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April 2014 Newsletter

Hedging for Inflation in a Long-term Care Policy

INFLATION MAY pose the single biggest threat to the value of a long-term care (LTC) insurance policy.

If a LTC policy doesn’t have some element of inflation protection, time can erode the care that the insured can afford later in life.

Fortunately, LTC policies today feature several ways to fight the erosion of inflation. However, options vary from insurer to insurer.

You can choose from these options:

Simple inflation – This option adds a set percentage, usually 3% or 5%, to the daily benefit amount. For instance, if your benefit amount is $200 per day at “5% simple,” that amount would grow to $210 the first year, $220 the second year, and so on.

The advantage of this option is that it’s easy to calculate and gives you a fair amount of protection against inflation. The disadvantage is that because the inflation amount is set against the first year’s coverage and increases based on that first year, the inflation protection actually decreases as time goes by.

This arrangement is typically best for individuals who are over 60 years old and who want some inflation protection at a low cost.

Compound inflation – This option adds an annual percentage to the benefit amount based on its compounding value. In the above example, coverage would grow to $210 the first year, then 5% of $210 the second year, and so on.

This provides better protection in the long run, but, this type of coverage costs more than a simple inflation rider.

It is best suited for buyers aged 50 to 60.

Consumer Price Index, or CPI – This option will adjust the amount of the benefit each year based on how much the U.S. Consumer Price Index changes.

This is a good option for individuals who purchased enough coverage to begin with. In a period of no inflation or a slight fall in the CPI, the policyholder receives no benefit. But these policies may not be able to keep up with increases in health care services.

Guaranteed purchase option – This allows the policyholder to purchase additional benefit coverage every two or three years to better adjust the benefit level to reflect the realities of health care services inflation, which often runs at a rate higher than inflation.

This is a valuable option as it allows someone to beef up coverage if health care inflation is increasing at a more rapid clip than overall inflation, which has often been the case in the last 10 years. However, you can’t lock in rates at one age as you would continuously be adding coverage, essentially necessitating new underwriting.

This is a good option for younger individuals who may not have sufficient income to cover higher premiums.

Automatic inflation – In this case, the premium automatically adjusts upward to keep up with inflation. This policy can initially be more expensive than the guaranteed cost option, but over time, it tends to work out lower. v

Regulations Require $63-a-head Tax in 2015

NEW AFFORDABLE Care Act final rules will allow employers to split the payment of a $63-per-employee fee in 2015.

The rules, issued by the Department of Health and Human Services (HHS) in March, mean that a special $63 “reinsurance” tax on employers can be paid in two installments starting in 2015.

The fees are part of ACA provisions designed to collect $25 billion in “reinsurance” taxes from employers who sponsor health plans for their workers over a period of three years. The money will be used to partially reimburse insurance companies that are writing policies in public insurance exchanges.

According to the final rules, employers would be able to pay $52.50 for each employee participating in a company-sponsored health plan by Jan. 15, 2015, and a final payment of $10.50 in the fourth quarter of that year.

“We recognize that the reinsurance collections provided for in the Affordable Care Act will result in substantial up-front payments from contributing entities for the reinsurance program. Therefore, in consideration of the comments received, we are finalizing our proposal to collect contributions via two payments,” the final rules said.

In the second year of the tax, 2016, the fee will be reduced to $44 per plan enrollee.

HHS has not proposed the amount of the fee for the third and final year of the program.

That’s because the final rules will exempt self-insured and self-administered plans from the fees in 2015 and 2016.

And that, health reform pundits say, will leave collections short of the $25 billion target, which could portend a higher than expected tax on employer plans in the final year of the tax, 2017.

HHS said its reading of the law is that self-insured and self-administered plans “should not be a contributing entity,” adding that few plans will qualify for the exemption.

Congressional Republicans have criticized the fee, saying it’s an unfair tax because employers will receive nothing in return for paying it. v

Most Employers Aren’t Keeping Plan Docs in Order

NEARLY THREE-quarters (71%) of benefit advisers say their clients are not maintaining plan documents or providing employees with summary plan documents – two major requirements under ERISA, according to a survey by the website. The top four reasons that brokers cited for their employer clients not distributing SPDs to their employees or maintaining plan documents were:

•      Employers mistakenly thought they were compliant by distributing benefits booklets/summaries

•      Employers were not aware of the ERISA requirements

•      Too difficult and time-consuming to develop the documents

•      Too expensive

Many companies mistakenly assume that insurance contracts, certificates of insurance and benefits summaries fulfill the ERISA requirements for an SPD and plan document – but they don’t include the required or recommended provisions that protect the plan and the employer.

And that could be costly.

Failure to provide an SPD or plan document within 30 days of receiving a request from a plan participant or beneficiary can result in a penalty of up to $110/day per participant or beneficiary for each violation.

The lack of an SPD could also trigger a plan audit by the U.S. Department of Labor.

All ERISA-covered benefit plans, including group health plans and other welfare plans, must also, by law, be administered in accordance with a written plan document. If you are unsure whether you have the right documents, please call us. v

Be Prepared for the Inevitable: a DOL Audit

THE DEPARTMENT of Labor has said it wants to audit all employee benefit plans in the country by the end of 2015. While it may be hard-pressed to meet that goal, the DOL will be out in full force to audit employers’ health plans to ensure they comply with the Affordable Care Act.

All employers that provide employee benefits to their workers need to be prepared when the DOL comes knocking.

