In 2006, Massachusetts enacted the Massachusetts Health Care Access and Affordability Act (the “Mass Health Law”). This law imposes requirements on employers with employees located in Massachusetts, as well as on Massachusetts insurers[1]. The employer requirements include establishment of a Section 125 cafeteria plan (a “Section 125 Plan”) to allow all employees to make pre-tax contributions to the cost of medical care coverage – even employees who are ineligible under the employer’s medical plan. In addition, the Mass Health Law requires employers to make a “fair share contribution” toward its Massachusetts employees’ medical care coverage or to pay an annual surcharge to the Commonwealth, and to file disclosure forms with the Massachusetts Division of Health Care Finance and Policy.
The Mass Health Law also contains requirements applicable to group health insurance contracts. These requirements, applicable to insured medical plans, include a nondiscrimination requirement applicable to levels of contributions offered to all employees for contracts issued or renewed in Massachusetts on or after July 1, 2007, expanded coverage following loss of dependent status, certain small group insurance reforms and additional rules on insurance contract provisions designed to address portability of coverage (including waiting periods).
This Employee Benefits Update includes a brief overview of the Mass Health Law requirements applicable to employers based on currently available guidance. The application of these requirements is specific to the facts and circumstances of each employer. Employers are encouraged to review the administration of their medical plans under the Mass Health Law with their advisors.
Section 125 Plan Required by July 1, 2007
Under the Mass Health Law, the Commonwealth Health Insurance Connector (the “Health Connector”) was created for the purposes of furnishing affordable health care to eligible individuals and administering the new requirements and programs established under the Mass Health Law. The Health Connector has mandated July 1, 2007 as the effective date for establishing or amending a Section 125 Plan to meet the Mass Health Law requirement, although initial eligibility to make pre-tax contributions may be deferred until September 1, 2007.
Employers Who Must Establish a Section 125 Plan
Employers with the equivalent of eleven or more full-time employees located in Massachusetts are required to adopt and maintain a Section 125 Plan that meets the requirements of both federal law and the Mass Health Law[2]. Employers that pay 100% of all medical care coverage for all of its Massachusetts employees are not required to establish a Section 125 Plan.
Highlights of the Mass Health Law Section 125 Plan Requirements
- The plan must, at minimum, allow employees who are Massachusetts residents to pay for their share of the cost of medical care coverage on a pre-tax basis.
- The plan must offer eligible employees access to one or more medical care coverage options. (A health spending account is permitted, but alone will not satisfy the Mass Health Law requirement.)
- Medical care coverage options may include the Commonwealth Choice plans offered through the Health Connector or other alternatives designated by the employer.
- Employers are not required to contribute to the cost of medical care coverage options available under the plan.
- Employers may exclude certain defined classes of employees from the plan (see below).
- A plan may cover employees of two or more affiliated employers, provided that all participating employers are identified in the plan document.
- A copy of the plan must be filed with the Health Connector. (To date, no guidance has been issued on how to meet this requirement.)
Penalty for Non-Compliance
The “Free Rider Surcharge” is a penalty that may be assessed if an employer has employees who are not covered by a Section 125 Plan as required by the Mass Health Law and such employees access state funded medical services. The surcharge is based on the amount of state-funded medical services provided to the employer’s non-covered employees. (State-funded medical services are emergency medical services that are paid for by the state out of the “Free Care Pool,” which reimburses hospitals and health centers for the care they provide to uninsured patients.)
Employees Who Must Be Covered by a Section 125 Plan
The following classes of employees may be excluded from eligibility to participate in an employer’s Mass Health Law Section 125 Plan:
- employees under age 18;
- temporary employees (defined as any individual who works on either a full or part-time basis, whose employment is explicitly temporary in nature and does not exceed twelve consecutive weeks during the period from October 1 through September 30);
- part-time employees working, on average, fewer than 64 hours per month for the employer;
- employees who are considered wait staff, service employees or service bartenders (as defined in M.G.L. c. 149, Section 152A) and who earn, on average, less than $400 in monthly payroll wages;
- student employees who are employed as interns or as cooperative education student workers;
- employees whose employer is obligated through good faith bargaining to contribute to a multiemployer health benefit plan with respect to the employees’ employment;
- seasonal employees who are international workers working for a designated seasonal employer, who have either a U.S. J-I student visa or a U.S. H2B visa, and who are also enrolled in travel health insurance; and
- independent contractors who meet a narrow definition of independent contractor under Massachusetts law.[3]
Section 125 Plan Document Requirements
An employer that already maintains a Section 125 Plan is not required to establish a second plan to cover its benefit ineligible employees. However, it may need to amend its existing plan to offer the plan to employees who are not eligible for medical coverage through the employer but who are required to be covered by a Section 125 Plan under the Mass Health Law. A separate plan for benefits ineligible employees may make administrative sense for some employers.
