartered corporations: until further guidance is issued, the reporting requirement does not apply to tribally chartered corporations wholly owned by federally recognized Indian Tribal governments. • Small employer exemption/agents: The 2012 Notice clarifies that the small employer exemption created by the 2011 Notice–the exemption that is based on employers who are required to file less than 250 Forms W-2 for a year–is determined based on the number of W-2s the employer would otherwise be required to file and without regard to the use of an agent. If an agent files the W-2 on an employer’s behalf, and the employer is otherwise required to report, the employer must provide the necessary information to the agent (but see below regarding W-2s provided by third party sick pay providers). • related employers/Common Paymaster: The 2011 Notice indicated that cost of coverage for an employee who is concurrently employed by related corporations that compensate the employee through a common paymaster in accordance with Code Section 3121(s) must be reported by the common paymaster. The 2012 Notice further clarifies that related employers that do NOT compensate a concurrently employed individual through a common paymaster may either report the aggregate reportable cost of coverage provided to the

employee by each of the related employers on one of the Forms W-2 or they may allocate the aggregate reportable cost of such coverage to each Form W-2 issued by the related employers by any reasonable allocation method. • health FSAs: The 2012 Notice clarifies that the reporting requirement does not apply to health FSAs funded solely through salary reductions. however, as noted in the 2011 Notice, employer flex credit dollars allocated by the employer to the health FSA may have to be reported in certain instances (see below for more details). • Dental/vision: The 2012 Notice clarifies that Dental and vision benefits that qualify as “excepted benefits” as defined by the hIPAA portability rules are not applicable employer sponsored coverage the aggregate cost of which is required to be reported

on the W-2. PPACA includes an exemption for dental and vision benefits similar to that which is under hIPAA for dental and vision benefits that qualify as excepted benefits but PPACA did not specifically reference HIPAA. • Discriminatory Coverage: The 2012 Notice indicates that “excess reimbursements” included in a highly compensated employee’s income under Code Section 105(h)’s nondiscrimination rules reduces the aggregate reportable cost of the applicable employer sponsored coverage provided to the employee for reporting purposes. For example, if the cost of the highly compensated employee’s coverage is $12,000, but the highly compensated employee received a $4000 excess reimbursement under Code Section 105(h), only $8000 would be reported.This is a change in course from the 2011 Notice, which indicated that excess

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February 2012

reimbursements neither reduced nor added to the cost of the highly compensated employee’s coverage required to be reported (i.e. the reportable cost, in our example, would be $12,000, not $8,000). • 2% shareholder-employees: The 2012 Notice indicates that the cost of coverage provided to a more than 2% shareholderemployee that is taken into income is not an aggregate reportable cost. The 2011 Notice did not address the cost of coverage provided to more than 2% shareholders. • Composite rate Calculations: The 2012 Notice further clarifies that if an employer uses a composite rate (as defined in Q-28 of both the 2012 Notice and the 2011 Notice) for active employees but is not using a composite rate for COBRA qualified beneficiaries, the employer may use either

•

the composite rate or the applicable COBrA premium to determine the aggregate reportable cost. eAP, wellness program, onsite medical clinics:The cost of such programs are not required to be included in the aggregate reportable cost, even though they may otherwise qualify as applicable employer sponsored coverage, to the extent that a premium is not charged to a qualified beneficiary for such coverage under COBrA. reporting cost of coverage only a portion of which constitutes health coverage: The 2012 Notice clarifies that employers that offer coverage only a portion of which is applicable employer sponsored coverage required to be reported (e.g. a long term disability plan with a health coverage component), employers may use any reasonable allocation method to determine the reportable cost. If the applicable employer sponsored coverage is incidental in comparison to the portion of the program that is not applicable employer sponsored coverage, no costs associated with the program are required to be reported. likewise, if the coverage that is not reportable is incidental in comparison to the portion that is applicable employer sponsored coverage required to be reported, the employer may report the entire cost of coverage under the program as the aggregate cost. Notice after the end of the year of events occurring prior to the end of the year: The 2012 Notice clarifies that no adjustments are required if notice of an event is provided after the end of the year that has a retroactive effect on coverage the cost of which is required to be reported (e.g. notice on January 15, 2013 of a divorce that occurred on November 20, 2012). Not surprisingly, a W-2c is not required if a W-2 has already been issued prior to receiving such notice. Coverage/Payroll Periods that extend through December 31. If a coverage period,

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February 2012

The Self-Insurer

such as the final payroll period, extends through December 31 into the subsequent year, employers may report the coverage provided during the period that includes December 31 and into the subsequent calendar year using any one of the following methods: (i) treat the coverage after December 31 as provided during the calendar year that includes December 31; (ii) treat the coverage after December 31 as if it were provided during the subsequent calendar year and (iii) allocate the cost of coverage during the entire period that includes December between the two calendar years by any reasonable allocation method. • Hospital and other fixed indemnity: The 2012 Notice clarifies that hospital or other fixed indemnity insurance that is otherwise an excepted benefit (as defined by hIPAA’s portability rules) is exempt from reporting unless: (i) the employer makes any tax free contribution towards the premium or (ii) the employee pays any portion of the premium with pre-tax salary reductions under a cafeteria plan. • W-2 provided by a third party sick pay provider: The 2012 Notice clarifies that reporting is not required on W-2s provided by third party sick pay providers. however, a W-2 provided by the employer is subject to the reporting requirements without regard to whether the third party sick pay provider is providing a separate Form W-2 with respect to the sick pay. • Other coverage:The employer may, but is not required to, report the cost of applicable employer sponsored coverage that is not otherwise required to be reported in accordance with the interim relief provided by the 2012 Notice. Thus, for example, the employer may, but is not required to report

the cost of hrA coverage provided to an employee. Since 2012 is the first year during which coverage provided must be reported, plan sponsors should review any steps they have already taken in reliance on the 2011 Notice and determine what, if any additional steps are required, or permitted as a result of the 2012 Notice. Below is a more comprehensive review of the new W-2 reporting requirement that incorporates the provisions of both the 2011 Notice and the 2012 Notice.

