Question: What are the main employer considerations when responding to requests to enroll a new hire in the health plan prior to satisfying the plan’s waiting period?

Short Answer: The main concerns are the insurance carrier or stop-loss provider prohibiting the early enrollment and the scope of the ERISA plan precedent created by permitting the early enrollment. As a workaround during the waiting period, employers could choose to reimburse all or a portion of the COBRA premium for continuation coverage through the new hire’s prior employer.

Note: This is the third in a multi-part series addressing employee health plan exception requests.

• Part I: Mid-Year Enrollment Requests Outside of Permitted Election Change Event

• Part II: Ineligible Part-Time Employee Enrollment Exception Requests

Eligibility Exceptions:** New Hire Waiting Period Exception Requests**

There are two main issues for employers to consider upon receiving a request to enroll a new hire in the health plan prior to satisfying the plan’s waiting period.

The two main issues are:

1)    The Insurance Carrier Limitations; and

2)    The ERISA Plan Precedent.

Issue #1: The Insurance Carrier Limitations

Insurance carriers (and stop-loss providers for self-insured plans) generally will pay claims only for employees and dependents who are eligible and properly enrolled pursuant to the terms of the applicable insurance policy.

Carriers will in most cases permit coverage only for those employees who satisfy the plan’s waiting period.  These carrier restrictions are crucial to (among other reasons) avoid significant adverse selection issues for the carrier.

If an insurance carrier or stop-loss provider were to discover that the employer made an exception to permit a new hire to enroll early prior to satisfying the plan’s waiting period, the carrier would be within its right to deny paying (or reverse payment for) all claims for that employee. That would ultimately likely make the employer responsible for self-funding all claims incurred by the employee—at least for the period prior to satisfying the otherwise applicable waiting period—which is the worst-case scenario of potentially unlimited liability that employers must avoid.

Note that even in the rare situations where the insurance carrier approves the exception, the carrier does not have the same concerns as the employer regarding the need to consider the scope of the ERISA plan precedent (issue #2 below) because the carrier is not responsible for that issue.  Employers (as the ERISA plan administrator) will often incorrectly assume that the green light from the carrier absolves them of any additional concerns arising from ERISA compliance.

**How to address the issue: **Most insurance carriers and stop-loss providers will permit employers to offer coverage as of the employee’s date of hire or the first of the month coincident with or next following the employee’s date of hire.  Employers can therefore often accommodate such requests by modifying the plan’s eligibility terms for all employees.  Any such changes to the plan’s waiting period would need to be confirmed by the carrier and communicated to employees by updating any plan materials addressing eligibility (e.g., SPD, EOC, policy, certificate, open enrollment materials, new hire materials, handbook).

Issue #2: The ERISA Plan Precedent

Employers frequently impose an eligibility and/or waiting period before a new hire can participate in the health plan.  For example, the employer might impose a 90-day waiting period or a combined eligibility orientation period and waiting period that makes coverage available as of the first day of the fourth full calendar month of employment.

•  For more details, see: ACA First Day of the Fourth Full Calendar Month Rule.

Regardless of the employer’s waiting period approach, ERISA requires that employers administer and maintain the plan pursuant to its written terms, including its eligibility requirements.  Nonetheless, requests to enroll an employee before satisfying the plan’s waiting period typically arise from situations where a key recruit demands health plan coverage immediately upon hire, or a new hire has immediate health concerns that need to be addressed prior to completion of the waiting period. 

 Within this ERISA framework, employers should not make “exceptions” to act contrary to plan terms because doing so could be a breach of fiduciary duty.  Rather, employers may exercise their discretionary authority to interpret plan terms when making a plan eligibility determination.  Employers that permit enrollment in these situations have therefore interpreted the plan’s terms to be flexible enough to accommodate the early enrollment.

 A broad interpretation of the plan’s terms beyond their standard denotation to permit the early enrollment effectively acts in the same manner as a plan amendment because the employer must apply that approach consistently for all similarly situated employees.  For example, an employer permitting a key recruit to enroll as a new hire prior to satisfying the waiting period (as a purported “one-off” needed to address a health concern) would generally have to accommodate the same early enrollment requests from all other eligible new hires making the same types of requests.

 In other words, health plan early enrollment “exceptions” create an ERISA plan precedent requiring the plan to offer coverage upon satisfying the reduced (or eliminated) waiting period for all employees in similar circumstances.  An employee denied the ability to enroll in similar circumstances (i.e., prior to satisfying the waiting period) would have a potential claim for ERISA breach of fiduciary duty or claim for benefits.

