From the Hotline: Changing the Renewal Date of a Group Health Plan

Question:  Are there any drawbacks to moving the effective renewal date of a group health plan in order to capitalize on additional savings before the “Community Rating” standards go into effect on 1/1/14?

Answer:  Certain health insurers are offering “early renewals” (prior to 2014) suggesting that they can offer more attractive rates. The Affordable Care Act’s “market reform” provisions will take effect on the first day of the plan year beginning on or after January 1, 2014. There are several ACA “market reform” provisions, but the primary reforms apply only to “small group” health insurance policies: guaranteed issue/renewability and modified community rating.

Let’s assume the group is a “small group” and that renewing prior to 1/1/2014 would avoid the ACA’s new “modified community rating” requirement with respect to the 2013 renewal. Note, however, that the new rating method would not necessarily generate higher rates than the existing method. There will be both winners and losers under modified community rating. In many cases, groups that have an older employee demographic and/or have less healthy members will benefit from the new rating method. Groups with many younger members may experience higher rates under the new method. Generally, the new rating method under the ACA allows carriers to consider only the members’ region (e.g., zip code area), age, family size and tobacco use in rating small groups. The maximum ratio of old to young rates will be 1:3, which is significantly more compressed than current methods in many states. In any event, carriers will no longer be able to adjust small group policy rates based on health status or gender.

On the other hand, small group policies renewing 1/1/2014 and later must provide the “essential health benefits” package prescribed by the ACA which may be more extensive than the group’s 2013 benefits. All plans, whether small or large, must remove any pre-existing condition exclusions starting with 2014 plan year, so that may be another change that would increase costs.

Carriers often think only in terms of the policy’s renewal date. The employer’s group health plan year, however, is not necessarily the same as the policy anniversary or renewal date. The employer’s plan year is set forth in its ERISA materials (e.g., plan document, SPD, Form 5500) and any change would require amending those materials. In most cases, employers offer health coverage to workers through a cafeteria plan (also called a §125 plan or flexible benefits plan) so that employees can make coverage contributions (payroll deductions) on a pretax basis. IRS regulations provide that employers can change the cafeteria plans year based on a valid “business purpose” (e.g., changing insurance carriers, corporate merger or reorganization).

You also will want to consider the health insurance policy provisions regarding annual benefit provisions, such as deductible or out-of-pocket maximums. Presumably the current policy tracks annual amounts on a calendar year basis. If the policy year changed to a Nov 1 or Dec 1 basis, would the policy continue tracking benefit amounts on a calendar year basis?

Due to legal concerns about “early renewals”, several states have or are considering legislation to prevent or restrict carriers – particularly in the small group market – from using early renewals to avoid any provisions under the ACA or under state insurance law.

Our comments are merely examples of some of the potential issues regarding “early renewals”, and there may be other issues or legal challenges. We do not provide tax or legal advice to clients and you should review this matter in full with appropriate counsel and, most importantly, your benefits broker.