Comprehensive Overview What is the new W-2 reporting requirement? New Code Section 6051(a)(14), which was added by Section 9002 of PPACA, provides generally that employers must include the “aggregate reportable cost” of “applicable employer-sponsored coverage” on an employee’s W-2. There is no corresponding requirement to report health care costs on the corresponding Form W-3 (Transmittal of Wage and Tax Statements). Practice Pointer: The new reporting requirement is informational only; it does not cause excludable employer-provided coverage to become taxable.

When is the new W-2 reporting requirement effective? Although originally effective for tax years beginning in 2011, the 2011 Notice officially delayed the reporting requirement to tax years beginning January 1, 2012. Thus, the first W-2 on which the aggregate reportable cost of applicable employer sponsored coverage must be reported is the W-2 for the 2012 calendar year, which is required to be provided no later

January 31, 2013. Coverage provided prior to January 1, 2012 is not required to be reported (although employers are permitted to report the aggregate reportable cost of applicable employer sponsored coverage provided during 2011 on the 2011 Form W-2).

Which employers are subject to the new W-2 reporting requirement? virtually all employers, including governmental employers and taxexempt entities, are subject to the new reporting requirement. however, the following employers are not subject to the reporting requirement: • until further guidance is issued, small employers that were required to file fewer than 250 Forms W-2 during the prior year; Practice Pointer: Are related employers considered when making a small employer determination? The answer is not clear. The rule is based on the exemption set forth in Code Section 6011(e) that exempts employers from filing electronic returns if they file fewer than 250 returns. If the filer of the W-2 is exempt from filing an electronic return in the prior year, the filer is arguably exempt from the new W-2 reporting requirement. However, confirming guidance from the IRS on this issue would be welcome. • Federally recognized Indian tribal governments, • Tribally charted corporations wholly-owned by a federally recognized Indian tribal government. Practice Pointer: An employer whose only “applicable employer sponsored coverage” is self-insured coverage that is not subject to any federal continuation coverage requirements is also not subject to reporting. See “What is applicable employer sponsored coverage?” below for more details.

The Self-Insurer

February 2012

What if we use a common paymaster? The aggregate reportable cost of applicable employer sponsored coverage for an employee who is concurrently employed by related corporations that compensate the employee through a common paymaster in accordance with Code Section 3121(s) must be reported by the common paymaster. however, related employers that do NOT compensate a concurrently employed individual through a common paymaster may either report the aggregate reportable cost of coverage provided to the employee by each of the related employers on one of the Forms W-2 or they may allocate the aggregate reportable cost of such coverage to each Form W-2 issued by the related employers by any reasonable allocation method

What if the W-2 is filed by an agent or third party sick pay provider? If the employer uses an agent to file the employer’s W-2 in accordance with Code Section 3504, the agent must satisfy the new reporting requirement on behalf of the employer to the extent that the employer would otherwise be subject to the new W-2 reporting requirement without regard to whether the employer used an agent. Thus if the employer on whose behalf the agent files the W-2s would be subject to the small employer exemption, the agent is not required to satisfy the W-2 requirement with respect to that employer. On the other hand, reporting is not required on W-2s provided by third party sick pay providers; however, a W-2 provided by the employer is subject to the reporting requirements without regard to whether the third party sick pay provider is providing a separate Form W-2 with respect to the sick pay. If an employee transitions to a successor employer under Code Section 3121(a) (1), who must satisfy the new W-2 reporting requirement? If an employee transitions to a successor employer under Code Section 3121(a) (1), both the successor and predecessor employer must satisfy the new W-2 reporting requirement (unless exempt) with respect to the aggregate reportable cost of applicable employer sponsored coverage provided that employer unless the successor employer follows the optional procedure in rev. Proc. 2004-53 and issues one W-2 reflecting wages paid by both the predecessor and the successor.

For which employees is reporting required? reporting is only required for employees for whom a W-2 must otherwise be issued. Thus, for example, former emploeyes who participate in a retiree medical plan, but for whom a W-2 is not issued, need not be included in the W-2 reporting for health coverage.

What is “applicable employer sponsored coverage” for W-2 reporting purposes? The reporting requirement generally applies with respect to coverage under employer-sponsored group health plans. For this purpose, a group health plan is a plan (including a self-insured plan) of, or contributed to by, an employer (including a self-employed person) or employee organization to provide health care (directly or otherwise) to the employees, former employees, the employer, others associated or formerly associated with the employer in a business relationship, or their families. For purposes of determining whether a specific arrangement is a group health plan, employers may rely on a good faith interpretation of the statute and any applicable guidance, including guidance under COBrA.

