Departments Issue Guidance on Summary of Benefits and Coverage
Author, Anne Tyler Hamby, Atlanta, +1 (404) 572-2719, firstname.lastname@example.org.
On August 22 the Departments of Labor, Treasury and Health and Human Services (the “Departments”) issued proposed regulations defining the content, format and timing of the issuance of the summary of benefits and coverage (SBC) (the “Proposed Regulations”). The SBC is mandated by Section 2715 of the Public Health Service Act (PHSA), which was added by the Patient Protection and Affordable Care Act (PPACA). The SBC is intended to provide individuals with a written description of the benefits and coverage available under a group health plan. The requirements were scheduled to go into effect on March 23, 2012. However, the DOL has recently indicated that plans and insurers are not required to comply with the new SBC requirements until final regulations are issued and applicable. The final regulations will include an effective date that is intended to provide plans and insurers sufficient time to comply with the new SBC requirements (See DOL FAQs, 11/17/11).
Distribution of SBC
Generally, for fully insured group health plans both the insurer and the plan administrator of the plan must provide the SBC. However, the Proposed Regulations permit the obligation to be satisfied for both entities if either the insurer or the plan administrator timely provides the SBC. With respect to self-insured plans, the Proposed Regulations state that it is the plan administrator’s responsibility. Generally, the SBC must be provided to all participants and beneficiaries. In addition, a group health plan is also entitled to receive an SBC from an insurer.
To avoid duplication, if a participant and any beneficiaries reside at the same address, a single SBC sent to that address will satisfy the obligation to provide the SBC for all individuals residing at that address. Where a group health plan provides multiple benefit packages, the plan or insurer is required to provide a new SBC automatically upon renewal only with respect to the benefit package in which a participant is enrolled. The plan or insurer is not required to provide an SBC automatically with respect to benefit packages in which the participant or beneficiary is not enrolled. However, if a participant or beneficiary requests an SBC with respect to another benefit package (or more than one other benefit package) for which the participant or beneficiary is eligible, the SBC must be provided upon request, no later than seven days following the request.
Contents of the SBC
The SBC must include the following nine content requirements:
- Uniform definitions of standard insurance terms and medical terms;
- A description of the coverage, including cost sharing for each of the categories of benefits identified by the Departments;
- The exceptions, reductions and limitations on coverage;
- The cost-sharing provisions of the coverage, including deductible, coinsurance, and copayment obligations;
- The renewability and continuation of coverage provisions;
- A coverage facts label that includes examples to illustrate common benefit scenarios and related cost sharing based on recognized clinical practice guidelines;
- A statement about whether the plan provides minimum essential coverage and whether the plan’s share of the total allowed cost of benefits provided under the plan or coverage meets applicable requirements (this statement is not required to be in the SBC before January 1, 2014);
- A statement that the SBC is only a summary and that the plan document, policy, or certificate of insurance should be consulted to determine the governing contractual provisions of the coverage; and
- A contact number to call with questions and an Internet Web address where a copy of the actual individual coverage policy or group certificate of coverage can be reviewed and obtained.
With respect to the coverage facts label requirement, the Proposed Regulations propose using “coverage examples” that estimate what proportion of expenses under the illustrative benefits scenario might be covered by a given plan or policy. Consumers can then use this information to compare their share of the costs of care under different plan or coverage options to make an informed purchasing decision. The Proposed Regulations recommend the following three coverage examples for inclusion in the SBC: i) the normal delivery of a baby, ii) treating breast cancer, and iii) managing diabetes.
In addition to the nine content elements, the Proposed Regulations require that the SBC include the following four additional items:
- For plans or insurers that maintain one or more network providers, an Internet address (or similar contact information) for obtaining a list of network providers;
- For plans and insurers that maintain a prescription drug formulary, an Internet address where an individual may find more information about the prescription drug coverageunder the plan or coverage;
- An Internet address where an individual may review and obtain the uniform glossary; and
- The premium charged by the insurer or, for self-insured plans, the cost of coverage.
The SBC must be presented in a uniform format that does not exceed four double-sided pages and does not include print smaller than 12-point font. The SBC must include terminology understandable by the average enrollee and it must be presented in a culturally and linguistically appropriate manner. This means that if at least 10 percent of the population in a county are literate only in a non-English language, each SBC sent to a recipient with an address in that county must include a statement in that non-English language about the availability of the SBC in such non-English language. The Proposed Regulations also provide that the SBC may be provided electronically if the requirements of the Department of Labor’s electronic disclosure safe harbor are satisfied.
