Self-Insurer June 2012 by SIPC

June 2012

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Surprising

Tax BenefiTs for Your Captive

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JUNE 2012 | Volume 44

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

feaTures

arTicles 12

From the Bench: Benefit Denials, Breach of Fiduciary and Statutory Penalties: The Threefold Nature of the Typical erISA lawsuit

ArT gallery: eTFs Can Keep You Out of the Bunker

New Agency guidance on required Contraceptive Coverage under group health Plans

editorial staff PuBlIShINg DIreCTOr James A. Kinder MANAgINg eDITOr erica Massey

SeNIOr eDITOr gretchen grote

Surprising Tax Benefits for your captive by Daniel Kusaila

DeSIgN/grAPhICS Indexx Printing CONTrIBuTINg eDITOr Mike Ferguson DIreCTOr OF OPerATIONS Justin Miller

SIIA Grassroots & Political Advocacy Monthly Wrap up report

DIreCTOr OF ADverTISINg Shane Byars

indusTry leadership 26

Editorial and Advertising Office P.O. 1237, Simpsonville, SC 29681 (888) 394-5688

SIIA Chairman Speaks

2012 self-insurers’ Publishing Corp. Officers James A. Kinder, CeO/Chairman erica M. Massey, President lynne Bolduc, esq. Secretary

The Self-Insurer

June 2012

Surprising

Tax BenefiTs for Your Captive by Daniel Kusaila

June 2012

The Self-Insurer

ompanies are created with a common purpose of generating profits, with a focus on maximizing earnings in order to return value to shareholders or the owners of the company. Controlling costs and limiting business risks help to increase shareholder value. One of the largest expenses a business may incur is the cost of insurance to protect the company from various internal and external risks. Whether it is workers’ compensation, employee benefits, general liability or property coverage, many companies are paying more and more each year for insurance protection. Today, a growing number of businesses are forming captive insurance companies as a way to reduce their overall costs of insurance and better control their risks. A captive insurance company, commonly referred to simply as a “captive”, is a real insurance company with policyholders, premiums, claims and regulation. Captives primarily insure the risks of the parent company or other entities that are related through common ownership. For example, the owner of a group of businesses can form a captive insurance company for the purpose of insuring some or all of its related companies. The insured businesses pay premiums to the captive in exchange for insurance coverage. A captive can be owned by the business owner, a spouse, relatives, a trust, or any of the companies under common ownership. First and foremost, captives are and should be formed as a risk management tool. The most compelling reason to form a captive is to reduce the overall insurance costs to its related affiliates. Through lower administrative costs and access to the reinsurance markets, a captive insurance program can provide insurance at a substantial savings compared to the commercial marketplace. In addition to these savings, by understanding the company’s own loss experience, a captive provides a way to recapture underwriting profits

which would otherwise be realized by a traditional insurance carrier. Although the monetary benefits are the most recognized, a captive adds much more value to the organization. Such additional benefits include the ability to customize its insurance program, increase claims control, provide coverage not available in the traditional market and provide a formalized mechanism to monitor the company’s risk. To ensure maximum cost savings, the captive must be established in the most tax efficient manner. This often means making sure that the captive qualifies as an insurance company for income tax purposes. For federal tax purposes, insurance companies are entitled to tax benefits that other companies are not allowed. These benefits include a deduction for unpaid loss reserves, deductions for unearned premium reserves or the ability to be taxed solely on its investment income simply by making an election pursuant to IrC § 831(b).

For those entities which do not qualify as an insurance company for federal income tax purposes, reserves for unpaid losses are treated in the same manner as a self-insurance reserve. Self-insurance reserves are established by companies to provide for those exposures which the company is not insured for and believes it will have to pay claims against in the future. While such reserves are deductible for financial reporting purposes, they are not currently deductible for income tax purposes. rather, the company receives a tax deduction in the year in which the claim is actually paid. A captive qualifying as an insurance company under IrS and case law standards can provide significant tax benefits in the form of accelerated loss reserve deductions. As discussed, taxpayers generally cannot deduct losses for items such as third-party claims until payment has been made to the claimant. An insurance company, however, can take a current tax deduction (on a time value of money discounted basis) for reported and

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June 2012

“incurred but not reported” (“IBNr”) losses (as determined by an actuary) before any payments have been made. In other words, an insurance company can take a deduction on its tax return today for what it “believes” it will have to pay in 5, 10 or even 15 years. While this is merely a timing difference as to when the company will ultimately receive a tax deduction for the losses, for large corporations, the savings resulting from the time value of money can be significant. The acceleration benefit may also be magnified by having the captive assume payout contingencies for past losses that have been “self-insured” and that have not accrued and therefore are not yet deductible. By shifting the losses from a self-insurance program to a bonfide insurance company in a similar manner to a “loss portfolio transfer” transaction, for tax purposes an otherwise deferred deduction could become deductible in the current year. These types of

June 2012

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transactions are complex and require the expertise of an actuary and a captive insurance tax expert to ensure the premium paid to the captive is deductible as a valid premium expense. Example 1: XYZ Company formed ABC Captive Insurance Company to insure the general liability coverage for XYZ’s 50 subsidiaries, all sister corporations to ABC Captive. The total premium paid by all sister companies is $20 million. The captive will not pay a loss until year 3 of the program, which is actuarially determined to be $14 million. All companies file a consolidated federal income tax return with XYZ Company. Situation 1: Assuming the captive qualifies as an insurance company for federal tax purposes, the sister subsidiaries would receive an immediate deduction for the $20 million premium paid to the captive. The captive in turn would receive $20 million of premium income, resulting in zero tax benefit at the consolidated federal level. However, the captive would then establish a reserve for $14 million which would be deducted currently for u.S. income tax purposes. Situation 2: If the captive does not qualify as an insurance company for tax purposes the subsidiaries would not receive a deduction for the $20 million paid to the captive. ABC Captive Insurance Company would not be required to take the $20 million into income. The $14 million reserve would be deductible in the year the claim was actually paid. generally, most taxpayers pay federal income taxes on income no later than in the year in which the cash is received (or when it is available under the “constructive receipt” rules). however, insurance companies once again escape the “normal” rules. Insurance companies earn their premium over the life of the policy regardless of when the cash is received. gross written premium is recorded