February 2012

The Self-Insurer

The following are not considered applicable employer sponsored coverage? • long term care • Any coverage described in Code Section 9832(c)(1)–other than coverage through an onsite clinic (see discussion below under “For which applicable employer sponsored coverage are the aggregate costs not included on the W-2?” for more information on onsite clinics). Such coverage includes: • Coverage only for accident and/or disability • Coverage issued as a supplement to liability insurance • liability insurance • Workers’ compensation or similar insurance • Automobile medical payment insurance • Credit only insurance • Any coverage under a separate policy, certificate or contract of insurance which provides benefits substantially all of which are for treatment of the mouth or eye. Practice Pointer: The scope of the statutory exemption for dental and vision described above is not clear. The 2012 Notice provides interim transition relief for dental and vision benefits. Under the transition relief, the costs of dental and/or vision that qualify as an excepted benefit under HIPAA’s portability rules are not required to be reported. However, if the benefit is not an excepted benefit, the aggregate costs of such benefit must be reported. • Any coverage described in Code Section 9832(c)(3) the payment for which is not excludable from gross income and for which a deduction under Code Section 162(l) is not allowable. Such coverage includes hospital and other fixed indemnity insurance,

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The Self-Insurer

February 2012

and specified disease insurance, to the extent that such insurance is issued pursuant to a separate policy that is not coordinated with medical coverage. Practice Pointer: The 2012 Notice clarifies that hospital or other fixed indemnity insurance that is otherwise an excepted benefit (as defined by HIPAA’s portability rules) is exempt from reporting unless: (i) the employers makes any tax free contribution towards the premium or (ii) the employee pays any portion of the premium with pre-tax salary reductions under a cafeteria plan. Thus to the extent that the employer merely makes such coverage available to employees and does not provide an opportunity to pay the premium with tax free dollars, the coverage is not applicable employer sponsored coverage.

What is the “aggregate cost” of applicable employer sponsored coverage that is required to be reported? The aggregate cost is the total cost of all applicable employer sponsored coverage provided to the employee. Practice Pointer: The aggregate costs of applicable employer sponsored coverage are generally reported without regard to whether such costs are excluded from income. However, there are exceptions. See “What costs are not included in the aggregate reportable costs of applicable employer sponsored coverage?” below for more information.

What costs are not included in the aggregate reportable costs of applicable employer sponsored coverage? The costs associated with following applicable employer sponsored

February 2012

The Self-Insurer

coverage are not required to be reported: • contributions to an Archer MSA or a health Savings Account (hSA); Practice Pointer: Although not required as part of the new W-2 reporting requirement under PPACA, Health Savings Account contributions made by the employer (including pre-tax salary reductions) are already required to reported on the Form W-2 under Code Section 6051(a)(12). Such contributions are included box 12 of the W-2, Code W. • Coverage under an eAP, wellness program, and/or Onsite Clinic to the extent a COBrA premium is not charged to qualified beneficiaries for such coverage.* Practice Pointer: As a threshold matter, if the above mentioned programs are not “group health plans”, they are not “applicable employer sponsored coverage”. Many employers struggle with whether these types of programs are group health plans. For example, an EAP is typically a group health plan to the extent it is offered by the employer and provides more than a mere referral service for care. However, if they are group health plans and thus applicable employer sponsored coverage, the costs of such programs are still not included in the aggregate reportable costs if a COBRA premium is not charged to a qualified beneficiary on COBRA. • health FSA Salary reductions; Practice Pointer: Although Health FSA salary reductions will not be reported, the employer’s non-elective contributions to the Health FSA may be in certain instances. If the “Amount of the Health FSA” for the plan year exceeds the employee’s salary reduction for all qualified benefits for the plan year, then the Amount of the Health FSA, reduced by the employee’s health FSA salary

reductions, must be reported. The amount of the health FSA is the sum of the employer’s non-cashable credits that the employee elects to apply to the Health FSA. For example, if an employee only enrolls in the Health FSA, under which he makes a $700 annual salary reduction election and to which the employer makes a matching $700 contribution. The Amount of the Health FSA is $1400. In this case, the Amount of the Health FSA is greater than the employee’s total salary reduction for all benefits ($700); therefore, the employer must report $700 (the Amount of the Health FSA ($1400) reduced by the employee’s Health FSA salary reduction ($700)). • Coverage under an hrA (i.e., if the only employer provided coverage is an hrA, no reporting is required);* • Coverage under a multiemployer plan;* • Coverage under a plan of a self-insured employer that is not subject to any federal continuation coverage requirement (e.g., church plans);* and • Coverage provided by a federal, state or local government to members of the military and their family. • The “excess reimbursements” included in a highly compensated employee’s income under Code Section 105(h)’s nondiscrimination rules is not reported. In fact, the excess reimbursement reduces the aggregate reportable cost of the applicable employer sponsored coverage provided to the employee for reporting purposes. For example, if the cost of the highly compensated employee’s coverage is $12,000, but the highly compensated employee received a $4000 excess reimbursement under Code Section 105(h), only $8000 would be reported.

Practice Pointer: This is a change in course from the 2011 Notice, which indicated that excess reimbursements neither reduced nor added to the cost of the highly compensated employee’s coverage required to be reported (i.e. the reportable cost, in our example, would be $12,000, not $8,000). • The cost of applicable employer sponsored coverage provided to a more than 2% shareholderemployee of a subchapter S corporation that is taken into income. *The exclusions marked with an asterisk are provided on a transition basis and apply at least with respect to Forms W-2 required for 2012. Future guidance from the IRS may limit the availability of some of this transition relief. Any future guidance that is more restrictive will be prospective only.