Timing of SBC
The Proposed Regulations require group health plans and insurers to provide an SBC to eligible individuals without charge at the following times:
- Initial Enrollment. The SBC must be provided as part of any written application materials that are distributed by the plan or insurer for enrollment. If the plan does not distribute written application materials for enrollment, the SBC must be distributed no later than the first date the participant is eligible to enroll in coverage for the participant and any beneficiaries.
- Open Enrollment. If written application materials are required for renewal (in either paper or electronic form), the SBC must be provided no later than the date the materials are distributed. If renewal is automatic, the Proposed Regulations provide that the SBC must be provided no later than 30 days prior to the first day of coverage in the new plan year.
- HIPAA Special Enrollment. The plan or insurer must also provide the SBC to special enrollees within seven days of a request for enrollment pursuant to a special enrollment period.
- Upon Request. An SBC must be provided as soon as practical (but no more than seven days) after a request.
Notice of Modifications
Group health plans are required to provide a notice of material modification if they make a material modification in any of the terms of the plan or coverage that is not reflected in the most recently provided SBC. Plans and insurers must provide a notice of material modifications no later than 60 days prior to the date on which the change will become effective. A modification is material for this purpose if it would be required to be disclosed in a “material modification” for purposes of a “summary of material modifications” under ERISA. The plan or insurer can satisfy this requirement by a separate notice describing the material modification or by providing an updated SBC.
In addition to the SBC requirements, PPACA also requires the Departments to devise a uniform glossary of specific terms. The Proposed Regulations require that a group health plan must provide the uniform glossary to participants and beneficiaries within seven days of request. A plan or insurer may satisfy this disclosure requirement by providing an Internet address where an individual may review and obtain the uniform glossary. This Internet address may be a place the document can be found on the plan’s or insurer’s Web site or on the Web site of either the Department of Labor or Health and Human Services (HHS).
A failure to comply with the SBC requirement can result in an excise tax of up to $1,000 for each failure. The Proposed Regulations specify that a separate fine may be imposed for each individual for whom there is a failure to provide an SBC. In addition, the IRS and DOL intend to coordinate enforcement of the potential civil fines under ERISA and the excise tax under Internal Revenue Code Section 4980D ($100 per day per individual to whom the failure relates).
In a letter to the Department for Health and Human Services dated October 21, 2011, the American Benefits Council (the “Council”) requests that the effective date of the SBC requirements be delayed for group health plans until no earlier than the 2014 plan year. In the alternative, the Council requests that the effective date be delayed at least 18 months following the issuance of any final rule. The Council noted that PPACA directed the Secretary of HHS to develop standards not later than March 23, 2011. However, the Notice of Proposed Rulemaking (NPRM) was issued five months after this deadline. Given the late issuance of the NPRM, the Council stated that it would be very difficult, if not impossible, for large plan sponsors to come into compliance with the SBC requirements by March 23, 2012.
The transition from health plans’ current benefit descriptions to the new system will be difficult and costly to implement in such a narrow time frame. SBC requirements will require substantial modification of the systems of both self-insured plan sponsors and health insurers. In addition, plan administrators will need to consider how to coordinate the delivery of the SBC with other important enrollment materials to participants. The Proposed Regulations have left open the possibility of combining certain notices to satisfy the SBC requirement along with the notice requirements of ERISA. In conjunction with the Proposed Regulations, the Departments have published proposed templates, instructions and a uniform glossary available at: http://www.dol.gov/ebsa/healthreform/. Employers should begin preparing now to draft SBCs, implement procedures to ensure they are timely provided to participants, and provide a uniform glossary to participants who request a copy.
King & Spalding is happy to assist you with any questions you may have regarding compliance with the SBC requirements.
EBSA Issues Final Regulations Clarifying Investment Advice Exemption
Authors, Eleanor Banister, Atlanta, +1 404 572 4930, email@example.com and James P. Cowles*, Atlanta, +1 (404) 572-3455, firstname.lastname@example.org.