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June 2012

as income and a deduction is allowed for the unearned portion of the premium (subject to an add back of 20% of the unearned premium reserve balance). Therefore, there can be a timing mismatch between the year in which the premium is expensed and the year in which the premium is earned. Example 2: Assume the same facts as example 1, and assume the policy period is December 1, 2012 through November 30, 2013. As of December 31, 2012, ABC Captive Insurance Company would have earned only one month of premium on its calendar year tax return. Therefore, the company would have earned $1,666,667 of premium, with an unearned premium reserve balance of $18,333,333 for financial statement purposes. For tax purposes, ABC would have taxable premiums of $5,333,334 ($1,666,667 premiums earned + $3,666,667 ($18,333,333*20%)). Thus, $14,666,666 of income would be deferred until ABC’s 2013 tax return. Assuming the subsidiaries deducted their respected portions of the full $20 million on each of their tax returns pursuant to the “recurring expense theory”, a timing difference of $14,666,666 would have been created. Often overlooked are the state income tax benefits a captive insurance company may provide. generally, most states charge a premium tax in lieu of all other taxes, including income taxes. Premium taxes are often due from captives on a direct written premium basis, with the tax rate ranging between 2/10ths of 1% and ½ of 1%, depending on the state. Most states have a cap on the maximum premium tax due ranging from $50,000 to $200,000. Some states, such as Arizona and utah, have no premium tax on captives domiciled in their state to provide an incentive to attract large captives to domicile in their state. given that premium taxes are either capped or do not exist for a majority of the states, a tremendous opportunity exists for state tax planning with a captive

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insurance company. related entities can receive a state tax deduction for the premium paid to the captive. In turn, the captive would not be taxed by the state on the premium received from its affiliates. Unlike the federal benefits described above, because the captive pays a premium tax in lieu of an income tax, the benefit achieved at the state level is not merely one of timing. Rather, the benefit is permanent in nature and represents an actual all-time savings to the overall corporate family. Example 3: using the same facts as example 1, XYZ’s subsidiaries would receive a $20 million deduction at the state level for the premium paid to the captive. Assuming a 6% average state income tax rate, this would result in an income tax savings to the subsidiaries of $1.2 million. If the captive was domiciled in a state with a .5% premium tax rate, it would pay $100,000 in premium taxes in lieu of the income tax.

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In this scenario, a savings of $1.1 million would be recognized by the overall corporate family. Due to the increase in the awareness of the captive industry as a whole and the benefits a captive can provide, we are seeing tremendous growth within the captive insurance industry. gone are the days in which only the S&P 500 companies were aware of the benefits a captive program provides and had the resources available to form a captive. The industry is seeing further expansion into the middle market sectors. With smaller companies now taking advantage of the benefits that captives provide, the premium levels are often much less than those of the larger fortune 500 companies. A special tax election is available to “small property and casualty insurance companies” which can substantially reduce the company’s federal income tax liability. Captives whose premiums do not exceed $1.2 million can elect, pursuant to IrC § 831(b), to be taxed solely on taxable investment income. Thus, all underwriting profits earned by the captive are essentially earned tax-free. This represents a significant advantage, especially when considering the operating entity being insured will receive a tax deduction for the full amount of premiums paid to the captive. This could potentially result in permanent federal income tax savings of up to $420,000 ($1.2 million * 35%). These small captives electing to be taxed on their taxable investment income are often referred to as “831(b) captives”, referencing the Internal revenue Code section to which the election pertains to. Example 4: using the same facts as example 1, except that the total premiums paid to the captive are $1 million and ABC Captive Insurance Company has made an election pursuant to IrC § 831(b). The subsidiaries would receive a deduction for the $1 million of premium paid to ABC. In turn the captive insurer would

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not be subject to federal taxation on the premium received, representing a $350,000 savings ($1 million* 35% tax rate) to the overall consolidated tax return. While income tax savings receive most of the publicity, the use of a captive can also reduce a company’s overall federal excise tax liability. In an effort to reduce insurance costs, companies find themselves purchasing insurance from the global marketplace. At times, foreign insurance companies can provide competitive pricing advantages compared with u.S. insurance carriers. however, insureds purchasing insurance from a foreign carrier will typically be subject to an excise tax on the gross premium paid. Direct placement is subject to a 4% excise tax rate, while reinsurance ceded offshore is subject to a 1% rate. For those entities purchasing coverage on a direct basis paying a 4% excise tax, it might be advantageous instead to utilize a captive and reinsure to the offshore insurer. Not only can the captive retain a layer of coverage to

reduce premiums paid, but it can also reduce the federal excise tax rate from 4% to 1% by taking advantage of the reinsurance excise tax rate. up to this point the focus has been on current tax benefits and how they relate to the overall corporate structure. In certain situations, the ownership of the captive can play just as important a role in tax planning as the actual captive itself. For example, if a captive is owned by a trust whose beneficiaries are the children, over the age of 21, of the owners of the operating business, an opportunity exists to pass wealth outside the parent’s estate. By paying premiums to the captive, wealth is essentially transferred out of the operating business to the captive. Premiums paid to the captive will reduce the federal tax liability of the operating business. Because insurance companies enjoy unique tax advantages, it is easier to mitigate the tax exposure to the captive. As discussed above in greater detail, insurance companies can reduce their tax liability through the