Practice Pointer: An employer may, but is not required to, include the costs of the coverage identified with asterisk above on the W-2, if the calculation of the cost of coverage meets the requirements discussed below, and the coverage constitutes applicable employer-sponsored coverage.

how do you calculate the aggregate reportable costs? The entire cost of applicable employer coverage must be reported to the employee, without regard to whether (i) the employer or employee pays for the coverage; (ii) the coverage covers just the employee or the employee, his or her spouse and any dependents; or (iii) a portion of the coverage is taxable to the employee (e.g., coverage provided to a non-dependent adult child over age 26 or to a non-tax-dependent domestic partner). The IrS provides four methods that employers may use to calculate the cost of coverage. employers may use different methods for different plans, provided that they use the same method for every employee receiving coverage under the same plan. • COBrA Applicable Premium: report the cost of coverage by using the COBrA rate for that period. A good faith estimate of the COBrA premium may be used. • Premium Charged: report the cost of coverage by using the premium charged by the insurer for the employee’s coverage for the applicable period. • Modified COBRA Premium: For employers who subsidize the cost of COBRA, report the cost of coverage by using a reasonable good faith estimate of the COBrA applicable premium. If the actual premium charged is equal to the COBrA applicable premium for a prior year, report the cost of coverage by using the COBrA period for each period in the prior year.

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The Self-Insurer

February 2012

• Composite rate: report the cost of coverage by using the same reportable cost for a period for (1) the single class of coverage under the plan; or (2) all the different types of coverage under the plan for which the same premium is charged to employees, provided that this method is applied to all types of coverage provided under the plan. An example of a plan with a composite rate would be a plan that charges a self-only rate, a self-and-spouse rate and a family rate, regardless of how many members are in the family. If an employer uses a composite rate for active employees but not for COBrA qualified beneficiaries, the employer may use either the composite rate or the applicable COBrA premium to determine the aggregate cost of coverage if the same method is used for all active employees and COBRA beneficiaries.

how do you calculate the aggregate reportable costs of coverage, only a portion of which includes applicable employer sponsored coverage? If an employer offers coverage only a portion of which is applicable employer sponsored coverage required to be reported (e.g. a long term disability plan with a health coverage component), employers may use any reasonable allocation method to determine the aggregate reportable cost. If the applicable employer sponsored coverage is incidental in comparison to the portion of the program that is not applicable employer sponsored coverage, no costs associated with the program are required to be reported. likewise, if the coverage that is not reportable is incidental in comparison to the portion that is applicable employer sponsored coverage required to be reported, the employer may report the entire cost of coverage under the program as the aggregate cost.

how do you calculate the aggregate reportable costs when an employee has a change in coverage during the year? If an employee enrolls in, terminates or changes coverage during the year, then the amount reported must take into account the change in coverage for the period. For changes during the middle of a period, the employer can use any reasonable method to determine reportable cost for such period, including averaging or prorating the reportable costs, as long as the employer uses the same method for all employees it covers under the plan.

how do you calculate the aggregate reportable costs when an employee terminates during the year? If an employee terminates employment before the end of the year, the employer may use any reasonable method of reporting the cost of coverage, provided that the same method is used for all employees in the plan. If a terminated employee requests a W-2 prior to the end of the calendar year in which they terminated employment, the employer does not have to report the cost of coverage on that employee’s W-2, and does not need to issue a separate W-2 solely for purposes of satisfying the health coverage reporting requirement.

For what time period must the aggregate reportable costs be reported on the W-2? The employer must report the cost of coverage on a calendar year basis, regardless of the plan year used for the health plan. If the coverage period of a calendar year includes December 31 but continues into the subsequent calendar year, the employer has three options for addressing this coverage period: (1) treat the coverage as provided during the calendar year that includes December 31; (2) treat the coverage as provided during the calendar year immediately subsequent

February 2012

The Self-Insurer

to the calendar year that includes December 31; or (3) allocate the cost of coverage for the coverage period between each of the two calendar years under any reasonable allocation method, which generally should relate to the number of days in the period of coverage that fall within each of the two calendar years. The employer must apply the method selected consistently to all employees.

What are the consequences of failing to satisfy the new W-2 reporting requirements? The new W-2 reporting requirements have a number of implications for employers: • The penalties for failure to comply with the new requirement are the same as those applicable to W-2 reporting generally, which range between $30 and $100 per W-2, depending on the length of time the employer fails to comply, with capped penalties for small businesses. • employers need to begin to modify their systems now so that they are ready with required information for the January 2013 Forms W-2. In particular, employers (and payroll agents) must implement a system to determine what coverage is subject to the reporting requirement for each employee, determine the cost of the coverage, and report the aggregate value of such coverage. • Further systems changes may well be required when the IrS issues guidance with respect to the Cadillac plan tax for 2018. • employees understand that Form W-2 includes information regarding taxable compensation– employers should consider whether further employee communications are needed in order to prevent confusion. n

The Self-Insurer

February 2012

Pharmacy Benefit, Wellness and Drugs Costs – how they all tie together! by Jennifer Kingsley Wilson

s six months really a long time? When you first think of six months – such as six months of school, or a six month subscription to the newspaper, or a six month pregnancy (wouldn’t that be great!) – six months is really not a long time at all. That’s what I thought when I began a 24 week program which has changed my life as I knew it forever, but in a good way. This past year we stumbled across a wellness program that is drastically different. So different and effective that it is something we can support. What are we talking about? read carefully and learn how simple it is. Wellness and prevention measures

