Early Renewal – Keeping it Legal

Beginning January 1, 2014 the ACA (Healthcare Reform) will dramatically change the types of small group health insurance plans offered and how their premiums are calculated.  Some employers may, as a result, face breathtaking increases in both rates and complexity in 2014 compared with their present plans.  In particular, employers in the following situations will face the greatest negative changes:

  • Employers who now have a low Risk Adjustment Factor (RAF) – (Since discounts are no longer permitted for good health, plans that have the lowest RAF of .90 will receive a rate increase in 2014 of 11% in excess of the rate increase they normally would have.)
  • Employers with young employees – (Since the ACA reduces the maximum difference in rates between the youngest and the oldest, rates for the younger employees will increase dramatically compared with prior years.)
  • Employees with larger families or children over age 20 – (Under new ACA rules, the employee is charged separately for each child (up to a maximum of 3 children) plus additionally for each dependent over the age of 20.  All children over age 20 are charged separately as adults.)

A program called “EARLY RENEWAL” can help defer these changes for almost a year. 

Are there reasons why I might not want to take advantage of “Early Renewal”?

Yes, there certainly are:

  • It is not certain yet that your rates under ACA will be disadvantageous.  We expect to be able to make this determination as 2014 rates become available in the coming weeks/months.
  • If too many employers find Early Renewal advantageous and all choose to change their renewal date to December, it will become much more difficult for both insurers and brokers, like us, to devote additional time and resources to difficult renewals in the future. 
  • Keeping it legal is a challenge.  See “Keeping it legal” below. 


Early Renewal – Keeping it Legal

Early renewal may be a good cost control strategy for small, healthy employers to defer potential cost increases that will come with your next renewal on or after January 1, 2014. 

The challenge is that changes to plans for the sole purpose of avoiding or deferring the ACA rules are illegal.  Unless restricted in your state, however, this can work if it is done correctly.

Working closely with Attorney and Senior Council, Greg Matis of Intermountain Healthcare, and ERISA Attorney, David Williams of Snell & Wilmer, LLP, we clearly define important steps to take with an Early Renewal Strategy to help you do this right to avoid ERISA citations and fines, to pass an ERISA Audit, and be able to effectively change their plan year. 


Early Renewal Strategy – Keeping it Legal

No doubt you are hearing quite a bit about “Early Renewal” strategies to lower costs next year.  With major provisions of the Affordable Care Act (ACA) effective as of the first plan year beginning on or after January 1, 2014, many small employers are considering an “early renewal” strategy to defer, as long as possible, some of the impact of these changes.  Under this strategy, a small employer renews its insurance contract early, for example on December 1, 2013, & makes corresponding changes to its plan documents, so the ACA provisions at issue don’t take effect until December 1, 2014.  While this approach may be a fit for some employers, it doesn’t work in all circumstances, is not without risks, & requires some additional paperwork. Some states may restrict efforts to defer implementation of healthcare reform change.  
COMMUNITY RATING – Small employers with a relatively healthy workforce have perhaps the largest incentive to consider the early renewal strategy because medical insurance rates for groups under 50 will be community rated starting with plan years beginning on or after January 1, 2014.  With community rating, all groups, those with serious medical challenges as well as healthy groups, are pooled together as one group to determine insurance rates.  Rates can vary by geography, age, family, & smoking status.   The net effect to healthy groups, not currently rated up by insurance companies, will likely be significant rate increases.  An early renewal strategy could amount to thousands of dollars in savings.

Less healthy groups, those already rated up, will enjoy the new community rates allowing them to share their risk with more healthy groups.  If these employers have an effective date later than January 1, 2014, they too may want to consider an early renewal strategy (switching to a January 1st effective date), if the new pooled rates are better than their current rates.

SMALL EMPLOYERS ONLY – The early renewal strategy generally does not work for large employers (more than 50 full-time employee equivalents) subject to the “Shared Responsibility” (Play or Pay) requirements of the ACA.  Under the federal Shared Responsibility regulations, attempts during 2013 to change the applicable plan year are considered invalid and will not delay the employer’s effective date.

ERISA REQUIREMENTS – ERISA legislation requires employers to provide an Summary Plan Description (SPD) for their medical insurance plan(s) and all health and welfare plans.  There is no small company exemption—all ERISA-governed employers, regardless of size, are required to provide an SPD.  California HMO plans and most PPO plans for small employers do not provide SPDs and as a result, most small employers do not have an SPD.

There is a common misperception that the information provided by insurance providers (e.g., the Certificate of Coverage or its Summary of Benefits) meets the SPD requirements.  Many small employers erroneously think the insurance company or their insurance broker is responsible to provide them with these required plan documents.  However, the Plan sponsor (typically the employer) is the one held accountable when the Plan is subject to an audit by the Department of Labor’s ERISA compliance division, the Employee Benefits Security Administration (EBSA).  Under healthcare reform, the EBSA has increased audits, including those of small employers.  DOL statistics show as many as three out of four plans have ERISA violations, with 70% resulting in fines.

