Posted on behalf of Mark Holloway, J.D. – Senior Vice President and Director – Lockton Compliance Services
One of the areas in the employee benefit world where agency guidance has been sorely needed is the application of federal tax and ERISA rules, particularly rules added by the Affordable Care Act (ACA), to health insurance plans that cover foreign-bound U.S. employees (expatriates).
The application to expatriate health coverage of the ACA’s various benefit mandates and taxes and fees, and the extent to which such coverage satisfies the ACA’s individual and employer mandates, resulted in a mishmash of complex and nearly unworkable rules. The federal agencies realized the complexity of these issues and issued FAQ guidance that exempted insured expatriate programs from some of the ACA requirements through 2015; see our blog post. Subsequent guidance pushed the compliance date for plan years ending through Dec. 31, 2016. Even with the regulatory leeway, U.S. health insurers argued the complexity and associated costs of the ACA rules created a competitive disadvantage with non-U.S. insurers writing expatriate coverage that did not comply with all of the ACA-related mandates.
We now have some good news, sort of. Buried in the budget bill signed by the President last week is the “Expatriate Health Coverage Clarification Act of 2014” (EHCCA) that exempts some expat coverage from several thorny ACA-related requirements, and treats the coverage as adequate for both the individual and employer mandates…but only if the coverage meets several specific and potentially difficult requirements.
The new rules and their potential accommodations apply to insurance contracts issued or renewed on or after July 1, 2015. Unfortunately, the law does not exempt expat coverage from meeting the tax reporting requirements under the ACA (the so called “Section 6055/6056 reporting rules” that apply beginning in calendar year 2015) and does nothing to exempt expatriate coverage from pre-ACA ERISA rules, such as COBRA and mental health parity requirements.
Nevertheless, the EHCCA does hold some advantages for expat coverage that can clear three hurdles. Here they are:
Hurdle #1 – Expat Plan’s Enrollees Must Be Substantially All “Qualified Expats”
To qualify for the relief, the expatriate health plan must be a group health plan (including a self-funded plan) or insured program where substantially all “primary enrollees” meet one of the three criteria below (the law refers to these as “qualified expatriates”). Primary enrollees include not only the employee, but other enrollees including the employee’s spouse, children and other family members, such as domestic partners.
The three types of qualified expatriates are:
- Expatriates outside the U.S. – Persons who work outside the U.S. for a period of at least 180 days in a consecutive 12-month period that overlaps the plan year.
- U.S.-bound inpatriates – Foreign workers transferred or assigned to the U.S. on temporary assignment who need access to health insurance in multiple countries and their employer offers them multinational benefits, such as tax equalization, cross-border moving expenses, etc. Persons who are not U.S. nationals and who reside in their country of citizenship do not qualify.
- Students/missionaries/charity workers – These individuals also meet the definition of qualified expatriate, subject to future criteria to be determined by the federal agencies.
The new law does not define “substantially all.” However, the U.S. Department of Labor has issued rulings on when a plan covers persons “substantially all” of whom are nonresident aliens, to determine whether ERISA applies to the plan. Those rulings, some up which are decades old, seem to indicate that at least 93 percent of the plan’s enrollees must fit within the criterion to meet the “substantially all” threshold. It remains to be seen if the agencies will adopt a similar standard for an expatriate health plan under the new law.
Hurdle #2 – Expat Plan’s Coverage Must Meet Specific Criteria
Assuming the plan clears the first hurdle, the coverage must then meet specific criteria to qualify for the partial exemption from the ACA discussed below. These conditions include:
- Insurance coverage for inpatient hospital services, outpatient facility and physician services, and emergency care.
- The plan has an actuarial value of at least 60 percent and substantially all of the plan’s benefits cannot be ACA excepted benefits (dental, vision, etc.).
- If the plan provides for coverage of children, that coverage extends through age 26.
- If the coverage is insured, the insurer is licensed to sell insurance in more than two countries and meets network adequacy and other standards, including maintaining call centers and providing global evacuation and repatriation coverage.
- The coverage satisfies the applicable pre-ACA ERISA standards for health insurance, including mental health/substance abuse parity, 48 hours of maternity care, COBRA, claims appeal requirements, distribution of summary plan descriptions and filing of Form 5500 (as applicable). Expat coverage issued by a U.S. carrier typically meets these requirements, but often coverage issued by a foreign carrier does not.
Keep in mind that ERISA will apply to expat coverage except if the plan is established and maintained outside the United States primarily for the benefit of persons, substantially all of whom are nonresident aliens.
Hurdle #3 – Insurer Agrees to Handle ACA Tax Reporting
ACA tax reporting still applies to the expat coverage (the dreaded “Section 6055/6056 reporting”), but the IRS forms can be supplied electronically to the enrollee without consent, unless the enrollee explicitly refuses electronic delivery.
Significantly, if the insurance carrier does not agree to facilitate the tax reporting, then the expat coverage falls outside the scope of the new law and becomes subject to the full array of ACA mandates. It remains to be seen whether the federal agencies would assess penalties on the insurer – which may be outside the agencies’ jurisdiction if the carrier is not licensed in the U.S. – or whether penalties could accrue to a U.S.-based employer/plan sponsor.
If My Expat Plan Clears All the Hurdles, What Relief Applies?
First, the good news: Expat plans that meet the criteria above do not have to comply with the following ACA mandates:
- Dollar limits on essential health benefits
- Waiting period limits of 90 days
- Out-of-pocket maximums for in-network care
- Cost sharing on in-network preventive care
- Rigorous claim appeal procedures
- Preexisting condition exclusions
- Retroactive coverage terminations (except fraud)
- Distribution of summaries of benefits and coverage (SBCs)
Coverage under the expat plan is also deemed to satisfy the individual and employer mandates and is exempt from the ACA’s taxes and fees, including the transitional reinsurance fee, PCORI fee, and the insurance company excise tax (after 2015, subject to transition rules). The new law contains an exemption for some expat coverage with respect to the “Cadillac tax” on high value health plans that will apply in 2018 (see discussion below).
Now, the not-so-good news: The exemption from the Cadillac tax does not apply with respect to a U.S.-bound inpat (second bullet under Hurdle #1, above), if the person is assigned, rather than transferred, to the U.S.
The federal agencies – IRS, DOL and HHS – will need to issue regulatory guidance on the new requirements. It is unclear whether plans can rely on the existing FAQ guidance though 2016 or will need to comply when coverage is renewed on or after July 1, 2015 (the law’s effective date).