•  For more details, see our Newfront Office Hours Webinar: ERISA for Employers.

**How to address the issue: **Unfortunately, there is no good way to solve for the unavoidable establishment of an ERISA plan precedent.  The only mitigating factor could be an argument as to the scope of the precedent.  How broadly or narrowly the precedent applies in practice is a matter of interpretation based on the specific facts and circumstances of the exception.  Employers should keep in mind that an aggressive argument as to the narrowness of the precedent’s scope could always be challenged by the DOL or a participant lawsuit if it were unreasonable.  _Accordingly, the plan precedent derived from permitting a waiting period exception will always be a thorny concern that is difficult to manage.  _

Alternative Approach: COBRA Reimbursement for Coverage Under Prior Employer’s Plan

The most common solution to an employer’s desire to accommodate a new hire’s early enrollment request is for the employer to reimburse all or a portion of the employee’s COBRA premium during the waiting period. 

In many cases, new hires have recently left a prior position for which they have access to COBRA continuation coverage through the prior employer.  Employees typically dislike COBRA because—absent any employer subsidy—the requirement that they pay the full 102% of the premium is often cost-prohibitive.

The COBRA reimbursement option avoids the issues described above, while providing a cost-effective coverage bridge for the employee during the plan’s waiting period for new hires.

Note: There are no ACA individual policy reimbursement issues with reimbursement COBRA premiums because COBRA is not an individual policy (it is continuation of group health plan coverage).

Taxable Reimbursement

Unless the employer takes steps to make the COBRA reimbursement non-taxable, the default position is that the reimbursement with be taxable.  The employer can pay the new hire the amount of the intended COBRA reimbursement (plus a gross up, if desired), and include that amount in standard taxable income subject to withholding and payroll taxes.

Non-Taxable Reimbursement

If the employer wants the COBRA reimbursement to be non-taxable to the employee, the employer has two available approaches to make the payment a tax-free health expenditure:

1)    Pay the COBRA premiums directly to the COBRA administrator (or to the employee via a check made out directly to the COBRA administrator); or

2)    Distribute the reimbursement to the employee only upon the employee substantiating the expenses by providing a receipt showing proof of payment.

For more details, see:

• COBRA Subsidies and Reimbursement

• Newfront COBRA for Employers Guide

Summary

For the reasons outlined above, employers should generally avoid making health plan eligibility exceptions to enroll new hires before satisfying the plan’s waiting period.  The issues associated with making an exception in most cases far outweigh the typical recruiting purpose, hardship case, or other motivation presented by the employee requesting the exception.

 Employers wishing to enroll a new hire prior to satisfying the waiting period do have the option of working with the insurance carriers and/or stop-loss providers to change the plan’s eligibility terms to establish a reduced or eliminated waiting period for all new hires.  Any such changes to the plan’s eligibility terms would need to be confirmed by the carriers and communicated to employees by updating any plan materials addressing eligibility.

 Alternatively, employers can utilize the common workaround strategy during the waiting period of reimbursing all or a portion of the COBRA premium for continuation coverage through the new hire’s prior employer.

 Relevant Cites

ERISA §402(a)(1):

(1) Every employee benefit plan shall be established and maintained pursuant to a written instrument. Such instrument shall provide for one or more named fiduciaries who jointly or severally shall have authority to control and manage the operation and administration of the plan.

ERISA §404(a)(1)(D):

_(1) _Subject to sections 403(c) and (d), 4042, and 4044, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—

…

(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this title and title IV.

IRS Publication 15-B:

COBRA premiums.

The exclusion for accident and health benefits applies to amounts you pay to maintain medical coverage for a current or former employee under the Combined Omnibus Budget Reconciliation Act of 1986 (COBRA). The exclusion applies regardless of the length of employment, whether you directly pay the premiums or reimburse the former employee for premiums paid, and whether the employee's separation is permanent or temporary.

IRS Information Letter 2006-0042:

On the other hand, **if the employer makes the payments for the health insurance directly to the insurer, then the payments are not included in the employee’s gross income. **See Revenue Ruling 61-146, 1961-2 C.B. 25. This holds true even if the payments are routed through the employee to the insurer, as long as the employee’s right to dispose of the funds is not unlimited. However, if the employer makes health insurance payments directly to the employee with only an understanding that the employee will purchase health insurance with them, and there is no verification of or control over the purchase, that amount is included in wages for employment tax purposes and would be subject to FICA taxes.