Section 125 Plan Filing Requirements
Each employer subject to the Mass Health Law requirements must file its Section 125 Plan(s) with the Health Connector by July 1, 2007. To date, no guidance has been issued on how an employer will meet this filing requirement.
The Health Connector Enrollment System
Employers may allow their employees to access Commonwealth Choice medical coverage made available through the Health Connector through their Section 125 Plans on a voluntary basis (i.e. with no employer endorsement or contribution). Alternatively, an employer may offer other coverage that is fully paid by the employee; it is not required to offer the Health Connector option.
If an employer chooses to provide medical coverage options through the Health Connector for its benefit ineligible employees, it must file an employee census and an agreement with the Health Connector. These forms, including instructions for filing, are available at http://www.MAhealthconnector.org by clicking on the links for employer voluntary plans.
Although an employee enrolls directly in a Commonwealth Choice plan through the Health Connector, employers must notify employees of their eligibility for the new Section 125 Plan. Once an employee elects coverage through the Health Connector, the Health Connector will send monthly invoices to the employer indicating the premium payments to be deducted on a pre-tax basis and remitted monthly by the employer to the Health Connector.
Employees with Earnings That Do Not Cover Full Premium Payment
The employee must pay any shortfall on an after-tax basis. An employer may choose to collect the shortfall from the employee and submit it to the Health Connector or may direct the employee to send a personal check directly to the Health Connector.
Special Rules for Employee Leasing Arrangements
If there is a “co-employment” arrangement between a company and an employee leasing organization, the company is treated as the employer for purposes of the Mass Health Law with respect to those employees covered under the co-employment arrangement. The company may contractually allocate to the employee leasing organization the responsibility to adopt and maintain a Section 125 Plan for the benefit of the co-employed employees, and to comply with the filing requirements; however, if the leasing company fails to comply, the employer is ultimately responsible.
Permissible Eligibility Waiting Period for the Section 125 Plan
Pre-tax deductions need not begin before September 1, 2007. For employees hired after July 1, 2007, if the employer contributes toward the cost of medical plan coverage under the Section 125 Plan, the employer may include an eligibility waiting period that corresponds with any waiting period for enrollment in any medical care coverage option available to an eligible employee. Otherwise, the Section 125 Plan waiting period may not exceed two months.
Additional Information
Information on the coverage options available through the Health Connector, as well as copies of the Health Connector employee census and agreement are available at http://www.MAhealthconnector.org. Information on the Mass Health Law, including an Employer Handbook and a Section 125 Handbook that contains sample plans and employee communications, is available at http://www.mass.gov/?pageID=hichomepage&L=1&L0=Home&sid=Qhic.
Fair Share Contribution
Employers in Massachusetts with eleven or more full-time equivalent employees employed in Massachusetts must make a “fair and reasonable” contribution to the cost of their Massachusetts employees’ medical care coverage. (This requirement is effective for the twelve-month period beginning October 1, 2006.)
Employers that do not make a fair and reasonable contribution to employees’ medical care coverage will be assessed up to $295 annually per Massachusetts full-time employee equivalent – the “Fair Share Contribution.” (Prorated contributions will be assessed for seasonal and temporary employees.)
There are two tests for determining whether the employer meets the fair and reasonable test: a primary test and a secondary test. An employer that satisfies either test does not pay the $295 Fair Share Contribution.[4]
Primary Test
- An employer that contributes toward the cost of medical care coverage and that has at least 25% of enrolled employees (i.e., employee that is accepted and enrolled in the medical plan) is exempt from making the Fair Share Contribution.
- The formula for determining the 25% threshold for the primary test is calculated based on the number of enrolled full-time employees for the period of October 1 to September 30 each year.
- The percentage of enrolled employees is calculated by dividing the total payroll hours of enrolled full-time employees by total payroll hours of all full-time employees. Full-time employees are defined as employees working 35 or more hours per week.[5]
Secondary Test
- An employer that offers to pay at least 33% of the cost of coverage of any group medical plan offered by the employer to its full-time employees that are employed at least 90 days during the period from October 1 to September 30, is exempt from the Fair Share Contribution[6].
Health Insurance Responsibility Disclosure
Employers with ten or more Massachusetts employees must complete additional forms. The Employer Form is required to be filed with the Division of Health Care Finance and Policy; the Employee Form must be signed by certain employees and collected and retained by the Employer for a three-year period.
- Employer Form . Employers are required to submit a form indicating the health insurance status of employees including whether each employee was offered health insurance by the employer, whether the employer offered a Section 125 Plan to purchase health insurance, whether the employee accepted or declined such coverage and certain other information. The data is to be submitted on a form known as the Employer Health Insurance Responsibility Disclosure (HIRD) Form. This form is not yet available.
- Employee Form . Any employee who declines to enroll in employer-sponsored insurance or who declines (or is ineligible) to participate in the employer’s Section 125 Plan is required to execute an Employee HIRD Form. This form is available under the Health Care Reform Bulletin link on the home page of the Massachusetts Division of Health Care Policy and Finance at http://www.mass.gov.