On October 25, 2011, the Employee Benefits Security Administration (“EBSA”) issued final regulations implementing provisions of the Pension Protection Act of 2006 (“PPA”) which allow “fiduciary advisers” to provide investment advice for an additional fee to participants and beneficiaries in defined contribution plans that permit participants and beneficiaries to direct the investment of their accounts. Prior to PPA, persons providing fiduciary services to a plan were prohibited from providing additional investment advice services to plan participants and beneficiaries if the service provider or an affiliate received an additional fee for those investment advice services. The Department of Labor had issued individual exemptions to enable certain fiduciaries to provide investment advice to plan participants. However, the PPA provides a statutory exemption from this prohibition. The exemption permits “fiduciary advisers” to offer plan participants and beneficiaries investment advice for a fee under eligible investment advice arrangements if there are sufficient safeguards to ensure there is no conflict of interest. The final regulations outline what fiduciary advisers must do to comply with the exemption. The statutory exemption is available for transactions occurring on or after December 27, 2011.
ERISA § 406(b) provides that a fiduciary with respect to a plan shall not deal with the assets of the plan in his or her own interest and prohibits a fiduciary from receiving any consideration from any party dealing with the plan. As discussed above, ERISA § 408(b)(14) and § 408(g) together with the final regulations provide an exemption from the prohibitions of § 406(b) for fees received in connection with investment advice provided by a “fiduciary adviser” under an “eligible investment advice arrangement.” The exemption applies to:
(i) the provision of investment advice to a participant or beneficiary with respect to a security or other property available as investment under the plan;
(ii) the acquisition, holding or sale of a security or other property available as an investment under the plan pursuant to the investment advice; and
(iii) the direct or indirect receipt of fees or other compensation by the fiduciary adviser or an affiliate (or any employee, agent or registered representative of the fiduciary adviser or affiliate) in connection with the provision of the advice or in connection with an acquisition, holding or sale of a security or other property available as an investment under the plan pursuant to the investment advice.
To be a fiduciary adviser, a person or an entity must be a registered investment adviser under the Investment Advisers Act of 1940, a bank or similar financial institution, an insurance company, a person registered as a broker or dealer under the Securities Exchange Act of 1934 or an affiliate or employee of any one of these individuals or entities.
The regulations expressly provide for the continuance of exemptions authorized prior to the final regulations.
What is an Eligible Investment Advice Arrangement?
There are two types of eligible investment advice arrangements, a Level Fee Arrangement and a Computer Model Arrangement. Both types of arrangement must:
(i) be based upon generally accepted investment theories that take into account the historic risks and returns of different asset classes over defined periods of time (other considerations may also be included);
(ii) consider the fees and expenses of the investments; and
(iii) considercertain individualized information, for example, age, time horizons, risk tolerance, current investments, other assets and sources of income, and investment preferences, which must be solicited from the participant or beneficiary, and, if provided, must be considered in the recommendations.
Level Fee Arrangement
Under a Level Fee Arrangement, fees paid to the fiduciary adviser, including fees paid to any employee, agent or registered representative of the fiduciary adviser, must be “level” and cannot vary based on the investment option. This requirement is intended to remove the possibility that a fiduciary adviser may recommend a particular investment option because he or she will receive a larger fee if the participant or beneficiary directs assets to the recommended investment option.
However, the preamble to the final regulations makes it clear that the level fee requirement does not extend to an affiliate of a fiduciary adviser. Thus, as long as the affiliate is not providing investment advice, the fiduciary adviser can provide investment advice for a level fee and be protected by the exemption, even if the fiduciary adviser’s affiliate receives fees that vary based on the investment selected. This is obviously an attempt by the EBSA to take into account the reality that a significant portion of service providers today provide “bundled services” in which the investment advice and the investment options are provided by affiliated service providers.
Computer Model Arrangement
Under the Computer Model Arrangement, the computer model must:
(i) appropriately weight the factors used in estimating future investment returns;
(ii) use objective criteria to recommend asset allocation portfolios comprised of designated investment options;
(iii) avoid investment recommendations that may (A) inappropriately favor options offered by or (B) generate greater income for, a fiduciary adviser (or a person with a material affiliation or material contractual relation with the fiduciary adviser); and
(iv) take into account all designated investment options; other than a brokerage window or self-directed brokerage account, an annuity option offered under the plan, and an investment option the participant or beneficiary requests be excluded from consideration.
Prior to using a Computer Model Arrangement, an independent expert must certify, in writing, that the computer model meets the regulatory requirements. The regulations define an expert as a person who has the appropriate technical training or expertise to analyze the computer model and conclude it complies with regulatory requirements. The expert may not (a) have any material affiliation or material contractual relationship with the fiduciary adviser or with a person who has a material affiliation or a material contractual relationship with the fiduciary adviser, (b) be an employee, agent or registered representative of either of the forgoing or (c) be the developer of the computer model.
