Child Health Insurance Program (CHIP) Expansion Affects Both ERISA and Insured Employer-Sponsored Health Plans

March 18th, 2009

On Feb. 4, 2009, President Obama signed into law an expansion of the Children’s Health Insurance Program (CHIP) which includes provisions that affects employer-sponsored group health plans.  CHIP was formerly known as the State Children’s Health Insurance Program (SCHIP).  It is a federal-state program designed to decrease the number of individuals without health care coverage.

The new law gives provides for added flexibility in order to cover children whose annual family income exceeds 200% of the federal poverty level ($22,050 for a family of four in 2009).  In addition to the income changes, the new law also includes a provision allowing legal aliens to participate in CHIP.  These changes will result in up to 4 million additional children being covered by CHIP.

In order to encourage more cost-effective coverage of CHIP-eligible individuals, the new law permits (but does not require) states to provide premium assistance to qualifying children (and, in some cases, their employed parents) to help pay employer group health plan premiums.  It is unknown how many states will adopt such a program or when the programs will be operational.  According to a recent Kaiser Family Foundation study, currently six states have state assistance programs – Florida, Idaho, Illinois, Oregon, Utah, and Virginia.

Qualified Coverage

CHIP applies to “qualified employer-sponsored coverage”, which is defined as group health plan or health insurance coverage offered through the employer which meets the following requirements:

  • The coverage must be “creditable coverage” for Health Insurance Portability and Accountability Act (HIPAA) purposes;
  • The employer contribution toward the cost of any premium for the coverage must be at least 40%; and
  • The coverage must be available to individuals in a manner that would be considered to be a nondiscriminatory group for eligibility purposes under Internal Revenue Code’s Section 105(h) rules.

Qualified employer-sponsored coverage does not include:

  • A health flexible spending arrangement (such as a Health Flexible Spending Account or a Medical Reimbursement Account); or
  • A high deductible health plan (for Health Savings Account purposes).

Premium Assistance

The permitted premium assistance available for employers to offer to qualifying children is the incremental difference in cost to the employee between the cost of enrolling only the employee under the employer sponsored coverage and the cost of enrolling the employee and the low-income child under the employer-sponsored coverage.  If premium assistance is also provided to the parent of a low-income child, the amount of the subsidy is increased to take into account the cost of enrollment of the parent (or the family, if allowed by the state) in the employer-sponsored coverage.  A state is allowed to provide the premium assistance subsidy either as a direct reimbursement to an employee for out-of-pocket expenditures, or as a reimbursement to the employee’s employer.

Under the new law, employers are allowed to opt-out of being reimbursed for the premium subsidy.  If an employer chooses to opt-out, the employer is effectively removed from the subsidy process, and the state will then make its reimbursement for the subsidy directly to the employee.  This opt-out option will allow the employer to continue to withhold the full amount of the employee contribution required for coverage of the employee and the low-income child under the employer’s group health plan.

Special Enrollment Period

The new law also creates a new HIPAA special enrollment period to allow employees and dependents to enroll in an employer group health plan when they either lose Medicaid or CHIP eligibility or first become eligible for state premium assistance.  Employers will have to notify employees of the availability of state premium assistance and respond to state agency requests for information about an employee’s or a family member’s plan coverage.  The special enrollment provisions take effect April 1, 2009.  However, the premium assistance notice and disclosure provisions won’t be effective until model notices and forms are issued.

Under existing HIPAA rules, most group health plans (whether insured or self-insured) are required to allow employees to enroll themselves and certain family members in employer plan coverage under certain circumstances (such as loss of other coverage or adding dependents due to marriage, birth, adoption or placement for adoption).  Group health plans must notify employees of these special enrollment rights either before or at the time of enrollment in the plan.

The expanded CHIP law gives employees and their dependents who are eligible for but not enrolled in an employer group health plan a special enrollment period if either of two events occurs:

  • They lose Medicaid or CHIP coverage because they are no longer eligible, or
  • They become eligible for a state’s premium assistance program.

Unlike the existing HIPAA special enrollment rights, which allow a 30-day enrollment period after a qualifying event, under the new CHIP requirements, employees have 60 days from the date of the Medicaid/CHIP event to request enrollment in the employer’s group health plan.  In order to qualify for this midyear enrollment right, individuals must experience a Medicaid/CHIP qualifying event and provide the plan timely notice of the event and an enrollment request.

