Guest Article

(From the March 10, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Joins DOL to Close Wellness Plan Loophole in HIPAA Nondiscrimination Rules

Following the Department of Labor's lead, the IRS has issued Notice 2008-23 to provide a safe harbor for treating supplemental health insurance coverage as a HIPAA excepted benefit. The safe harbor is identical to the one provided in the DOL's Field Assistance Bulletin 2007-04, but is necessary because the HIPAA portability and nondiscrimination rules are codified in ERISA, the Internal Revenue Code (IRC), and the Public Health Service Act (PHSA). The DOL's enforcement authority is limited to the ERISA provisions, so Notice 2008-23 clarifies IRS will enforce the parallel IRC provisions in the same manner. The Department of Health and Human Services is expected to issue the same safe harbor for the PHSA provisions in the future.

The apparent purpose of the safe harbor is to address concerns about certain wellness plan products being marketed as HIPAA excepted benefits, and thus not subject to the HIPAA portability and nondiscrimination rules. This wellness plan design alternative had been getting some play, especially among smaller employers. However, as discussed below, Notice 2008-23 and FAB 2007-04 prevent these products from achieving their objective.

Background on Wellness Plans and HIPAA Nondiscrimination

The idea behind wellness plans is to encourage healthy behavior, or discourage unhealthy behavior, as a way to keep total health care costs under control. This simple concept is so broad that it eludes easy definition. For example, stocking vending machines in the employee cafeteria with healthier snacks or making running trails available on the corporate campus are forms of wellness plans, but so too are offering employees health insurance premium discounts or other cash incentives to maintain a certain cholesterol level or not smoke.

Some wellness plans raise HIPAA nondiscrimination issues, but others do not. Basically, the HIPAA nondiscrimination rules prohibit group health plans from discriminating with respect to eligibility, premiums or other contributions against any individual based on any of the following health factors:

An example of a wellness plan that discriminates based on a health factor is one that provides a group health plan premium discount to non-smokers (or that charges a premium surcharge to smokers). In this case the health factor is nicotine addiction, which is a medical condition. By comparison, a wellness plan that involves providing premium discounts to anyone who attends a "healthy living seminar" does not discriminate based on any health factors, and thus does not raise any questions under the HIPAA nondiscrimination rules.

A special exception to the HIPAA nondiscrimination rules is available for wellness plans that otherwise would violate these rules, but it applies only if the wellness plan satisfies a series of specific requirements. Among others, the premium discount or other "reward" must not be worth more than 20 percent of the cost of employee-only coverage under the plan, and there must be a "reasonable alternative standard" for obtaining the reward for individuals who otherwise could not get it due to a medical condition. For example, the premium discount for non-smokers could be made available to smokers who participate in a smoking cessation program -- even if they fail to stop smoking.

Where HIPAA Excepted Benefits Come In ...

Notice 2008-23 and FAB 2007-04 are concerned with a certain wellness plan design that attempts to avoid HIPAA nondiscrimination problems without resorting to the wellness plan exception. Instead, this design relies on the treatment of certain supplemental health insurance coverage as a HIPAA excepted benefit, which is exempt from the HIPAA nondiscrimination rules.

The wellness plan design in question generally uses a primary and supplemental group health plan. The primary plan provides comprehensive coverage, but may have a high deductible and/or high copay or coinsurance requirements. The supplemental plan fills in a portion of the gap created by the primary plan's cost-sharing requirements. Then the wellness plan reward is tied to the supplemental plan premium, which is intended to be a HIPAA excepted benefit. If this arrangement works, the reward (e.g., lower premiums for non-smokers) does not have to be limited to the 20 percent of the cost of employee-only coverage and a reasonable alternative standard for earning the reward does not have to be available.

However, Notice 2008-23 and FAB 2007-04 make it clear this type of arrangement does not work. The Notice and FAB establish four specific criteria the supplemental coverage must meet for IRS and DOL to treat it as a HIPAA excepted benefit. The four criteria are as follows:

The requirement that the supplemental coverage not differentiate among individuals based on any health factor is key. Effectively, IRS and DOL are saying they will not treat supplemental coverage as a HIPAA excepted benefit that is exempt from the HIPAA nondiscrimination rules unless the supplemental coverage itself satisfies the HIPAA nondiscrimination rules. Thus, tying the wellness plan reward to the supplemental coverage will prevent such coverage from being a HIPAA excepted benefit -- and the wellness plan will have to satisfy the HIPAA nondiscrimination rules.

More Information on Wellness Plans and the HIPAA Nondiscrimination Rules

The interaction between wellness plans and the HIPAA nondiscrimination rules has generated considerable confusion among employers, group health plan administrators, and benefits practitioners since the agencies issued final HIPAA nondiscrimination regulations last year. The DOL recently issued FAB 2008-02 to provide a helpful checklist plan sponsors can use to determine whether the nondiscrimination rules apply to its wellness plans -- and whether those plans comply with such rules when they do. The FAB and its checklist are available on the DOL's Web site, at www.dol.gov/ebsa/regs/fab2008-2.html.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2008, Deloitte.