February 2012

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are at the forefront of managing medical benefits. One of the hottest topics is the increasing drug costs associated with chronic conditions. related drug costs have spiraled out of control for obesity, diabetes, chronic inflammation, fibromyalgia, arthritis, metabolic syndrome, IBS and gI disorders, ADhD, asthma, migraine headaches, chronic fatigue, eczema/ other skin conditions – to name a few. All of these conditions are currently being treated with multiple, expensive prescriptions while the patients remain uncured and are usually taking these drugs for the rest of their lives. Today, seven out of ten deaths are attributed to chronic disease. What if

we could turn the tide? how can we stop the condition from occurring or continuing? First, let’s take a look at where the money is being spent. The dollars are astounding! The saying is “let Thy Food be Thy Medicine.” What does this have to do with drug costs? everything! We discovered a unique approach that has been available for over a quarter century and is tailored to each patient. Just like a fingerprint, everyone has their own unique immune system. Most people don’t realize that the foods, dyes, herbs and molds they ingest or come in contact with on a daily basis are inhibiting their body from metabolizing or digesting

uS SpEndInG $Bn 2010 TOTAL US MARKET $307.4 1 Oncologics 22.3 2 respiratory Agents 19.3 3 lipid regulators 18.8 4 Antidiabetes 16.9 5 Antipsychotics 16.1 6 Anti-ulcerants 11.9 7 Antidepressants 11.6 8 Autoimmune Diseases 10.6 9 hIv Antivirals 9.2 10 Angiotensin II 8.7 11 Narcotic Analgesics 8.4 12 ADhD 7.2 13 Platelet Aggregation Inhibitors 7.1 14 erythropoietins 6.1 15 Multiple Sclerosis 5.7 16 Anti-epileptics 5.6 17 vaccines (Pure, Comb, Other) 5.0 18 hormonal Contraceptives 4.8 19 Anti-Alzheimers 4.5 20 Immunostimulating Agents 4.2

2009 $300.3 21.5 18.1 18.6 15.0 14.7 14.1 11.5 9.7 8.2 8.6 8.0 6.3 6.5 6.3 4.9 6.9 4.6 4.7 4.0 4.1

2008 $285.7 19.7 16.0 18.1 12.8 14.3 14.2 11.7 8.6 7.1 7.6 7.3 5.2 5.7 6.9 4.1 11.1 5.0 4.5 3.4 4.1

2007 $280.5 18.1 15.1 19.4 11.4 12.8 14.6 11.7 7.6 6.2 6.5 6.7 4.6 5.0 8.4 3.4 10.0 5.9 4.1 2.9 4.1

2006 $270.3 15.8 13.1 22.4 10.2 11.4 14.1 13.3 7.0 5.6 5.7 5.7 4.0 4.7 9.8 3.2 8.7 3.9 3.9 2.5 4.0

Source: IMS Health, National Prescription Audit, Dec 2010

in 19 out of 20 disease categories. Amazingly, other symptoms people were unaware of improved as the contraindicated foods were removed. As a case study example, my oldest daughter was experiencing ADhD. I thought feeding her broccoli was healthy, wouldn’t you? We found it was a reactive food for her! She has severe gluten and dairy problems as well as a severe intolerance to mint – her toothpaste of all things! My younger daughter had no problems with broccoli but has a mild intolerance to gluten and mint. So I was sending my children to school after feeding them waffles (gluten) or cereal with milk (dairy) – no wonder the oldest was having problems concentrating and participating. Occasionally my younger daughter would experience skin rashes and hyperactivity from time to time. It was a combination of foods we were feeding her that were thought to be nutritious – just not for her!

food properly (creating a disease like ulcers or gastro–intestinal problems). For example, you may have eaten chicken for years and have no idea that chicken is causing inflammation in your body. Did you know that milk and dairy products may cause sinusitis, respiratory or intestinal problems for some people?

People don’t realize that some of the things we ingest daily – and have for years – can affect us the way they do. I know I did not.

Did you know – regardless of whether you have a reaction to the food – it is not recommended to eat the same foods repeatedly within a 72 hour time frame? Your body doesn’t process the same foods over and over very well. As a simple matter of practice, you should change your menu and rotate foods to optimize your metabolism.

The Baylor Medical College found that 98% of the participating in this program either lost weight and /or improved body composition. As a side effect of eating indicated foods, according to the personalized AlCAT test, foods that are beneficial for your body, demonstrated a statistically significant improvement

Most think that going on a “diet” or an eating program where you have to buy packaged meals will lead them to optimum health. has anyone heard of going on a diet when you are already underweight? Not likely, at least in the way most people interpret the word “diet”. I personally explored this program after years of no answers and taking proton pump inhibitors, medication. Finally, through my new physician, Dr. edwin lee, former Cleveland Indian team physician and is triple board certified in Internal Medicine, endocrinology, Diabetes, Metabolism and Anti Aging, had suggested an AlCAT food intolerance test to attempt to heal my stomach. I had suffered from gI disorders and suspected stomach ulcers. I would go

The Self-Insurer

evidence links headaches and migraines to a food the person is eating frequently or has eaten within a week time frame that triggers the headache response. Once the food is identified and removed, voila! Headache gone and medications are not necessary. Sounds pretty simple right? Actually, it is. Did you know that reactions can take several days to manifest? You may have intolerance to blueberries which could cause a reaction of mild nasal stuffiness and stomach bloating. You ate a blueberry muffin Monday morning at the staff meeting and you got a little sniffle later that afternoon. Tuesday night your stomach felt a little bloated. Of course, you don’t associate the two symptoms and you’re thinking about what you ate for lunch that day.

February 2012

to a restaurant for one of my favorite Italian meals that included pasta with spinach, shrimp, red sauce, bread and a glass of red wine. Sounds pretty healthy, right? What I found was that the tomatoes and parsley in the red sauce along with the grapes in the wine were causing my stomach upset. (But I didn’t know which ones at the time) I eliminated these foods from my diet and reintroduced each food, one at a time, waiting three days to see if there is a reaction or not. After you’ve completed this process you know if your body can tolerate that food. Consequently, my stomach is healed and I do not take any over the counter or prescription drugs and all is well, but I’ll continue to eliminate tomatoes from my diet! It is called an AlCAT test and it worked positively for: 98% of the participants in a Baylor Institute study,

who eliminated their trigger foods, they either lost weight, reduced their percentage of body fat and gained muscle tissue, or all of the above.

hundreds of agents to identify chronic inflammation response to foods, chemicals, molds, dyes and herbs – all items encountered in everyday life.

each patient accesses a personal nutritionist to provide guidance and meal plans for the entire six months.