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June 2012

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establishment of actuarial determined reserves or, for the smaller captives, an § 831(b) election could essentially negate taxes on all underwriting income. By utilizing a trust, it is possible that every premium dollar paid would pass outside the parent’s estate and to the children without creating any federal gift or estate taxes. Each of these tax benefits alone can result in significant tax savings to the overall corporate structure which will in turn contribute to the reduction in the insured’s insurance costs. It is important to note that when establishing a captive insurance company, each benefit must be analyzed in conjunction with the overall tax strategy of the entire organization. This might encompass utilizing several of the strategies outlined above, in addition to other considerations outside of the scope of this article. To ensure that the captive structure is operating in the most tax efficient manner, the importance of having a knowledgeable captive insurance team cannot be stressed enough. Not only is it critical to have a captive attorney and CPA, it is just as vital to have a seasoned captive manager and actuary who understand the captive industry. Surrounding yourself with a knowledgeable team will ensure that your captive will operate in the most efficient and effective manner and withstand the test of time. n Daniel Kusaila is the lead Insurance Tax Partner with Saslow Lufkin & Buggy, LLP. Daniel is responsible for the execution and delivery of all tax consulting and compliance services to the Firm’s insurance clients. He has significant expertise in the taxation of traditional property & casualty insurance companies, life insurance companies, single-parent captives, risk retention groups, reciprocal insurance companies, cell captives, associations, risk pools and non-profit companies. Daniel is a frequent national speaker on topics relating to the Federal and State taxation of insurance companies.

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June 2012

SIIA GrassrooTs & Political Advocacy Monthly Wrap up report

SIIA pursues its mission to preserve and protect selfinsurance and alternative risk transfer in part through political advocacy that is a coordinated, multi-layered ongoing effort. Activities include lobbying by an expanded full-time staff in SIIA’s Washington, D.C. office; operation of the Self-Insurance Political Action Committee; visits to legislators in Washington and elsewhere by members of the SIIA Grassroots Project; educational activities in conjunction with SIIA by members of the Self-Insurance Educational Foundation (SIEF) and direct presentations about self-insurance to business and public affairs organizations throughout the United States. This page will reflect selected events each month.

ast month was a busy one for members of SIIA’s grassroots and Political Action Network as they jumped into the political process on both state and national levels.

SIIA waged a full-scale campaign in California to oppose legislation that would restrict stop-loss coverage by smaller employers. Scores of California members got the information they would need to contact their representatives, either on SIIA’s Facebook page or by contacting our Washington lobbying office. The Facebook page is still active at www.Facebook.com/DefeatSB1431. SIIA’s Facebook page represents an ideal medium to provide information that will enable members to take action. Then they can put the background briefings to work by visiting, writing, phoning or e-mailing their representatives. This issue is not going away anytime soon, either in California or in other states where stop-loss insurance is under fire, stimulated by traditional insurance and regulatory interests that are attempting to undercut self-insurance by denying employers’ rights under erISA. All members should be alert to help defend their interests when they are threatened in their states.

Working with Congress Melissa Duffy of The Alliance in Madison, Wisconsin, volunteered to carry SIIA’s positions to her Congressional representatives. Working with our lobbying office in Washington, she received talking points and background material that she used in meeting in Rep. Tammy Baldwin’s (D) Madison office. Tom Cardwell, executive director of account management at The Trizetto group of Naperville, Illinois, was briefed by SIIA’s Washington staff for a meeting in the Bloomingdale office of Rep.Peter Roskam (R).

Continuing the ‘Walk on the Hill’ The traditional round of hundreds of visits by SIIA members during the annual legislative and regulatory Conference in Washington now continues all year long by members of the grassroots and Political Action Network. It’s both exciting and satisfying to become part of the political process, and – even more important – it can help save and strengthen self-insurance during a time of great challenges from government and the traditional insurance industry. To get involved, call or e-mail Meghan Scheidemann in the Washington office at 202-463-8161 or mscheidemann@siia.org.

June 2012

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June 2012

Bench From the

by Steve Polino

Benefit Denials, Breach of Fiduciary and Statutory Penalties: The Threefold Nature of the Typical erisa Lawsuit

ection 1132 (a)(1)(B) of the employment retirement Income Security Act of 1974 (“erISA”), provides, in pertinent part, for suit by a participant “to recover benefits due. . . to enforce his rights. . . or to clarify his rights to future benefits under the terms of the plan.” 29 u.S.C. § 1132(a)(1)(B). Claims denials inescapably involve the exercise of fiduciary duty because the plan administrator is ultimately responsible for a final denial on appeal regardless whether the plan administrator has designated this function to a thirdparty. More often than not, such suits include claims for statuary penalties for failure of the fiduciary or its designee to timely provide a copy of the Plan, SPD (if

June 2012

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separate) and other documents that may have been relied upon to deny a claim. The law governing claims denial standards, fiduciary duties and statutory penalties is interrelated. Failure to act properly in one instance could result in potential liability under all three areas of the law. Plan fiduciaries can avoid exposure to liability by following the law outlined below.

claims denial standards Where the Plan Administrator or its designee is given the maximum legal discretionary authority to interpret and apply the terms of the Plan, a court will reverse a fiduciary’s decision only for abuse of discretion. Firestone Tire and rubber Co. v.

