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. 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.
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. 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
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:
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.
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.
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.
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.
For more information about the contents of this alert, please contact:
Kristina Hansen Wardwell
ERISA & Executive Compensation
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