Step 2) the patient completes some background history and information for a nutritionist who will review their results against their current environment and habits.

According to the March 9, 1998 Pr Newswire article from James M. rippe, M.D., of the Center for Clinical and lifestyle research and Tufts university School of medicine, urges physicians to treat obesity as an independent health problem rather than simply treating its common consequences– such as coronary heart disease, hypertension, Type 2 diabetes and elevated blood lipids. Data clearly supports the positive effects of weight loss on reducing health risks. The process is relatively simple. Step 1) the patient has blood drawn and it is sent to a specific lab where they analyze the sample against

Step 3) the lab provides results back to the patient identifying the different items according to their severity level. Step 4) Patient consultation with a trained nutritionist to create a 24 week plan to eliminate and reintroduce the items that causes reactions. The plan is detailed to the individual’s tastes and preferences. The nutritionist provides recipes that exclude all reactionary foods and agents to simplify menu planning, shopping and staying on track. Step 5) the patient goes grocery

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February 2012

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shopping and starts a new diet that has no calorie restrictions and gives them a complete guideline unique to their own body chemistry and uses foods that their body is receptive to. Consequently, some people have no apparent reaction to food although are overweight, which in itself is a hidden reaction to the foods they are eating causing a snowball, negative effect. The reality is that America cannot sustain the costs of the current healthcare system. We have to look for ways to eliminate these chronic diseases rather than treating the myriad of symptoms that come along with them. The fuel we feed our bodies every day is a fundamental to good health. Food intolerance is a big part of optimizing your body’s performance and reducing overall healthcare costs. n Jennifer is the founder and CEO of ARMS, Inc. formed in 1991 and ARMSRx Pharmacy Benefits Consultants formed in 2004. ARMSRx is a pharmacy benefit consulting firm whose main focus is employer, TPA, broker and payor representation ensuring reduced drugs costs through plan design, contract negotiation, audits and overall program management. ARMS, Inc., founded in 1991, is a health benefits product development company and was the first U.S. company to develop a fully– insured, prescription drug carve out program. For information about the PreviLEAN corporate program, ALCAT program, please contact: Jennifer@ ARMSIncorporated.com or (800) 578–9714.

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February 2012

The litigation ride for

2012 by Adam V. Russo

February 2012

The Self-Insurer

hat a weird and unexpected year 2011 was for the self-insured industry. If any of our readers correctly predicted what would happen, I ask you to contact me as soon as possible. I could use your help with my ball game predictions this year! Seriously folks, 2011 was like driving on a mountain top road with twists and turns every few feet. I was under the clear impression that 2011 would be the year that the entire era of unpredictability for self-funding would finally clear up. Well, I was wrong... again. If anything, 2011 just brought on an additional onslaught of questions for all of us. I wanted to use this opportunity to share with you what I expect will be the big legal issues for 2012. I may not have the answers, but I can at least let you know what will have you scratching your head the rest of the year.

A big issue we are watching out for in 2012 relates to the role preferred provider organization (“PPO”) networks play in the self-insured industry, what benefits networks provide to our plans, and the alternatives that either exist or may develop this year. Two of the biggest issues relate to the discount and payor status. As networks have expanded, the exclusivity of in-network status has diminished greatly since the incentive for providers to offer real savings has lessened. This expansion of networks and reduction of the value has resulted in discounts that do not do much justice to our industry. The worst part of it all is that benefit plans entering into network agreements contractually obligate themselves to pay whatever the in-network provider charges. In most situations, self-funded plans eliminate their ability to audit claims and dispute charges they believe to be excessive when they sign PPO agreements.

This leads to the issue of who exactly is signing these contracts and what the definition of a payor really is. The fact remains that in today’s business and legal climate, PPOs and providers are deeming TPAs to be payors. This makes the TPA responsible for payment of claims if the underlying employee benefit plan either fails to pay a claim or does not pay the claims within the deadline set by the PPO contract. More and more providers are hiring audit firms to identify late payments to their facilities and are pursuing TPAs for payment rather than the employee benefit plan. If I was a hospital administrator who has late payments from eight employee benefit plans administered by the same TPA, it is much easier and more cost effective to sue the TPA, rather than serve all eight employers! As discounts dwindle and the risks of entering into PPO arrangements increase, more plans will seek alternatives, whatever they may be. The market is already beginning to

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February 2012

see more and more TPAs and firms offer pricing based on Medicare and cost plus. This issue connects closely with a major lawsuit that may be heard by the Texas Supreme Court titled gPA holding, Inc. v. Baylor health Care System, Dallas County, Texas Trial Court Cause No. 06-00120. ron Peck and I wrote a brief on behalf of SIIA in support of group and Pension Administrators holding, Inc. (“gPA”), and in opposition to Baylor health Care System (“Baylor”). We urged the Court to reverse the judgment of the Fifth District Court of Appeals as the financial integrity of all TPAs is placed in jeopardy by the prior rulings. This case focuses on the issue previously discussed, whether a TPA, such as GPA, can be held financially responsible for expenses incurred by self-funded benefit plans. The lower court held gPA to be a guarantor of payment. This eliminates exactly what differentiates a self-funded plan from an insurance carrier. If the Texas Supreme Court does not reverse the appellate court decision, then a TPA will be held to be a fiduciary payor, essentially calling a TPA an insurer. This can cause immense havoc for our industry and negatively impact self-funded plans across the country. If legal interpretation requires that TPAs be deemed plan fiduciaries then we have a clear conflict with the employee retirement Income Security Act (erISA). In addition, it could lead to a slippery slope of fiduciary issues for TPAs ensuring that more and more TPAs are found liable for breaches of fiduciary duties. We have already seen more of that in 2011. In late December, the Supreme Court of Texas requested that Baylor respond to the amicus brief petition in this case. This indicates any improved likelihood that the Court will hear