Bruch, 489 u.S. 101, 115, (1989). The abuse of discretion standard is substantively indistinguishable from the arbitrary and capricious standard. Wildbur v. ArCO Chemical Co., 974 F.2d 631, 635 n. 7 (5th Cir. 1992). Factual determinations made during the course of a benefits review will be rejected only upon the showing of an abuse of discretion. Meditrust Financial Services v. Sterling Chemicals, 168 F.3d 211, 213 (5th Cir. 1999). This means a court will not set aside a denial of benefits based which is based on any reasonable interpretation of the plan, regardless whether the court would have reached the same conclusion. In other words, the court will only overturn the fiduciary’s denial of

benefits if the fiduciary’s interpretation of the plan is completely unreasonable. The first step a court will take in reviewing a claims decision under the abuse of discretion standard is to determine the legally correct interpretation of the plan’s provisions. This is why it is so important for the Plan Sponsors and third-party administrator (“TPA”) to ensure that the plan contains specific language to support the payment standard the Plan wishes to apply to claims. The Plan does not have the discretion to pay a Medicare plus percentage unless that specific factor is stated in the Plan. Second, the court must determine whether the fiduciary acted arbitrarily or capriciously in light of the interpretation they gave the plan in the particular instance.” Izzarelli vs. rexene Products Co., 24 F.3d 1506, 1519 (5th Cir. 1994). however, if the plan interpretation was legally correct, the court need not proceed to the next step. Therefore, a fiduciary can limit the time, cost and attorneys fees of an erISA lawsuit by including language in their plan documents which supports claims decisions. If the plan wants to pay a certain way, put it in the plan. Otherwise the plan and its fiduciaries will expose themselves to liability greater than the provider’s billed charges, discount charges or out-of-network allowable.

plan fiduciaries; (2) that defendants breached their fiduciary duties; and (3) that their breach caused some harm” to the participant or assignee. Kannapien v. Quaker Oats Co., 507 F.3d 629, 639 (7th Cir. 2007). erISA expressly requires a plan administrator to furnish an SPD to each plan participant. 29 u.S.C. § 1021(a). The SPD must be furnished to the participant within 90 days of enrollment. 29 u.S.C. § 1024(b)(1)(a). SPD’s for group health plans must include provisions governing the use of network providers, and under what circumstances, coverage is provided for out-of-network services. 29 C.F.r. § 2520.102-3 (j)(3). The fiduciary complies with its duty of care by providing accurate and complete written explanations of the benefits available to plan participants and beneficiaries. By supplying participants and beneficiaries with plan documents that are silent or ambiguous on a recurring topic, the fiduciary exposes itself to liability for the mistakes that plan representatives may make. Such mistakes could include incorrect payment recommendations. Mistakes could also be made by claims review agents while answering questions from participants or providers. A fiduciaries duty to disclose is broad. “Once an ERISA beneficiary has requested information from an ERISA fiduciary who is aware of the beneficiary’s status and situation, the fiduciary has an obligation to convey complete and accurate information material to the beneficiaries circumstance, even if that requires conveying information about which the beneficiary did not specifically inquire.’” Kenseth v. Dean health Plan, Inc.,610 F.3d 452, 466 (7th Cir. 2010) (emphasis in original)(citation omitted). Moreover, “[r]egardless of the precision of this question, once a beneficiary makes known his predicament, the fiduciary ‘is under a duty to communicate . . . all material facts in connection with the transaction which the [fiduciary] knows or should know.” Id. at 467.

Fiduciary Standards ERISA requires a plan fiduciary to act “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” 29 u.S.C. § 1104(a)(1) (B). To establish a breach of fiduciary duty, a participant or his/her assignee “must prove (1) that defendants are

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June 2012

A fiduciary will not be held liable when the plan documents are clear and the fiduciary has exercised appropriate oversight over what its agents advise plan participants and beneficiaries as to their rights under those documents.

Statutory Penalties erISA requires a plan administrator to, “upon written request of any participant or beneficiary, furnish a copy of the latest updated summary plan description, the latest annual report, any terminal report, a collective bargaining agreement (if applicable), trust agreement, contract or other instruments under which the plan is established or operated.” 29 u.S.C. §1024 (b)(4). Further, the plan administrator must comply with such a request within 30 days or face statutory penalties. 29 u.S.C. 1132 (c)(1)(B). The penalty may be as much as $110 for each day that the Plan Administrator fails to produce the requested documentation. 29 C.F.r § 2575.502c-1. Yet the decision of whether to impose a statutory penalty and the amount by which an administrator should be penalized is left to the discretion of the court. 29 u.S.C. § 1132 (c)(1)(b). Fines are not mandatory, even if there has been a statutory violation. Nevertheless, if there has been a violation, there is likely to be a penalty.

Conclusion Statutory penalties and breach of fiduciary claims based upon failure to timely provide plan and other related documents concerning a claim are inexcusable. There is no legitimate reason why these breaches should occur. Similarly, it is not that difficult to ensure the plan document contains each enumerated basis for containing claims cost. Fiduciaries and TPA’s can save themselves and the Plan time and money by making payment recommendations and adjudicating claims based upon a legally correct interpretation of plan provisions. n

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arT gAllerY by Dick Goff

ETFs Can Keep You Out of the Bunker

aving worked with many captive insurance owners I can pretty accurately generalize about their abilities and characteristics. For example, most are strategically astute and entrepreneurially vigorous. But few are what I would describe as meticulously analytical. That’s probably why the most ignored element of many captives is the investment portfolio. Most captive owners think of it as the mattress containing the liquidity required by law and by operational necessity. Many owners become timid in the face of the regulators’ squintyeyed attention. For example, some exhibit what I call a “bunker mentality” in the face of market downturns, and find safety for their capital in cash or the like. Then when the market turns up again they are the proverbial deer in the headlights, unable to make a move. Other captive owners may take the line of least resistance and let their bank manage their portfolios. While it may be convenient, this approach seldom optimizes investment performance. It is investment management 101 to prescribe a long-term strategy that can help reduce the effects of market volatility. But that medicine is sometimes difficult to find. I have recently heard about