A material affiliation exists when one person is an affiliate of the other person. Affiliate generally means a person who owns, controls or holds (directly or indirectly) a five percent (5%) or more interest in the other person; or controls, is controlled by or is under common control of such other person or is an officer, director, partner, copartner, or employee of such other person.
A material contractual relationship exists if payments made by one person to the other person pursuant to a contract or agreement, exceed ten percent (10%) of the gross revenue, on an annual basis, of such other person.
Each person who develops the computer model or who markets the computer model or investment advice program is a fiduciary adviser of the plan that uses the program. Alternatively, one person involved in the developing or marketing of the computer model may elect to be treated as the sole fiduciary adviser.
Each arrangement must also satisfy the following requirements:
Plan Fiduciary Authorization - A plan fiduciary must expressly authorize the eligible investment advice arrangement. Generally, the plan fiduciary authorizing the arrangement cannot be (i) the person offering the arrangement or providing the investment options under the plan, or (ii) an affiliate of either. However, a special rule applies for plans maintained by the fiduciary adviser. If investment advice is provided to participants and beneficiaries in a plan sponsored by a fiduciary adviser or a provider of an investment option (or an affiliate of either), the sponsor of the plan may authorize the arrangement so long as the same arrangement is offered to unaffiliated plans in the ordinary course of its business.
The final regulations clearly state that a plan sponsor is not considered to be providing a designated investment option merely because employer stock is one of the investment options offered under the plan.
Annual Audits - The fiduciary adviser must engage an independent auditor to audit the arrangement at least annually for compliance with the exemption. The independent auditor must provide each fiduciary adviser and each authorizing fiduciary with a written report identifying (i) fiduciary adviser; (ii) the type of investment advice arrangement being used (fee leveling, computer modeling or both); (iii) the most recent computer model certification date and the name of the independent eligible investment expert who provided the certification, if applicable and (iv) the auditor’s specific findings regarding the arrangement’s compliance with the final regulations. The selection of an auditor is a fiduciary act subject to the requirements of ERISA § 404(a)(1).
Participant Notice - Prior to providing any investment advice, the fiduciary adviser must provide participants and beneficiaries, free of charge, a written notification of:
(i) the role of any party that has a material affiliation or material contractual relationship with the fiduciary adviser in the development of the investment advice program and in the selection of investment options available under the plan;
(ii) to the extent not otherwise provided, the past performance and historical rates of return of the plan’s investment options;
(iii) all fees or other compensation that the fiduciary adviser or any affiliate is to receive (including compensation provided by any third party) for (A) providing the advice; (B) the sale, acquisition, or holding of the security or other property pursuant to such advice; or (C) the rollover or other distribution of plan assets or the investment of distributed assets pursuant to such advice;
(iv) any material affiliation or material contractual relationship of the fiduciary adviser or affiliates in the security or other property;
(v) the manner, and under what circumstances, any information provided under the arrangement will be used or disclosed;
(vi) the types of services provided by the fiduciary adviser in connection with the investment advice;
(vii) that the fiduciary adviser is acting as a fiduciary of the plan in connection with the provision of the advice; and
(viii) that the participant or beneficiary may separately arrange for advice to be provided by another adviser that could have no material affiliation with and receive no compensation in connection with the security or other property.
The notification must be written in a clear and conspicuous manner, be understood by the average participant, be sufficiently accurate and include all the information required by the regulations.The disclosures to participants and beneficiaries may be provided electronically.
Authorizing Fiduciary Notice - The fiduciary adviser must notify the authorizing plan fiduciary in writing that the fiduciary adviser intends to comply with the conditions of the statutory exemption under ERISA §§ 408(b)(14) and (g) and the regulations; that the fiduciary adviser's arrangement will be audited annually; and that a copy of the audit will be provided within 60 days of its completion.
In addition, (i) the fiduciary adviser must provide appropriate disclosure in accordance with the applicable securities laws;(ii)any sale, acquisition or holding of a security or other property occurs solely at the direction of the participant or beneficiary; (iii) the compensation paid to the fiduciary adviser must be reasonable; and (iv) the terms of the transaction must be at least as favorable to the plan as the terms of an arm's length transaction.
The final regulations include a model notice that can be used to provide disclosures to participants and beneficiaries. Fiduciary advisers may, but are not required to, use the model notice. However, use of the appropriately completed model notice will be deemed to satisfy the notice requirements described above.
The fiduciary adviser must retain, for at least 6 years from the date the investment advice is provided, all records necessary for determining whether the applicable requirements of the final regulations have been satisfied.
