5.3 Welfare Benefits

• Library: Corporations and Partnerships in Virginia (Virginia CLE) (2016 Ed.)

5.3 WELFARE BENEFITS

5.301 In General. The requirements of ERISA apply to employee welfare benefit plans. Welfare benefit plans include plans providing medical, surgical, or hospital benefits or benefits in the event of sickness, accident, death, disability, or unemployment. An ERISA-covered welfare benefit plan must comply only with the following provisions of ERISA: the reporting and disclosure requirements, the fiduciary responsibility requirements, and the claims procedures. Each of these provisions is discussed in detail in paragraph 5.2 of this chapter. While ERISA imposes some legal obligations on welfare benefit plans, there is a substantial amount of other legislation that applies to welfare benefit plans, including welfare benefit plans that constitute "group health plans." This legislation is discussed below.

5.302 Accident and Health Benefits. Accident and health benefits are probably the most common welfare benefits provided by employers. Those benefits are typically funded through hospitalization and major medical insurance policies underwritten by an insurance company licensed to do business in the state. However, some employers self-insure or self-fund the benefits payable under their accident and health plans.

A. Insured Health Benefits. ERISA leaves the regulation of insurance companies to state law. However, with the passage of the Health Insurance Portability and Accountability Act of 1996 (HIPAA), ⁷⁶ the Public Health Services Act (PHSA), ⁷⁷ and the Patient Protection and Affordable Care Act (ACA) ⁷⁸ insured health benefits can be subject to federal and state regulation.

1. State Insurance Regulations. Virginia's regulation of accident and health insurance is accomplished through the Virginia Bureau of Insurance, an office of the State Corporation Commission, and through the provisions of section 38.2-3400 et seq. of the Virginia Code. The Virginia Code requires that certain benefits be contained in or, in some cases, offered as

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options in every such insurance policy issued in the state. These mandated benefits include: (i) coverage for services rendered by certain practitioners in addition to physicians, such as chiropractors, psychologists, licensed social workers, and others; ⁷⁹ and (ii) coverage for mental health and substance use disorders. ⁸⁰ Virginia law prohibits an insurer from requiring a covered individual to repay to the insurer amounts recovered from a third party for an illness or injury. The state law theory is that an injured person should be permitted to receive a double recovery if injured by a third party. This provision is known as the anti-subrogation provision. ⁸¹

Virginia revised laws pertaining to the regulation of health insurance and related products in order to be consistent with relevant requirements of the federal Patient Protection and Affordable Care Act (ACA), ⁸² which became effective on January 1, 2014. These requirements include addressing premium rate restrictions on health benefit plans providing individual and small group health insurance coverage, prohibiting discrimination based on health status, prohibiting adjustments in the cost of coverage based on genetic information, requiring individual and small group health insurance coverage to include the essential health benefits as required by the ACA, limiting waiting periods for health plans offering group health insurance coverage to 90 days, providing for participation in clinical trials, and authorizing health carriers to provide for wellness programs. Provisions relating to the standard and essential health benefits plans have been deleted because they included coverage for services that may or may not have comported with the essential health benefit package and enforcement of the existing requirement would have conflicted with the ACA. Although not specifically required to maintain conformity with federal law, the measure (i) kept the existing limits for maximum size for a small group at 50 employees until 2016 and (ii) authorized the State Corporation Commission to establish geographic rating areas. The 2013 Act removed the sunsets that were placed in provisions affected by or enacted as a result of the ACA, including the external review processes. ⁸³

2. Cost Containment Features. To control increases in medical costs and the related premium costs for health insurance, health

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insurance companies have developed cost containment features and innovative health care delivery systems. Cost containment features include utilization review, large case management, preadmissions review procedures, required second surgical opinion, and enhanced prenatal care in cases of high-risk pregnancies.

3. Health Care Delivery Systems. Evolving health care delivery systems include the staff model health maintenance organization (the staff model HMO), the individual practice association health maintenance organization (the IPA-HMO), and the preferred provider organization (the PPO), as opposed to traditional indemnity coverage.