June 2012

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captives investing in exchange traded funds (eTF) that mimic selected market indices. Not being an expert in this field, I sought one out to give me a short course in eTFs. Joshua Magden is vice President of Insurance and Institutional Marketing at Sage Advisory Services of Austin, Texas, which has made captive investment management a specialty. Josh compared eTFs with familiar mutual funds but less costly. “Management fees are lower because eTFs are not actively managed but built to track an index,” he said. And that’s an advantage in itself, he pointed out, because adherence to a selected index allows no “style drift” as can happen in actively managed funds. An additional financial benefit of eTFs is inter-day liquidity, meaning transactions are closed as they occur rather than being held to be posted at the close-of-business share price.

Significantly to captive owners, there is a whole long list of eTFs that hold advance approval from most captive domicile regulators. That’s a very important consideration come audit time. Most important, in Josh’s view, is that eTFs allow captives to adjust their tactical exposure among asset classes or even categories within asset classes. I asked him for a hypothetical example of that. “Say in 2008 when markets were tumbling you put your captive’s portfolio into the iShares Barclays 1-3 Year Treasury Bond Fund shown as SHY on the ticker – that was the ‘flight to quality’ trade. In 2008, of course, the S&P 500 index fell 37 percent, but ShY earned 6.64 percent.” “Now, for simplicity’s sake, assume that going into 2009 you felt a little bit better about how the economy was sorting itself out but wanted to stay short in the 1-3 year range. You

also wanted to stay in fixed income but simply change asset class categories and move into high-grade corporate bonds. You could cost-effectively trade out of ShY and buy the iShares 1-3 Year Credit Bond Fund – ticker: CSJ – which earned a 10.73 percent return in 2009. Both ShY and CSJ are rated NAIC level 1.” Josh admits this is an oversimplified example to give us the idea of how tactical shifts in allocation can be executed based on market outlook. Of course, an investor or investment manager can still make the wrong call on sectors or allocation mix, but what eTFs offer insurers is a way to build a diversified portfolio if they are small and, no matter their size, one that can be tactically rotated without transaction costs eating away much of the returns. About this time in our conversation a little light bulb blinked on over my head. What Josh was describing was a method to invest on the same playing field as the biggest boys on Wall Street with a dynamic investment analysis process that looks vastly superior to the ordinary Main Street investment manager’s. In short: greater performance at less cost. This would be an ideal method, I concluded, for a captive to operate a portfolio to fund, for example, a group annuity product that would be unique in the ArT world. But that, as they say, would be a story for another day. n

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Dick Goff is managing member of The Taft Companies LLC, a captive insurance management firm and Bermuda broker at dick@taftcos.com. Joshua Magden may be reached at JMagden@ sageadvisory.com.

The Self-Insurer

June 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.

June 2012

The Self-Insurer

Q&A

New Agency Guidance on Required Contraceptive Coverage under Group health plans –

• Permanent Exemption for “Religious Employers” • One-Year Delay for Certain Non-Profit Employers • Proposed Rule Would Require Health Insurers and TPAs to Provide Free Contraceptive Coverage Beginning in 2013 for certain religious organizations

n August 1, 2011, the health resources and Services Administration (hrSA), a part of the Department of health and human Services (hhS), issued guidelines on Women’s Preventive health (the “hrSA guidelines”).1 under Section 2713 of the Public health Service Act (PhSA), as added by the Affordable Care Act (ACA) and incorporated by reference into erISA and the Internal revenue Code, a non-grandfathered group health plan and a health insurance issuer offering group or individual health insurance coverage must provide benefits for, and may not impose cost-sharing with respect to, preventive care and screening provided for under the hrSA guidelines.2 The hrSA guidelines supplement the previously adopted preventive care guidelines, and are subject to the same rules regarding cost-sharing.3 Non-grandfathered plans and issuers generally are required to

provide the preventive coverage specified in the HRSA Guidelines beginning with the first plan year (or, in the individual market, the first policy year) that begins on or after August 1, 2012. Thus, for non-grandfathered plans that have a calendar year plan year, the hrSA guidelines are effective starting with the plan year beginning January 1, 2013.

vasectomies, and abortifacient drugs are not covered by the hrSA guidelines. As is the case with other preventive care required under ACA, a group health plan or health insurance issuer may use reasonable medical management techniques to determine the frequency, method, treatment, or setting for an item or service to the extent not specified in the applicable guideline. HHS, the Department of labor (DOl), and the Department of Treasury (collectively, the “Departments”) have recently noted that they have received questions regarding the scope of required contraceptive coverage and that they intend to issue future guidance to address these questions.

Among other things, the hrSA guidelines require coverage of prescribed contraceptive methods and counseling. This requirement has generated substantial controversy from employers who object to providing such coverage on religious grounds, resulting in further guidance with respect to such situations, including a final regulation that provides that certain “religious employers” are exempt from the requirement to provide contraceptive coverage, a one-year delay for certain non-profit organizations that do not qualify under the religious exemption, and a proposal that, if finalized, would require third party administrators (TPAs) and health insurance issuers to provide contraceptive benefits free of charge to non-exempt religious employers (and their plan participants and beneficiaries).

