Written by Alden J. Bianchi
The Departments of the Treasury/IRS, Labor and Health and Human Services (the “Departments”) recently issued a final regulation under the 90-day waiting period limitation, which is included among the Affordable Care Act’s (the “Act”) insurance market reforms. Though technically included as an amendment to the Public Health Service Act (“PHS Act”), the provision is carried over into ERISA and the Internal Revenue Code. As a result, the requirement applies broadly to group market products issued by state-licensed carriers (or “issuers” in the parlance of the applicable law), and private sector, governmental, tax-exempt and other group health plans, whether fully-insured or self-funded.
Beginning in 2014, a group health plan or health insurance issuer offering group health insurance coverage may not apply any “waiting period” that exceeds 90 days. A group health plan that runs afoul of the 90-day waiting period limit is generally subject to an excise tax of $100 per day per failure, which must be self-reported on IRS Form 8928. For an explanation of the penalties and how they are reported, please visit our April 21, 2014 blog post. Final regulations implementing the requirement were issued February 24 of this year. The final regulations define “waiting period” as the period that must pass before coverage for an employee or dependent (who is otherwise eligible to enroll under the terms of a group health plan) can become effective. Being otherwise eligible to enroll in a plan means having met the plan's substantive eligibility conditions (such as, for example, being in an eligible job classification, achieving job-related licensure requirements specified in the plan's terms, or satisfying a reasonable and bona fide employment-based orientation period). We explained the final regulations in our March 4, 2014 client advisory.
The Orientation Period Final Regulations
Contemporaneous with the publication of the final regulations, the Departments published proposed regulations dealing with “orientation periods” under the 90-day waiting period limitation. The proposed regulations provided that one month would be the maximum allowed length of any reasonable and bona fide employment-based orientation period. An orientation period was envisioned as a period of time during which “an employer and employee could evaluate whether the employment situation was satisfactory for each party, and standard orientation and training processes would begin.” Under the proposed regulations, if a group health plan conditions eligibility on an employee’s having completed a “reasonable and bona fide employment-based orientation period,” the eligibility condition would not be considered to be designed to avoid compliance with the 90-day waiting period limitation.
The final regulations follow the proposed rule by permitting a one-month orientation period, which is determined by adding one calendar month and subtracting one calendar day, starting with the date that an employee is in a position that is otherwise eligible for coverage. If, for example, an employee’s start date in an otherwise eligible position is May 3, the last permitted day of the orientation period is June 2. If there is no corresponding date in the next calendar month upon adding a calendar month, then the last permitted day of the orientation period is the last day of the next calendar month. For example, if the employee’s start date is January 30, the last permitted day of the orientation period is February 28 (or February 29 in a leap year). According to the final regulations, if a group health plan conditions eligibility on an employee’s having completed a reasonable and bona fide employment-based orientation period, the eligibility condition is not considered to be designed to avoid compliance with the 90-day waiting period limitation if the orientation period does not exceed one month and the maximum 90-day waiting period begins on the first day after the orientation period.
The final regulations provide that being otherwise eligible to enroll in a plan means having met the plan's substantive eligibility conditions. It is only after an individual is determined to be otherwise eligible for coverage under the terms of the plan—i.e., after the end of a bona fide orientation period—that the waiting period begins (and from that point must not exceed 90 consecutive calendar days).
According to the preamble to the final regulation:
“Orientation periods are commonplace and the Departments do not intend to call into question the reasonableness of short, bona fide orientation periods. The danger of abuse increases, however, as the length of the period expands. Accordingly, the final regulations provide that one month is the maximum allowed length of an employment-based orientation period. The creation of a clear maximum prevents abuse and facilitates compliance.”
But, to be clear, while a plan is permitted to impose substantive eligibility criteria, such as requiring the worker to fit within an eligible job classification or to achieve job-related licensure requirements, “it may not impose conditions that are mere subterfuges for the passage of time.” Thus, for example, an employer could not create an artificial non-benefits-eligible job classification to which it assigns new hires for, say, 6 months before moving the employee into a regular, benefits-eligible class, merely to prolong a waiting period beyond 90 days.
The Code § 4980H connection
The rules limiting waiting periods to 90 days are separate from the Act’s employer shared responsibility rules, which are the subject of a separate final regulation issued in February of this year, which IRS explained in a useful set of Q&As.
The preamble to the final orientation period regulations emphasizes that:
“Compliance with the final regulations governing waiting periods is not determinative of compliance with section 4980H of the Code, under which an applicable large employer may be subject to an assessable payment if it fails to offer affordable minimum value coverage to certain newly-hired full-time employees by the first day of the fourth full calendar month of employment.”
The preamble offers an example in which an applicable large employer that has a one-month orientation period may comply with the 90-day waiting period requirement and Code § 4980H by offering coverage no later than the first day of the fourth full calendar month of employment. But that same employer may not impose a full one-month orientation period and the full 90-day waiting period without risking exposure under Code § 4980H.
While compliance with final regulations governing waiting periods is not determinative of compliance with Code § 4980H, it does facilitate that compliance. An employee hired September 15 must be offered coverage by the next following January 1 (i.e., the first day of the first calendar month immediately following the first three months of employment, provided that the employee is still employed on that day) in order to comply with Code § 4980H; but without the ability to impose an orientation period, that same employee must be offered coverage in December to satisfy the waiting period rule. By imposing an orientation period that delays the commencement of the waiting period, the employer may first make an offer of coverage on January 1 and still comply with both requirements.
The final regulations take effect August 25, 2014.