Current HIPAA rules require plans to provide notice of employees’ special enrollment rights at or before the time they can enroll in the plan.  CHIP does not address how or when employers should provide notice of the new special enrollment rights.  However, because the new Medicaid/CHIP qualifying event amends the HIPAA special enrollment provisions, it is believed that employers must revise their current notices of special enrollment to describe the new Medicaid/CHIP provisions – including the 60-day period to request enrollment.  At the very least, employers should include updated notices in enrollment materials for newly eligible employees beginning on April 1, 2009.  Additionally, employers may wish to notify all employees about their new special enrollment rights on or before the provision’s April 1, 2009 effective date.

Many employers that sponsor group health plans offer Section 125 cafeteria plans.  Under current cafeteria plan rules for electing benefits paid with pretax contributions, plans may allow employees to make midyear elections if they (or their family members) experience certain life events or status changes, such as gaining or losing Medicare or Medicaid eligibility or losing CHIP coverage.  Cafeteria plan rules also permit midyear elections for events triggering any mandated HIPAA special enrollment right, which will now include Medicaid/CHIP triggering events.

However, in contrast to the mandatory special enrollment period triggered by HIPAA-specified events, midyear cafeteria plan elections are completely optional – employers may choose to include some, all or none of the IRS-approved status change events in their cafeteria plans.  Therefore, an employee could have a HIPAA special enrollment right to join an employer’s health plan, but unless the employer’s cafeteria plan recognizes eligibility for HIPAA special enrollment as a status change allowing midyear elections, the employee will have to pay for health coverage using after-tax contributions.  Employers that already include HIPAA special enrollment events as grounds to permit midyear cafeteria plan elections may need to update their existing documentation and communication materials to make the scope of these events clear.  Employers that do not currently allow employees to make midyear pretax election changes for HIPAA special enrollments may want to consider adding them now.

Employer Notice and Disclosure Obligations

CHIP requires employers to notify employees about the availability of state premium assistance.  Additionally, employers must respond to any requests from state agencies about the group health plan coverage provided to specific employees and family members.  However, it appears that neither of these requirements is immediately effective.

The Departments of Labor and Health and Human Services must jointly develop and issue model national and state-specific notices within one year of CHIP’s enactment (February 4, 2009) for employers’ use.  Employers must provide the notice to employees starting with the first plan year beginning on or after the date the model notices are issued in final form.  Once the notice obligations become effective, employers may include these notices when distributing certain other benefits information to employees, such as:

  • Plan materials informing employees that they are eligible for group health plan coverage;
  • Annual open enrollment materials; and
  • Summary plan descriptions (SPDs).

Under the new law, employers will be required to respond to state agency requests for information about an employee’s or a family member’s plan coverage.  There is currently no deadline for when the model form for such responses will be issued.  However, once the model form is issued, employers must use it for any state agency requests in the first plan year starting on or after the issue date of the model form.

Once issued, the model form will require the following information from the group health plan:

  • Employee/dependent eligibility for group health plan coverage;
  • The plan administrator’s name and contact information;
  • A description of the plan’s benefits;
  • Premiums and cost-sharing amounts for plan coverage; and
  • Other relevant plan information.

Unfortunately, the law does not address how employers should respond to state requests for information prior to the model form being issued.

Penalties

CHIP does provide for non-compliance penalties.  Employers that fail to provide the required employee notice may be subject to a penalty of $100 per day for each violation.  Each employee who does not receive the notice is considered a separate violation.  Additionally, plan administrators that do not respond to state information requests face similar penalty assessments.

Next Steps for Employers

Because the new Medicaid/CHIP special enrollment right’s effective date is just around the corner, employers need to take several steps immediately.

1.    Confirm with vendors that qualifying employees and family members will be able to enroll in group health plans.

2.    Revise existing HIPAA special enrollment rights notices to include Medicaid/CHIP triggering events by the April 1, 2009 effective date.

3.    Revise any other employee communications that describe HIPAA special enrollment rights (such as SPDs and open enrollment materials).

4.    Amend cafeteria plan documents as necessary to reflect the new Medicaid/CHIP special enrollment right and the 60-day period to request plan enrollment.

5.    Establish procedures to respond to state requests for information about coverage provided to specific employees and family members.

Please contact our office for more information or to speak with benefits counsel about the new Medicaid/CHIP law and its impact on your business.

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