Religious Employer Exemption Final regulations provide that group health plans of “religious employers” (and health insurance coverage provided in connection with such group health plans) are not required to provide contraceptive coverage.5 For this purpose, a religious employer is an employer that: (1) has the inculcation of religious values as its purpose; (2) primarily employs persons who share its religious tenets; (3) primarily serves persons who share its religious tenets; and (4) is a non-profit organization as described in Section 6033 of the Internal revenue Code. The religious employer exemption applies only for purposes of the requirements of PhSA Section 2713. Many states have mandates relating to contraceptive coverage. Although the federal religious employer exemption was modeled after existing state law, state law requirements differ. Some states do not provide an exemption for religious employers and some include an exemption that is narrower than the federal law exemption. ACA generally does not preempt state law that is more restrictive than federal law. Thus, if the plan

This article discusses the recent guidance relating to the contraceptive coverage requirement as applied to group health plans of religious employers. 4

Required Contraceptive Services The hrSA guidelines provide that required preventive services include all Food and Drug Administration approved contraceptive methods, sterilization procedures, and patient education and counseling for all women with reproductive capacity, as prescribed by a provider. According to agency statements, condoms,

The Self-Insurer

June 2012

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June 2012

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administrator) provides a notice to participants stating that contraceptive coverage will not be provided under the plan for the first plan year beginning on or after August 1, 2012. The Bulletin includes the text of the required notice to participants.

(or health insurance coverage offered under the plan) is subject to state law mandates, these mandates generally will continue to apply unless the plan qualifies for an exemption under the applicable state law.

One-Year Delay for Certain Non-Profit Employers Contemporaneous with the issuance of the final regulations adopting the religious employer exemption, the Departments issued a bulletin announcing a one-year enforcement safe harbor for certain plans that do not qualify for the religious employer exemption (the “Bulletin”).6 The enforcement safe harbor applies until the first plan year beginning on or after August 1, 2013, and protects employers, group health plans, and health insurance issuers from enforcement action by hhS, DOl, and the Department of Treasury for failure to provide contraceptive coverage with respect to a group health plan. In order for the enforcement safe harbor to apply to a plan maintained by an organization, all of the following requirements must be satisfied: 1. The organization must be organized and operated as a non-profit entity.7 2. From February 10, 2012 (the date of issuance of the Bulletin) onward, contraceptive coverage has not been provided at any point by the group health plan established or maintained by the organization, consistent with any applicable state law, because of the religious beliefs of the organization. 3. The group health plan (or another entity on behalf of the plan, such as a health insurance issuer or third-party

4. The organization self-certifies that it satisfies criteria 1-3 above, and documents its selfcertification in accordance with the procedures detailed in the Bulletin. The Bulletin contains a form to be used for the selfcertification. Note that, as with the case of the religious employer exemption, the enforcement safe harbor applies only for purposes of federal law. Further, because one of the requirements to qualify for the enforcement safe harbor is that the plan is not required to provide contraceptive coverage under state law, a plan that is subject to a state law mandate to provide contraceptive coverage generally will not qualify for the safe harbor.

Proposed Rule Will Require Health Insurance Issuers and Tpas to provide free Contraceptive Coverage Beginning in 2013 for certain religious organizations In order to address the continuing concerns of organizations with religious objections to providing contraceptive coverage but that do not qualify for the religious employer exemption, the Departments have requested comments on a proposal to provide a “religious accommodation” to required contraceptive coverage.8 The proposal is designed to relieve objecting religious employers of the obligation to provide and pay for

contraceptive coverage, while making the coverage available to participants and beneficiaries without charge. In the case of self-funded plans, the proposal would make the third party administrator (TPA) of the plan (or possibly some other independent party) responsible for providing contraceptive benefits. The TPA would be considered the designated plan administrator under erISA, and, therefore, a fiduciary, with respect to such coverage. The TPA would not be permitted to charge the plan (or its participants and beneficiaries) for such coverage. In the case of a fully-insured plan, the insurer would be required to provide contraceptive coverage directly to plan participants and beneficiaries free of charge. The proposal raises a number of significant questions, including how TPAs are expected to fund such coverage and whether the provision of such coverage by a TPA (which presumably would be considered insurance for state law purposes) is permitted under applicable state law. Comments on the proposal are due by June 19, 2102. The goal of the Departments is to finalize a rule before the expiration of the temporary enforcement safe harbor. Further details of the proposal are discussed below. What organizations are eligible for a religious accommodation? The proposal does not contain a specific definition of religious organizations that would qualify for the accommodation, but suggest some possible definitions that might be used, such as pre-existing definitions under federal or state law. Comments are also requested as to whether the accommodation should be limited to non-profit organizations (as is the religious employer exemption and the

The Self-Insurer

June 2012

temporary enforcement safe harbor) or should also be available to certain forprofit organizations. In order to be eligible for an accommodation, a qualifying organization would have to make a self-certification and provide notice to participants in a manner similar to the provisions of the temporary enforcement safe harbor. How is the religious accommodation to be administered by a TPA in the case of a self-funded plan? A self-funded group health plan of a religious organization that self-certifies itself as being eligible for the religious accommodation is not required to provide contraceptive coverage if the organization (1) contracts with one or more third parties for the processing of benefit claims, (2) before entering into each such contract, the employer provides notice to the TPA, as required in the proposal, that the employer will not be responsible for providing contraceptive coverage and (3) with respect to contraceptive coverage, the TPA has the authority and control over the funds available to pay the benefit, authority to act as claims administrator and plan administrator, and access to information necessary to communicate with the plan’s participants and beneficiaries. The proposal further provides that the required notice will be an instrument under which the plan is operated and shall have the effect of designating the TPA as the plan administrator under section 3(16) of ERISA for those contraceptive benefits for which the TPA processes claims in its normal course of business. A TPA that becomes a plan administrator in accordance with this process will be responsible for providing those categories of contraceptive services for

which the TPA processes claims in its normal course of business. Thus, for example, if the TPA is responsible for processing surgical claims in its normal course of business, it would be responsible for providing required contraceptive coverage consisting of surgical services. Presumably, the requirement would apply to TPAs of health reimbursement arrangement (hrA) coverage where such coverage is sponsored by an employer that qualifies for the religious accommodation. The proposal suggests a number of possible funding sources that a TPA could draw upon to provide contraceptive benefits, including revenue received by the TPA that is not already obligated to the plan sponsor, such as drug rebates and service fees. The proposal indicates the Departments’ belief that some of these sources of revenue may

