Guest Article

(From the January 22, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

DOL Closes Wellness Plan Loophole in HIPAA Nondiscrimination Rules

The Department of Labor late last year issued guidance on when supplemental health insurance coverage will be treated as a HIPAA excepted benefit. Field Assistance Bulletin (FAB) No. 2007-04 (December 7, 2007) ostensibly established a straightforward enforcement safe harbor the DOL will use to determine if supplemental health insurance coverage is an excepted benefit, and thus not subject to HIPAA's portability and nondiscrimination rules. But in so doing the DOL eliminated a wellness plan design alternative that had been getting some play, especially among smaller employers.

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. However, some wellness plans raise HIPAA nondiscrimination issues.

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 factors:

A wellness plan that provides a premium discount to non-smokers (or that charges a premium surcharge to smokers) violates this rule because smokers have a medical condition -- i.e., nicotine addiction. There is a wellness plan exception to the HIPAA nondiscrimination rules, but it applies only if the wellness plan satisfies a series of specific requirements. Among others, the "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.

Significantly, only wellness plans that otherwise would violate the HIPAA nondiscrimination rules need to be concerned with this wellness plan exception. Giving employees access to fitness equipment in the workplace or reimbursing health club dues are examples of wellness plans that do not violate the HIPAA nondiscrimination rules. If the wellness plan is not based on satisfying a standard related to a health factor, there is no issue under the HIPAA nondiscrimination rules.

The Loophole

FAB 2007-04 is 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, FAB 2007-04 makes it clear this type of arrangement does not work. The FAB establishes four specific criteria the supplemental coverage must meet for 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, DOL is saying it 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.

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.