Question: What are the main employer considerations when responding to requests to enroll an ineligible part-time employee in the health plan?
Short Answer: The main concerns are 1) the insurance carrier or stop-loss provider denying coverage, and 2) the scope of the ERISA plan precedent created by permitting the enrollment.
Note: This is the second in a multi-part series addressing employee health plan exception requests.
Part I: Mid-Year Enrollment Requests Outside of Permitted Election Change Event
Eligibility Exceptions: Ineligible Part-Time Employee Enrollment Exception Requests
There are two main issues for employers to consider upon receiving a request to enroll a part-time employee who is working below the required hours threshold for health plan eligibility.
The two main issues are:
- The Insurance Carrier Limitations; and
- The ERISA Plan Precedent.
Issue #1: The Insurance Carrier Limitations
Insurance carriers (and stop-loss providers for self-insured plans) generally will pay claims only for employees and dependents who are eligible and properly enrolled pursuant to the terms of the applicable insurance policy. Carriers will in most cases permit coverage only for those employees who are performing the required hours of service. These restrictions are crucial to (among other reasons) avoid significant adverse selection issues for the carrier.
If an insurance carrier or stop-loss provider were to discover that the employer made an exception to permit an ineligible part-time employee to enroll at a reduced hours threshold, the carrier would be within its right to deny paying (or reverse payment for) all claims for that employee. That would ultimately likely make the employer responsible for self-funding all claims incurred by the employee—which is the worst-case scenario of potentially unlimited liability that employers must avoid.
Note that even in the rare situations where the insurance carrier approves the exception, the carrier does not have the same concerns as the employer regarding the need to consider the scope of the ERISA plan precedent (issue #2 below) because the carrier is not responsible for that issue. In almost all cases, the employer is designated as the ERISA plan administrator. Employers (as the ERISA plan administrator) will often incorrectly assume that the green light from the carrier absolves them of any additional concerns arising from ERISA compliance.
How to address the issue: Most insurance carriers and stop-loss providers will permit employers to reduce the plan’s eligibility hours threshold for all employees to as low as 20 hours of service per week. Employers can therefore often accommodate such requests by modifying the plan’s eligibility terms for all employees. Any such changes to the plan’s eligibility terms would need to be confirmed by the carrier and communicated to employees by updating any plan materials addressing eligibility (e.g., SPD, EOC, policy, certificate, open enrollment materials, new hire materials, handbook).
Issue #2: The ERISA Plan Precedent
Employers almost always set health plan eligibility based on a weekly hours of service threshold. Many applicable large employers (ALEs) set health plan eligibility at 30 hours per week to align with the ACA’s employer mandate full-time status, under either the monthly measurement method or look-back measurement method to determine average hours of service. It is also common for employers to design the plan with some variation in eligibity terms based on region, full-time vs. part-time, contingent vs. regular employees, divisions, or other clearly defined classes.
In some cases, employers have a reduced health plan eligibility hours threshold that is more inclusive than the ACA full-time employee definition. For example, many employers have (in consultation with and approval from the insurance carriers and/or stop-loss providers) designed the plan with a 20 hours of service per week eligibility threshold that is more generous than required to avoid potential §4980H penalties under the ACA employer mandate.
ERISA requires that employers administer and maintain the plan pursuant to its written terms, including its eligibility requirements. Nonetheless, requests to enroll an employee below the plan’s set hours of service threshold typically arise from situations where an employee has moved to part-time work, an executive is transitioning to retirement, or a key recruit wants to work part-time and still be eligible for benefits.
Within this framework, employers should not make “exceptions” to act contrary to plan terms because doing so could be a breach of fiduciary duty. Rather, employers may exercise their discretionary authority to interpret plan terms when making a plan eligibility determination. Employers that permit enrollment in these situations have therefore interpreted the plan’s terms to be flexible enough to accommodate the enrollment.
A broad interpretation of the plan’s terms beyond their standard denotation to permit the enrollment effectively acts in the same manner as a plan amendment because the employer must apply that approach consistently for all similarly situated employees. For example, an employer permitting a key executive to remain enrolled in active coverage after moving to part-time status (as a purported “one-off” transition to retirement offering to retain the executive) would generally have to accommodate the same requests from all other employees making the same types of requests upon losing full-time status.
In other words, health plan eligibility “exceptions” to offer coverage below the hours threshold for eligibility create an ERISA plan precedent requiring the plan to offer coverage at the reduced threshold for all employees in similar circumstances. An employee denied the ability to enroll in similar circumstances (e.g., working the same weekly hours of service) would have a potential claim for ERISA breach of fiduciary duty or claim for benefits.
How to address the issue: Unfortunately, there is no good way to solve for the unavoidable establishment of an ERISA plan precedent. The only mitigating factor could be an argument as to the scope of the precedent. How broadly or narrowly the precedent applies in practice is a matter of interpretation based on the specific facts and circumstances of the exception. Employers should keep in mind that an aggressive argument as to the narrowness of the precedent’s scope could always be challenged by the DOL or a participant lawsuit if it were unreasonable. Accordingly, the plan precedent derived from permitting an ineligible part-time employee enrollment exception will always be a thorny concern that is difficult to manage.
Instead of considering making an “exception,” employers should instead consider reducing the plan’s eligibility hours threshold for all employees. Any such changes to the plan’s eligibility terms would need to be confirmed by the carriers and communicated to employees by updating any plan materials addressing eligibility (e.g., SPD, EOC, policy, certificate, open enrollment materials, new hire materials, handbook).
For the reasons outlined above, employers should generally avoid making health plan eligibility exceptions to enroll part-time employees working below the plan’s hours threshold. The issues associated with making an exception in most cases far outweigh the typical hardship case or other motivation presented by the part-time employee requesting the enrollment.
Employers wishing to enroll an ineligible part-time employee do have the option of working with the insurance carriers and/or stop-loss providers to change the plan’s eligibility terms to establish a reduced hours eligibility threshold for all employees. Any such changes to the plan’s eligibility terms would need to be confirmed by the carriers and communicated to employees by updating any plan materials addressing eligibility.
(1) Every employee benefit plan shall be established and maintained pursuant to a written instrument. Such instrument shall provide for one or more named fiduciaries who jointly or severally shall have authority to control and manage the operation and administration of the plan.
(1) Subject to sections 403(c) and (d), 4042, and 4044, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—
(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this title and title IV.
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