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June 2012

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be larger if contraceptive benefits are provided, e.g., drug rebates. Another suggested option would be to provide a TPA with a credit or rebate against the amount it pays under the temporary reinsurance program established under Section 1341 of ACA. under recently issued final regulations under the reinsurance program, TPAs are responsible for making contributions to hhS “on behalf of ” self-funded plans.9 The Departments also suggest that TPAs could receive funding to pay for required contraceptive services from non-profit organizations. The Departments are also considering having the TPA separately arrange for contraceptive coverage, such as through an insurer. One possibility is to use insurers in the multi-state option established by ACA and administered by the Office of Personnel Management. In such cases, the insurer would become responsible for providing the coverage.

The Departments note that religious organizations have commented that tax-favored individual employee accounts could be used to pay for contraceptive benefits. Some religious organizations have also commented that using public funds to pay for contraceptive coverage is not objectionable to the organizations. How is the religious accommodation to be administered by a health insurer in the case of a fullyinsured plan? A fully-insured group health plan of a religious organization that selfcertifies itself as being eligible for the religious accommodation is not required to provide contraceptive coverage if the organization (1) provides written notice to the insurer, as provided in the proposal, that the organization will not be responsible for providing contraceptive coverage, and (2) the insurer has access to

information necessary to communicate with the plan’s participants and beneficiaries and to act as a claims administrator or plan administrator with respect to contraceptive benefits. A health insurer that receives such a notice must offer health insurance to the organization that does not include contraceptive benefits and must separately provide to the plan’s participants and beneficiaries health insurance coverage consisting only of required contraceptive benefits. This coverage must be provided free of charge, i.e., without any charge to the participant/beneficiary, the organization, or the plan. The insurer will also be required to provide notice to participants and beneficiaries of the availability of the coverage. The Departments are considering classifying this separate contraceptive coverage as a new type of “excepted benefit” in the individual market that would be subject to some, but not all, of the ACA heath reforms (e.g., the

The Self-Insurer

June 2012

new claims and appeals requirements might apply, but the separate contraceptive coverage would not be required to provide all essential health benefits).

Footnotes:

The proposal states that the Departments expect that savings that will be generated from the provision of the contraceptive coverage will pay for the coverage. n

For more on the preventive care requirements, see our prior Employee Benefits advisory at www.alston.com/files/Publication/bb1750fb-8a95-4dcb-b276c14a151e19eb/Presentation/PublicationAttachment/c20db36b-b8cf-4245-ac7dc15734d3dcaa/10-399%20EBEC%20Preventatitve%20Care%20Coverage.pdf.

Attorneys John R. Hickman, Ashley Gillihan, Johann Lee, and Carolyn Smith provide the answers in this column. Mr. Hickman is partner in charge of the Health Benefits Practice with Alston & Bird, LLP, an Atlanta, New York, Los Angeles, Charlotte and Washington, D.C. law firm. Ashley Gillihan, Carolyn Smith and Johann Lee are members of the Health Benefits Practice. Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner’s situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation. Readers are encouraged to send questions by E-MAIL to Mr. Hickman at john.hickman@alston.com.

See www.hrsa.gov/womensguidelines

The preventive care guidelines (including the religious employer exception) apply to student health plans. See 77 Fed Reg. 16453 (March 21, 2012). 2.

For more information on the other preventive services required under the HRSA Guidelines, see our prior Employee Benefits advisory at www.alston. com/files/Publication/511f716c-2331-4fee-8845-6bc32718f56f/Presentation/ PublicationAttachment/320b7e68-eeda-4168-ad7b-6d3a87c2b3c3/EBEC%20 HHS%20Womens%20Preventative%20Health%20Guidelines.pdf . 4.

The final regulations are published in 77 Fed Reg. 8725 (February 15, 2012), which may be found at http://webapps.dol.gov/FederalRegister/PdfDisplay. aspx?DocId=25828. The final regulations authorize HRSA to determine required women’s preventive care. The text of the religious employer exemption does not appear in the final regulations, but in the HRSA guidelines, which are found at www. hrsa.gov/womensguidelines/. 5.

The Bulletin, titled “Guidance on the Temporary Enforcement Safe Harbor for Certain Employers, Group Health Plans and Health Insurance Issuers with Respect to the Requirement to Cover Contraceptive Services Without Cost Sharing Under Section 2713 of the Public Health Service Act, Section 715(a)(1) of the Employee Retirement Income Security Act, and Section 9815(a)(1) of the Internal Revenue Code” may be found at http://cciio.cms.gov/resources/files/Files2/02102012/20120210-PreventiveServices-Bulletin.pdf 6.

The one year delay would generally apply to student health plans sponsored by such institutions as well. See 77 Fed Reg. 16453, 16456-16457 (March 21, 2012) 7.

The proposal was described in an advance notice of proposed rulemaking published on March 21, 2012 and may be found at www.gpo.gov/fdsys/pkg/FR-201203-21/pdf/2012-6689.pdf . The proposal similarly applies to student health plans sponsored by entities that qualify for the religious accodomation. 8.