ERISA requires SPDs to contain:

  • The Plan name;
  • The Plan sponsor/employer’s name & address;
  • The Plan sponsor’s EIN;
  • The Plan administrator’s name, address, & phone number;
  • Designation of any named fiduciaries;
  • The Plan number for ERISA Form 5500 purposes;
  • Type of Plan or description of benefits;
  • The date of the end of the Plan Year for maintaining Plan’s fiscal records;
  • Each trustee’s name, title, & address of principle place of business, if applicable;
  • The name & address of the Plan’s contact for service of legal process, along with a statement that service may be made on a Plan trustee or administrator;
  • The type of Plan administration;
  • Eligibility terms & the effective date of participation;
  • How insurer refunds are allocated to participants;
  • Plan sponsor’s amendment and termination rights and procedures, and what happens to Plan assets, in the event of Plan termination;
  • Summary of Plan provisions governing the benefits, rights, & obligations of participants upon termination or amendment of Plan or elimination of benefits; 
  • Summary of any Plan provisions governing the allocation and disposition of assets upon Plan termination;
  • Claims procedures, and time limits for lawsuits;
  • A statement identifying circumstances that may result in loss or denial of benefits;
  • The standard of review for benefit decisions;
  • ERISA model statement of participants’ rights;
  • The sources of Plan contributions and the method by which they are calculated;
  • Interim Summary of Material Modifications (SMM) since SPD was adopted or last restated;
  • The employer is a participating employer or a member of a controlled group;
  • Whether the Plan is maintained pursuant to one or more collective bargaining agreements, and that a copy of the agreement may be obtained upon request;
  • A prominent offer of assistance in a non-English language (depending on the number of participants who are literate in the same non-English language);
  • Identity of insurer(s), if any.

Additionally, group health plan SPDs must contain:

  • A description of Plan provisions and exclusions;
  • A link to network providers;
  • Plan limits, exceptions, and restrictions;
  • Information regarding: COBRA, HIPAA, WHCRA, QMSO, among other federal mandates;
  • Name & address of health insurer(s), if any, and;
  • A description of the role of health insurers.

Many of these requirements are provided in the certificate of insurance, provided by the insurance carrier, but the employer and Plan-specific information, e.g., the Plan sponsor’s name, address & EIN, are clearly not provided in the generic Certificate of Insurance from the insurance company.

SPD WRAP – In order to address this legal inadequacy, some employers use what is referred to as a Summary Plan Description (SPD) “wrap” document, which serves to provide the missing, employer-specific information to the generic insurer documents, i.e. to “wrap” the insurer documents with the missing, required ERISA language. The wrap document works together with the Certificates of Coverage to constitute the legally sufficient SPD.

– To be compliant, an early renewal strategy requires governing plan documents, including the SPD, properly reflect the different plan year. If the plan’s governing documents don’t reflect a different plan year the market reform provisions of the ACA (e.g., small employer community rating) will in most cases default to a January 1, 2014, effect date and the employer will be out of compliance.  Employers must document a valid business reason for changing their plan year.  That business reason does not include deferring the provisions of the ACA.

Most employers currently have either a full Cafeteria 125 plan or a 125 premium only plan allowing employees to pay for their portion of medical or dental insurance on a pre-tax basis. These documents must also be revised to avoid any fines or penalties.

Although federal regulators have not specifically addressed whether or not they support this strategy, many employers are moving forward with this approach. They should proceed with caution, making sure all documentation requirements have been satisfied.

We highly recommend that employers ask their own legal counsel to review this strategy and approve it before proceeding.  ERISA fines can run $100 per day per plan participant.  If your attorney approves, we can help you with creating your Wrap SPD and POP amendments.

Early Renewal for All Firms, Especially Larger Firms

 “Plan year” is not generally defined by PPACA.  The “play or pay” regulations define plan year as a period of 12 consecutive months, unless a short plan year of less than 12 months is permitted for a valid business purpose.  The play or pay regulations also say that once established, a plan year can only be changed for a valid business purpose, and that a change in plan year is not permitted if a principal purpose of the change is to circumvent the play or pay penalty rules.  Valid business purpose doesn’t generally mean saving money – it’s more like a new location, a merger or another change made to advance the business.  

For any group health care plan subject to ERISA – which is all plans other than church or government plans – the plan year is the 12-month plan year that ERISA requires to be disclosed in the plan’s wrap document or summary plan description.  For a plan that files a Form 5500, the plan year is disclosed on the form.  According to Fisher & Phillips, any group with more than 100 eligible employees should file a Form 5500. It has been their experience over the past two years that the DOL interprets “plan participants” to mean all eligible as opposed to all enrolled.   Your official plan year is what your 5500 says it is, if you file one. 

If a plan is not required to file a Form 5500 or the plan has failed to prepare a plan document, the plan year generally will be the policy year, assuming that the plan is administered based on that policy year. So, if a policy renews on Jan. 1 and any annual open enrollment/coverage changes take effect Jan. 1, the plan year likely will be deemed to start Jan. 1.  But if the policy renews on July 1 and open enrollment/coverage changes become effective on Jan. 1 of each year, the plan year is unclear.  While the employer would want the plan year to start on July 1 to delay the date the plan has to comply with the health care reform requirements, if the plan is actually administered on a calendar-year basis, the government could reasonably argue that the plan year is the calendar year.  A renewal that does not mesh with the policy year or the coverage year is subject to challenge as being abusive.
The penalties for failing to comply with the plan design rules are $100/person/day, in addition to the $2,000/full-time EE penalty that would apply if the ER was relying on the transition rules to delay play or pay.  So getting this wrong could be very expensive.
As always, this is not legal advice.  An employer could do this, not be challenged, and save money.  However, if the employer is challenged and loses the potential penalties are catastrophic.  We just believe you should understand the risks before going down this path.

For continuous updates with analysis follow our blog at or contact:

Robert Recchia, CLU ChFC
President, California Corporate Benefits, a UBA Partner Firm
p (877) 222-6843 x102


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