During an audit, the DOL will review health and welfare plan documents and other plan materials. These are essentially compliance audits. They want to see if you have all of the correct documents and that you are administering those documents in a way that is consistent with federal laws and regulations.

The DOL will levy fines for non-compliance. According to audits that were reported to the trade news website Employee Benefits Advisor, DOL agents will be asking for:

•      Plan documents for each plan, along with any amendments. (Content in all plan documents must comply with ERISA regulations.)

•      Current summary plan descriptions.

•      Form 5500 and accompanying schedules for the most recent plan year and previous three years. This form is used to file an employee benefit plan’s annual information return with the DOL. It should include not only health plan information but also 401(k), IRAs, money purchase plans and stock bonus plans.

•      A list of all service providers from the past three years.

•      All current contracts with administrative service providers on the plan, and most current fee schedules.

•      All insurance contracts between plan and service providers.

•      Name, address and phone number of the plan administrator.

•      Sample HIPAA certificate of creditable coverage, and proof of compliance with on-time issuance of COBRA notices.

•      Notice of special enrollment rights, and a record of dates when the notice was distributed to employees.

•      Written eligibility criteria for plan enrollment.

•      Documentation on all mandatory employee notices, i.e., ERISA Statement of Rights, Women’s Health and Cancer Rights Act notice, etc.

•      Copy of most recent monthly bill for premiums (if any) from insurance carrier(s).

•      Copy of check, wire transfer or other methods of payment for insurance premium (if any).

•      Enrollment form(s) for the plan.

•      Employee handbook (if any).

•      Documentation of claim adjudication and payment processes.


The fines involved can add up quickly. And while the DOL does not publish a schedule of its fines, it was documented by Employee Benefits Advisor that breaches of ERISA reporting and disclosure requirements are penalised at $110 a day, per person.

And it notes that most fines for non-compliance under the ACA are not tax-deductible, either. v

More Firms Raise Employee Deductibles to Cut Costs

MORE LARGE employers are offering their workers high-deductible health plans linked to health savings accounts and some are making it the only choice, according to a new study.

According to an annual health benefits survey by Towers Watson and the National Business Group on Health, 66% of companies surveyed offered at least one such plan this year. This figure is expected to grow to nearly 80% next year.

The survey of employers of 1,000 workers or more found that nearly 15% of them offered a high-deductible plan with a savings account as the only option. That’s compared to 7.6% in 2010.

The shift to these plans is part of a larger trend of employers trying to manage their health insurance costs. And those efforts have been paying off, according to Towers Watson.

After plan changes, average employer health care costs reached $9,248 in 2013, up 5.1% from $8,799 in 2012. This was the lowest increase in 15 years and down slightly from a 5.2% increase in 2012.

Towers Watson says employer insurance inflation has moderated to the single digits “largely due to an increasing number of employers that manage costs by emphasizing employee accountability [and costs], …and cultivate a healthy and productive workforce.”

It predicts that employers will continue to take action to reduce their overall health insurance outlays.

It forecasts that more employers will move to reduce their expenses as the ACA takes effect, combined with the excise tax (Cadillac tax) of 40% that employers will have to pay on plans with coverage exceeding $10,200 for individuals and $27,500 for families starting in 2018.

Some Non-compliant Plans Valid through 2017

THE OBAMA administration has ordered another delay in the implementation of the Affordable Care Act, this time allowing those with plans that don’t comply with the law to keep them through 2017.

The move comes after a firestorm of complaints last October when millions of Americans received letters of cancellations from their insurers, which said the plans were not in compliance with the minimum essential benefits requirements under the ACA.

After that initial wave of complaints, the administration quickly changed the rules and said it would allow individuals with those plans to keep them through 2014.

The plans in questions typically have lower premiums because they don’t cover the full slate of essential benefits required of all health plans starting this year.

But the edict is likely too little too late as more than half of the states aren’t allowing extensions, particularly those running their own exchanges.

A study by Rand Corp. estimates that about 500,000 people kept their non-compliant pre-ACA policies into 2014, so the pool is rather small.

Such plans typically include high deductibles and offer barebones coverage.

They were slated to come to an end last year, and people with those plans were supposed to replaced them with plans that comply with the ACA. For example, ACA-compliant plans have annual limits on out-of-pocket expenses and cover many more benefits, including drugs and maternity care.

Many states, however, refused to allow the extensions, fearing that this would drive healthier individuals away from the public exchanges, and leave them with a less healthy pool of insureds.

The policy would allow insurers to offer renewals on policies that begin on or before Oct. 1, 2016. That means some customers can stay on these plans into 2017.

The new rule also applies to small businesses. Some 1.5 million individuals and small business retained their former plans, according to the Congressional Budget Office.

The CBO estimates that a total of 1.5 million individuals and small businesses retained their former plans, administration officials said.

The administration said it was making the announcement in early 2014 so that insurance commissioners and state legislatures could respond with favorable legislation, in order that health insurers can set rates and so individuals can decide what to do.

The Obama administration will let people with health insurance plans that don’t comply with ACA standards keep them through October 2017 if their states allow it, officials said.

The administration also extended Obamacare’s open enrollment for next year by a month – it now will run from Nov. 15, 2014, until Feb. 15, 2015.

And it is giving insurers additional financial help to offset the costs of benefits claims from new ACA enrollees, with the goal of keeping Obamacare premiums “affordable” in coming years, officials said.

New rules also simplified the paperwork that larger employers will have to file when the mandate obliging them to offer affordable health insurance to workers begins next year.

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