Further discussion of the contribution requirements imposed on TPAs under the temporary reinsurance program may be found in our prior Employee Benefits advisory at www.alston.com/files/Publication/f6f66374-c7b7-4303-89330d28843bb48c/Presentation/PublicationAttachment/36fa8fa8-fd5d-4f72-818f0e3df215f234/12-196%20Reinsurance%20Fee.pdf 9.

June 2012

The Self-Insurer

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The Self-Insurer

June 2012

SIIA ChAIrMAN SPeAKS Alex Giordano

siia’s line in the california sand

e didn’t have the final disposition of California legislation SB 1431 by the deadline for this issue, but win or lose, SIIA members and staff put up a good fight against this bill that was a blatant attack on erISA preemption and would have severely damaged smaller employers’ ability to self-insure employee health benefits. And win or lose in the California legislature, you will likely see this issue before a federal court, whether in California or elsewhere. grassroots political action, expert testimony by SIIA chief operating officer Mike Ferguson and a media blitz were all employed to oppose the bill by a los Angeles State Senator. In its coverage of the issue, a los Angeles Times article stated that business and insurance groups were attacking the proposal, which would set a minimum attachment point at $95,000 for medical stoploss coverage of plans with 50 or fewer employees. “A trade group, the Self-Insurance Institute of America, Inc., raised legal concerns about the state’s proposal and vowed to stop it in court if necessary,” the article reported, and continued: “Federal law governs employers who self-insure, and it would be improper for California

June 2012

The Self-Insurer

to intervene in this way, argued Mike Ferguson, the group’s Chief Operating Officer. The federal Employee Retirement Income Security Act, or ERISA, regulates self-funded plans and generally bars state rules that affect the administration of these plans.” Then the article quoted Mike directly: “We will do everything to block this, and if we can’t we’ll likely pursue the matter in federal court. This is not legal.” If that’s not a line in the sand, I’ve never seen one. Mike knows that if states get away with penetrating the ERISA shield, self-insurance of benefits as we know it will be severely damaged. On a late April day, Mike appeared in Sacramento to oppose SB 1431 in a Senate health Committee hearing. There, he discredited the attempt to undercut self-insurance by limiting employers’ use of stop-loss insurance.

“Quite simply, if employers cannot retain stop-loss insurance with terms consistent with their financial risk transfer needs, they are not able to self-insure,” he said, and continued: “it is not appropriate for the state of california to substitute its judgment for that of individual employers and their professional advisors to determine appropriate financial risk transfer arrangements… the state should not intervene through restricting access to stop-loss insurance.” The California legislation was, of course, only the latest attempt by states to undercut self-insurance in a continuing campaign that some say is orchestrated – at least inspired – by the National Association of Insurance Commissioners (NAIC). NAIC members have long chafed at their loss of power to regulate selfinsured group employee plans that enjoy erISA protection from state mandates or other interference. In his testimony to the California Senate, Mike put it this way:

“So why are we even considering this legislation? It is our understanding that California’s insurance commissioner has embraced the canard that the growth of smaller self-insured health plans will result in adverse selection within the healthcare marketplace and in turn will compromise the success of the health insurance exchanges provided for by the Affordable Care Act.” “There is no evidence that selfinsured plans have any different health status characteristics from insured plans as a group. u.S. Department of Labor reports confirm that selfinsured plan membership – like insured plans – are made up of a broad cross-section of participants with health risks that mirror workforce risks seen in larger populations.” “A recent rand Corporation study concluded it is ‘unlikely’ that small

employers who self-insure will have a major impact on the future cost of healthcare in state exchanges.” Mike brought home to the California Senate health Committee the implications of what they were considering: “The legislation if enacted also likely violates federal law and would therefore expose the state to litigation.”

bear that in mind as they consider SIIA’s funding needs. SIIA’s fight in California is a good model to be employed when necessary in other states, but will require continual financial transfusions to accomplish. n

By the time you read this, because of the lengthy production time required for handsome paper magazines, you may know the result of California SB 1431 through SIIA’s electronic communications channels. But the point of considering this battle anew is that the fight won’t be over until the last state bill attempting to undercut self-insured benefits is dead. That requires continual, expensive efforts in political advocacy and litigation. All SIIA members should

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The Self-Insurer

June 2012

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

28 May 2012 | The Self-Insurer

Regular Members Company Name/Voting representative

Kelly Sullivan, Manager, Product Development, Blue Cross Blue Shield of vermont, Montpelier, vT

ChAIrwomAn, heAlTh CAre elizabeth Midtlien, Senior vice President, Sales Starline uSA, llC Minneapolis, MN

Michael Southwick, Assistant vice President, Concentra, Addison, TX

ChAIrmAn, InTernATIonAl greg Arms, Global Head, Employee Benefits Practice Marsh, Inc. New York, NY

ludmila Crowther, Marketing & Public relations Assoc., InstaMed, Philadelphia, PA

ChAIrmAn, worKerS’ ComPenSATIon Skip Shewmaker, vice President Safety National St. louis, MO

Sean Smith, CeO, Keenan & Associates, Torrence, CA richard Terhaar, President, Maxim Management Services, llC, Cheektowaga, NY

Directors ernie A. Clevenger, President Carehere, llC Brentwood, TN

russ Krueger, Owner/President, Ocozzio, Augusta, gA

ronald K. Dewsnup, President & general Manager Allegiance Benefit Plan Management, Inc.Missoula, MT

larry lewis, vice President Client Management, PCN Care Solutions, llC, elk grove, CA David Adams, The Caprock Companies, lubbock, TX

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

SIIA New Members

Employer Member Company Name/Voting representative Stephanie Waldrop, vice President, Beneco, Scottsdale, AZ Todd greer, Senior vice President, IPMg, St. Charles, Il

The Self-Insurer

June 2012

The Self-Insurer