HMOs use a "gatekeeper" system under which the patient must first see a general practitioner or primary care physician (the "gatekeeper"). The gatekeeper will provide the treatment or, if medically necessary, refer the patient to a specialist within the HMO system. Thus, the HMO system controls both cost and access to medical care.

The staff model HMO provides the greatest control because it uses managed care to the greatest extent. The doctors in a staff model HMO are salaried rather than paid on the basis of services provided. The patient must always go to a specific location for care and generally does not select the doctor.

The IPA-HMO differs in that the doctors participating in the HMO have their own medical practices apart from the HMO and, typically, contract with the HMO to service a specific number of patients. The patients visit the doctor in the doctor's separate office. The doctor's fee is usually based on the number of patients to whom he or she has agreed to provide services. Thus, the patient has a limited ability to select the doctor.

Under a PPO, the patient sees a participating doctor, including participating specialists, of his or her choice. In order to participate in the PPO, the doctor must agree in advance with the insurer that the fees for services established by the insurer will be considered full payment. The PPO, therefore, is designed to control costs but does not attempt to control access to care.

B. Self-Funded Health Insurance. Rather than providing health insurance through the purchase of an insurance policy or participation in one of the various forms of health care delivery systems described above, an employer may elect to self-fund benefits provided under the health and accident plan. Because of the potential for enormous liabilities, small employers typically do not risk self-funding the benefits. However, with

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careful analysis and proper stop-loss coverage, even small employers may realize cost savings through self-funding.

1. Effect of ERISA Preemption of State Law. One of the major advantages of self-funding is that, since no insurance policy is purchased, ERISA preempts state regulation of the plan. Thus, the state mandated benefits, which often add significantly to the cost of the insurance, are not required. In addition, ERISA's preemption of the state anti-subrogation provision can further lower claims cost because the plan (if properly drafted) is permitted to require reimbursement from the employee for subsequent recoveries from third parties or other insurance.

2. Need for Stop-Loss Coverage. A small employer that wishes to consider self-funding should also consider the level of stop-loss coverage needed to protect itself from financial ruin in the event of heavy claims. The stop-loss coverage must be written to run to the employer to reimburse the employer for payments of benefits above the aggregate or specific levels set, and never as a direct benefit to the employee. Other arrangements may cause the plan to be an insured plan and, as such, unable to take advantage of the preemption of state law. Furthermore, if stop-loss levels are set so low that the employer bears little or no risk of loss, then the self-funding arrangement may be viewed as a sham and the stop-loss coverage considered insurance for state law purposes.

3. Contract with a Third-Party Administrator. The claims administration in self-insured plans may pose a risk of liability to the employer. Many employers will contract out the claims administration to a professional administrative service organization (ASO). It is important to document any ASO arrangement carefully, including the parameters of the ASO's discretion, the ASO's indemnification obligations, and the employer's right to be held harmless from the ASO's improper actions.

C. Tax Considerations. The I.R.C. provides that the gross income of an employee does not include contributions made by the employer to an accident or health plan or premiums paid by the employer for insurance to provide accident and health coverage for the employee and the employee's spouse and dependents. ⁸⁴ Further, an employee's gross income does not include amounts received through accident or health insurance, except to the extent that those amounts exceed the costs actually expended for medical care of the employee and the employee's spouse and dependents. ⁸⁵

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For this purpose, a dependent is defined as any of the following individuals, provided the employee pays over half the individual's support: (i) the employee's lineal descendants, stepchildren, legally adopted children, and eligible foster children; (ii) lineal ancestors; (iii) brothers and sisters; (iv) nieces and nephews; (v) uncles and aunts; (vi) in-laws; and (vii) any other person who lives with the employee as a member of the employee's house-hold. ⁸⁶ In the case of children of divorced parents, the children may be dependents of either or...