Many insurers are offering small employers the option of changing their medical plan renewal dates with the expectation of maintaining better premiums for an additional period of time, particularly before the age-banded and tobacco use ratings are implemented under health care reform.
This early-renewal option is being embraced by employers. Employers who change the renewal date for their medical plans should consider the impact of the change on other aspects of their benefit programs. Employers should consult with their legal counsel before making a change.
COBRA
The early renewal will have an effect on COBRA administration. The COBRA rules require that COBRA premiums be set for a 12 month determination period, which typically coincides with the plan year. The 12 month determination period allows employers to change the COBRA rates at the start of the plan year, when rates are changed for similarly situated active employees.
Under the COBRA rules, plans must determine their premium in advance of each 12 month determination period and may not increase the premium during the 12 month period. The 12 month period can be any period selected by the plan, but it must be applied consistently from year to year. It must be the same period for all qualified beneficiaries and may not vary from person to person. If a plan offers different benefit options, the 12 month determination period may differ from option to option.
Some consultants are advising that an employer who elects to renew its group health plan before the end of the determination period cannot change the COBRA premium rate at the same time. These consultants advise that the employer must be responsible for the increased premium until the start of the next determination period and could not pass any increase on to existing COBRA participants.
Other consultants have advised that the plan should implement a short determination period for the upcoming plan year, but keep the determination period (and absorb any increased premium) for the remainder of the existing plan year.
The COBRA rules do not expressly prohibit or permit an employer to change a plan's COBRA determination period. The regulations simply state that the determination period must be a 12 month period that is applied consistently from year to year. Based on guidance with respect to other aspects of employee benefits, in particular guidance applicable to cafeteria plans (see below), it might be defensible to take the position that the plan can select a new determination period if the change is supported by a legitimate business reason, and if the employer intends to use the new 12-month determination period indefinitely. It is likely that changing an insured plan's policy year would be considered a legitimate business reason. This could be sufficient justification for cutting the determination period short in 2013 and implementing a new 12 month determination period going forward.
Cafeteria Plans
The plan year for a cafeteria plan must be specified in the cafeteria plan document. The cafeteria plan regulations provide that the plan year must be 12 consecutive months, unless a short plan year is allowed. The plan year must stay in effect unless changed in accordance with certain rules.
As briefly mentioned above, a cafeteria plan may change its plan year if the employer has a valid business purpose for the change. See Prop. Treas. Reg. section 1.125-1(d)(3). An example in the regulations allows a short plan year when an employer switches to an insurer with a different policy year.
To change plan years, the cafeteria plan documents must be amended and the change must be communicated to employees. If a Form 5500 is filed, the change must be indicated in the filing, and the return will be due sooner than previously required. Any SPD distributed to employees must also be updated.
Coordination with Other Benefit Plan Offerings
An employer will have to consider if it wishes to change its plan year for all plans (medical, dental, FSA, etc.,) or if the plan year will change for medical, only. This will be an important issue if the employer has over 100 employees and has to file Form 5500. It also will be important for communication to employees and for the employer's flexible spending account plans.
If the employer does not change the plan year for all benefits, the employer will still have to consider its open enrollment period. Will the employer have multiple open enrollment periods (i.e., one for medical and another for the other benefit offerings)? Or, will the employer have one open enrollment period, with benefit changes effective at different times?
Special Concerns for FSAs
Some employers offer FSAs to allow employees to put money aside to pay for deductibles and co-payments under the medical plan. Employers may wish to change their FSA plan year to coordinate with the new plan year for the medical plan.
If the If the plan year is changing for the FSA, employees should be notified as early as possible so they can plan to use the amounts in their account before the short plan year expires. Eligible expenses may only be incurred during the plan year. Changing a plan year after it has commenced, without notice when elections for the year are made, may be difficult for employees who expected to use their funds in the later part of the year.
A plan year change would likely not be a recognized life event to permit an employee to change his or her FSA election mid-year.
Summary
As identified above, there are several considerations for employers who implement an early renewal. The potential cost-savings should be weighed against other compliance issues.