The relief from the prohibited transaction penalties is available for transactions occurring on or after December 27, 2011. The relief will not be available to any transaction for which the conditions described above are not satisfied. Further, if a fiduciary adviser has engaged in a pattern or practice of noncompliance with any of the applicable conditions, the prohibited transaction relief will not apply to any transaction connected with the provision of investment advice during the period of such noncompliance.
Action Items for 2011 Year End and Early 2012
Authors, Kenneth A. Raskin, New York, +1 (212) 556- 2162, email@example.com and James P. Cowles*, Atlanta, +1 (404) 572-3455, firstname.lastname@example.org.
As year end is fast approaching, this is a good time for employers to take time to review their employee benefit plans to determine (1) what, if any, action is required by year end to keep their plans in compliance with law, and (2) what new requirements are on the horizon for 2012. Below is a list of the types of actions that may be required by year end, and a few new requirements effective in early 2012.
Qualified Retirement Plans
- Discretionary Plan Amendments - Plans must be amended by year end for any discretionary operational changes made during 2011. For example, an amendment may be required for new loan procedures implemented during the year.
- Mandatory Year End Amendments - Every year the IRS issues a list of items that plans must be amended for by year end. A few of the items on the 2011 list include:
(1) 2009 70 ½ mandatory distribution waiver - In 2009 defined contribution plans had the option to make, or not make, 70 1/2 mandatory distributions. Plans must now be amended to reflect their operation regarding this elective provision (refer to Internal Revenue Code § 401(a)(9)(H));
(2) Employer stock fund restrictions - Plans that have employer stock as an investment option and allow participants to direct their plan investments cannot impose restrictions on the employer stock fund that are not imposed on other plan investment funds, with certain exceptions. Plans must be amended to remove restrictions on the employer stock fund (refer to Internal Revenue Code § 401(a)(35); and
(3) Defined benefit plan funding restrictions - If certain funding requirements are not met, defined benefit plans must place restrictions on the plan’s benefit payment options. Plans must be amended to include these restrictions (refer to Internal Revenue Code § 436). LAST MINUTE REVISION: As we were publishing this article the IRS issued Notice 2011-96, which generally extends the deadline for amending plans for Internal Revenue Code § 436 until the last day of 2012.
- Automatic Enrollment and Qualified Default Investment Alternative (QDIA) - Plans that provide for automatic enrollment and/or include investment options that are considered “qualified default investment alternatives” must distribute an annual notice to participants. The notice must be distributed at least 30 days prior to the beginning of the plan year, which means the 2012 notice is due by the end of November 2011.
- Favorable Determination Letter Application - IRS determination letter applications for plan sponsors with an EIN ending in 1 or 6 must be filed no later than January 31, 2012.
- Fee Disclosure - Early in 2012, certain fee disclosures must be made to plan participants. Employers should be working with their investment providers now to develop the appropriate employee communications.
- Plans covering employees in Puerto Rico - Puerto Rico adopted a new Internal Revenue Code, generally effective January 1, 2011, which made changes to the tax qualification requirements for retirement plans that cover Puerto Rico residents. Plans that cover employees in Puerto Rico may need to be amended to comply with new Puerto Rican law.
- Claims and Appeals Procedures - Plans may need to be amended to comply with the new internal and external claims review procedures that take effect for plan years beginning on or after January 1, 2012.
- Qualified Transportation Fringe Benefits - Plans may need to be amended for the new guidance taking effect on January 1, 2012 related to the use of smartcards, debit cards and credit cards to provide transportation fringe benefits.
- Summary of Benefits and Coverage - Group health plans are required to provide participants with a summary of benefits and coverage. Employers should be working with their plan providers now to develop the appropriate employee communications. The requirements were scheduled to go into effect on March 23, 2012, however, the DOL has recently indicated that plans and insurers are not required to comply with the new requirements until final regulations are issued and applicable. The final regulations will include an effective date that is intended to provide plans and insurers sufficient time to comply with the new requirements
King & Spalding would be happy to assist you with any questions you may have about what action must be taken by year end or what is new for 2012.
*James C. Cowles, Non-lawyer Employee Benefits Consultant
The contents of this newsletter and any attachments are not intended to be and should not be relied upon as legal advice. If you are not currently on our Employee Benefits & Executive Compensation Practice mailing list under your own name, and you would like to join to receive our monthly Compensation & Benefits Insights publication and to receive notices of future programs and occasional commentaries on new legal developments in the industry, you can make that request by submitting your full contact information to CBI@kslaw.com.
>> Back to Top