February 2012

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the appeal. Evidently, the issues raised in SIIA’s brief, as well as briefs filed by the petitioner and other organizations, worried the Court enough to examine the lower court’s decision.

There is no question as to what will be the biggest legal issue to watch in 2012. We are talking about a television drama that will get lots of views – the Supreme Court’s decision regarding the constitutionality of the Patient Protection and Affordable Care Act (“PPACA”). An integral part of the law states that all citizens of the united States must have health insurance. The challenge to this law is that requiring citizens to purchase a private product is unconstitutional. The government cannot make its citizens buy something from the private market place. In addition, the argument is made that if this part of the law is found to be unconstitutional, then the entire PPACA is invalid since there is no severability clause in the law. It is important to note however that many courts have held that the provision is constitutional; including the Thomas Moore law Center v. Barack Obama case back in October of 2010, which was a 6th Circuit Court of Appeals decision. This was followed by the 4th Circuit Court of Appeals decision in virginia v. Kathleen Sebelius on December 12, 2010 stating that States do not have the authority to challenge the law. In the legal action filed by 26 states titled Florida et al v. United States Department of health and human Services, the Court declared that the law was unconstitutional since the individual mandate to purchase insurance exceeds the authority of Congress to regulate interstate commerce. Since the clause was not severable, it had the effect of eliminating the entire law. Back in August of 2011, a divided three-judge panel of the 11th Circuit Court of Appeals affirmed the lower court’s decision in part. The court agreed that the mandate was unconstitutional, but that it could be severed, allowing the rest of health care reform to be intact. Now it will be in the hands of the united States Supreme Court, which expects up to five and a half hours of arguments to take place in March of 2012. This is an immense amount of time being allotted by the Court, indicating that the importance of this issue to the country. While I believe this will be a 5 to 4

decision, I would not bet on one verdict over another. lastly, in late December of 2011, SIIA filed a complaint requesting a declaration that Michigan’s recently passed health Insurance Claims Assessment Act is preempted by erISA. SIIA also requested an injunction against enforcement of the Act involving self-insured group health plans that are subject to erISA. The Act created a 1% medical claims assessment, effective in 2012, to be imposed on carriers, TPAs and PBMs who pay claims for medical services to a Michigan resident in Michigan. The Act defines carriers to include employers, union trusts, stop-loss insurers, and TPAs. It applies to any employer sponsoring a group health plan or any TPA working for a group

health plan if the plan pays claims for medical services rendered to a Michigan resident in Michigan, whether or not the plan sponsor, TPA or group health plan is located in Michigan. This is a significant administrative burden on TPAs relating to reporting and record keeping. There is no question that we are clearly seeing an increase in these types of actions across the country by individual states. The states want a way to control self funding and whether it is through fees or burdensome regulations, they won’t stop fighting.

Adam V. Russo, Esq. is the Co-Founder and Chief Executive Officer of The Phia Group LLC; an innovative cost containment and consulting leader in the health insurance industry. In addition, Attorney Russo is the founder and managing partner of The Law Offices of Russo & Minchoff, a full-service law firm with offices in Boston and Braintree, MA. He is a frequent speaker and author on health care and employee benefits topics at webinars, conferences and seminars across the country.

2012 looks to be a big year on the litigation front. let us hope that as we watch the games begin from the stands, we do not get blown out. I believe that our industry will pull out the victory late in the fourth quarter! n

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February 2012

DICK gOFF Fact. Employers who own profitable businesses could not find a better funding tool for the purpose of wealth accumulation, estate planning, company perpetuation or even golden handcuffs for key employees.

Fact or Fiction. the recent proliferation of 831(b) captives is good for the alternative risk community. JAY ADKISSON Fact. 831b captives are one of the main growth engines of the ArT community.

SIIA 4X4 Gets traction on 831(b) captives

IIA 4X4 is a new feature enabling members to comment and debate on various topics – all part of the “Connections” experience enriching your membership. All members are invited to jump into the conversations via linkedIn and also to suggest future SIIA 4X4 topics. SIIA 4X4 forums can be found at http://siia4x4.blogspot.com/ In this first installment Andrew Cavenagh, Chairman of SIIA’s Alternative risk Committee, has posed four questions about the 831(b) captive structure and invited comments by four members of the ArT industry. The 831(b) structure is derived from that numbered section of the IrS code that exempts from income taxes any underwriting profits for captives writing less than $1,200,000 in annual premiums. These structures have proliferated in recent years, but there are differing opinions on their merits. Ideas for future SIIA 4X4 topics may be passed along to Andrew Cavenagh at Cavenagh@paretocaptive.com

Fact or Fiction. the recent proliferation of 831(b) captives is good for employers. JAY ADKISSON Fact. The more options for employers, the better. BIll FOrD Fiction. like other brands of aluminum siding, these vehicles will soon separate the unwary from their bankrolls. JAMeS lANDIS employers? It is good for entrepreneurial owners who want a risk management tool with great tax and financial planning benefits.

February 2012

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BIll FOrD Fiction. good for short-term commissions much like those received from selling aluminum siding to brick homes. JAMeS lANDIS Fact. It is another arrow in their quiver for mid-market companies. These captives do not compete with group captives, but can complement them well. DICK gOFF Fact. Indeed in that 831 (b) utilization exposes business owners and supporting professionals to the World of ART and to the many benefits which it brings by assisting successful business owners to take control of their business’ or company’s risk and it’s funding.

Fact or Fiction. Without the 831(b) tax regulations, there would be drastically fewer captives with premiums below $1.2m. JAY ADKISSON Fact.The promoters of captives as tax shelters would not have an easy product to sell. BIll FOrD Fact.They would move to other toxic cell captives that make great revenues for the providers. Just think alternative weapons of financial self-immolation. JAMeS lANDIS Fact. But it is not the regulations; it is the case law plus revenue rulings 2002-89 and 2002-90 that make this concept attractive. DICK gOFF Fact. A captive formed without the benefit of 831(b) tax regulation, is not an efficient funding structure for the purposes of wealth accumulation or estate planning purposes. So yes, there would be fewer captives today, not to forget that there would be fewer domiciles with enabling ArT legislation, both domestically as well as offshore.

Fact or Fiction. the fact that so many 831(b) captives are initiated at the behest of accountants and tax advisors is an indicator that these are primarily for tax purposes and insurance is a secondary motivation. JAY ADKISSON Fact. Some truths are self-evident. BIll FOrD No duh! JAMeS lANDIS Fact. Because those folks know nothing about risk management or the pricing of risk so they cannot present the captive in the correct light as a risk management tool FIRST. If you don’t get that part right, none of the other tax benefits can follow. DICK gOFF Fact.Though the tax treatment associated with 831(b) captives is certainly attractive, one must remember the fact that because of it, it allows for interesting wealth accumulation, estate planning and company perpetuation funding designs which benefits should certainly out weight the tax savings motivation. n About the Panelists: Jay D. Adkisson is a partner of the law firm of Riser Adkisson LLP with offices in Newport Beach, California. Bill Ford is the CEO of Privately Held Insurance, Inc., an Atlanta based captive management company. James Landis is the Managing Partner of Intuitive Captive Solutions, LLC. Dick Goff is managing member of The Taft Companies LLC, a captive insurance management firm and Bermuda broker.

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The Self-Insurer

February 2012

SIIA ChAIrMAN SPeAKS Alex Giordano

If “Mr. Smith” can do it, so can we

he classic movie “Mr. Smith goes to Washington” portrayed how a person from ordinary circumstances but with sincerity and commitment could change how things work in the nation’s capital. Of course, it wasn’t as easy as I make it sound for Jimmy Stewart’s character in the film, but the lesson is clear: You have to go to Washington to affect Washington. That’s our challenge and our opportunity next month when we stage the 26th Annual legislative/ regulatory Conference on March 7-9 at the Marriott at Metro Center in Washington, DC. I believe 2012 will be a pivotal year for the legislated and regulated environment of our industry. If ever there was a year when our membership should turn out in significant numbers to demonstrate our commitment to the public value of self-insurance, this is that year. A few years ago then – SIIA president Armando Baez wrote in this publication that if he had the power to do so he would make attendance at this event mandatory for SIIA members. Well, that power has not yet been authorized, but you get the idea. let me give you an offer you can’t refuse: Come to Washington with SIIA and see for yourself the effect you can have on the knowledge and attitudes of your elected representatives.

February 2012

The Self-Insurer

Of course, in SIIA’s stepped-up Washington presence, our members have been “marching” on the Capitol as part of our grassroots Network to bring our messages to members of Congress in the Capitol or in their district offices. Through last year, here are some of the reports we received back from them: “All members of SIIA owe it to themselves first and then to their industry to participate in the process.” -Bob Shupe, eSPinc. “I really enjoyed the opportunity to meet with Senator Chambliss’ staff. They were very receptive to meeting with SIIA…they feel SIIA is the expert in this area and they genuinely appreciate our assistance.” -Ken Martino, Broadspire “Without the participation of everyday people and organizations like SIIA our voice cannot be heard. It was a great experience meeting on Capitol hill.” -Kelly Burn, KlB healthcare Business Consulting “If we do not engage at this grassroots level they will only hear from those with the ‘loudest voice’ and will also assume that these are minor issues but that in reality could actually jeopardize our industry.” -Mike Sullivan, hM Insurance group “In my meetings I really tried to stress that we, the government, private sector and healthcare providers need to together address medical inflation and find reasonable solutions.” -Don Fiepel, Butler Insurance Services, Inc. “I believe our grassroots effort is vital and instrumental in getting the message to our elected officials and their staffs about the importance of the employer-based healthcare system and the value it brings to their constituents.” –Bob Clemente, Specialty Care Management “I’ve seen firsthand how these lobbying efforts are paying off. When we work together to educate legislators and reinforce the value of the self-insurance industry we achieve great results.” Craig Kelbel, hCC life Insurance This session of Congress will likely shape the future of our industry through continuing attention to aspects of federal healthcare reform, legislation that could improve the playing field for risk retention groups and other key issues. There is still time for you to do your part and register for the legislative/ regulatory Conference at www.siia.org to join the sessions with members of Congress and the administration, and to participate in the annual “March on Capitol hill” and the following Capitol reception. I hope to see every committed SIIA member on the attendance list, whether or not your name is Smith. n See you there,

The Self-Insurer

February 2012