A False Alarm at the IRS for TPAs

We normally report on actual legislative/regulatory developments, but this post discusses a false alarm coming from the IRS that appeared to subject health care TPAs to burdensome new reporting requirements in order to help head off any potential industry confusion.

At issue is Department of Treasury Final Rule 6050 W, which was published way back in August of last year. The rule is intended to define “third party transaction settlement organizations” in furtherance of the IRS’ goal of creating a mechanism to better track the flow of money within the economy.

A section in the preamble labeled “Healthcare Networks and Self-Insured Arrangements” got the belated attention of small circle of IRS observers who have a health care focus. The actual preamble language for this section (just three paragraphs) is as follows:

The proposed regulations included an example to demonstrate that health insurance networks are outside the scope of section 6050W because a health care network does not enable the transfer of funds from buyers to sellers. Instead, health carriers collect premiums from covered persons pursuant to a plan agreement between the health carrier and the covered person for the cost of participation in the health care network. Separately, health care carriers pay healthcare providers to compensate providers for services rendered to covered person pursuant to provider agreements. This example is retained in the final regulations.

A commenter requested that the final regulations clarify that a self-insurance arrangement is also outside the scope of Section 6050W. According to the commenter, a typical self-insured arrangement involves a health insurance entity, health care providers, and the company that is self-insuring. The company submits bills for services rendered by a health care provider to the health insurance entity. The health insurance entity pays the healthcare provider the contracted rate and then debits the self-insuring company’s bank account for the payments made to the healthcare providers.

This suggestion was not adopted because this arrangement could create a third party payment network of which the health insurance entity is the third party settlement organization to the extent that the health insurance entity effectively enables buyers (the self-insuring companies) to transfer funds to sellers of healthcare goods or services. If so, payments under a self-insurance arrangements are reportable provided the arrangement meets both the statutory definition of a third party payment network and de minimis threshold (that is, for a given payee, the aggregate payments for year exceed $20,000 and the aggregate number of transactions exceeds 200).

First, it was curious that the IRS received a single comment regarding self-insurance. Moreover, the commentator described self-insured arrangements in an odd way by using the term “health insurance entity” in an apparent reference to TPAs

Based on this interpretation, it would seem that the IRS did construe TPAs as third party payment networks. As a practical matter, this would mean that TPAs would have to expand their current 1099 Misc. reporting procedures to include payments to providers broken down on a monthly basis, which would be complicated and burdensome.

But upon a more detailed legal review of the full text of the regulations, it was concluded that TPAs did not meet the statutory definition of third party payment networks. One of the key considerations is that it is the employer and not the TPA which contracts with provider networks.

In this regard, it seems that the IRS may have indeed wanted to make TPAs subject to the rule, but the statutory language does appear not support this intent, possibly due to ignorance on the part of the Agency on how self-insured health plans operate and the role of the TPA.

Of course, it’s not uncommon for IRS rules to be tested in court so we will be watching to see if any enforcement actions and/or legal challenges arise on this issue.

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A New "Life Line" for Group Workers' Comp. Funds in New York

In the wake of several high profile group workers’ compensation funds (SIGs) failures a few years ago, the future for other SIGs operating in that state has been looking bleak.

With the state on the hook for unpaid claims totaling between $300 million and $800 million (depending if you believe industry or government estimates) , policy-makers were formally recommending that most funds be shut down and impose such rigorous new regulations on the remaining funds that it would be almost impossible for them to continue to operate.

But just as the obituary for the state’s SIG industry was being written, the conversation has apparently turned from focusing on shutting everything down to finding a solution for letting the well run SIGs continue thanks to an effective lobbying campaign initiated by industry leaders and Group participants.

Specifically, a serious proposal has been floated to allow SIGs to post some form of security in amounts calculated based in their anticipated liabilities to satisfy regulatory concerns about solvency issues going forward.

This proposal may well serve as the framework for a solution, but there are key details which still need to be resolved in order secure “buy in” from both the state and the industry.

The first detail to determine how the security amount should be calculates so that it satisfies regulator concerns but still allows funds sufficient access to cash to pay claims. This is not such an important issue for well-established SIGs with large cash reserves, but is critical to those SIGs that have not had the opportunity to build up such large reserves.

Another open question is the specific "security vehicle" the state would require and the additional transactional expense to the Group. Industry experts have expressed concerns about surety bonds that are fully secured with irrevocable letters because the bond underwriter has the LOC in their hand, so SIGs could never use that cash until it is given back and then replaced with a lesser LOC (assuming it goes down), which can be a difficult process and can be further complicated if the state remains inflexible to changing requirements that could occur depending on cash needs.

As an alternative, it has been suggested the security vehicle be in the form of a restricted investment/ cash account that would require signoff by the state Workers’ Compensation Board but is not wrapped up in an instrument such as an LOC or surety bond.

Another alternative suggestion would be to utilize Reg 114 trusts in which the reinsurer post the cash, freeing up SIG assets to capitalize a captive.

We’ll see how all this plays out but at least there is a viable “lifeline” in the water for the state’s well run SIGs.

In the meantime, we are aware that the state has received proposals for loss portfolio transfer arrangements in order transfer future liabilities back to the private sector, but out sources tell us that disagreement regarding the amount of the liabilities has prevented any deals from being finalized so far

Finally, we continue to wait on an appeal from a State Supreme Court ruling that determined it was constitutional for the state to assess member companies of financially solvent SIGs for the claims liabilities incurred by now insolvent funds.
This should be an easy ruling assuming an objective review of the law, but this is New York after all, so stay tuned. We will report on the ruling when it is announced.

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Stop-Loss Insurance, Reinsurance and "Partially Self-Insured" -- We Need to Talk

Forgive me for stating the obvious, but words mean things. I make this seemingly odd comment because I continue to observe a couple words being misused by self-insurance industry professionals on a regular basis and we all need to get on the same page.

Perhaps most aggravating is the term “partially self-insured,” which continues to get tossed around to describe self-insured health plans that utilize stop-loss insurance. Of course there is no such thing as being “partially” self-insured so the term is sloppy at best and can actually be harmful.

I say harmful because from a lobbying perspective, we are continually emphasizing the distinction between fully-insured and self-insured health plans. This “partial” description is often thrown back in our face in attempt to undermine our public policy and legal arguments, so this objection to the term is strictly academic. And those who use it against us have picked it up….from us!

The more subtle yet equally problematic imprecise word choice is when “reinsurance” is used interchangeably with “stop-loss” insurance. Reinsurance involves an insurance contract between two insurance entities, so by saying reinsurance when you really mean stop-loss insurance this implies that self-insured employers are insurance entities, which confuses policy-makers and has created legal uncertainty in some cases. Again, we have only ourselves to blame.

And that concludes our self-insurance vocabulary lesson (and sermon) for the day.

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Big Win for Captives in the Big Sky State -- And Related News

The Montana State Legislature only meets for two months every two years so getting a bill passed requires a certain amount of precision. So it is particularly impressive that legislation to significantly improve the state’s captive insurance statute cleared the House and Senate by near unanimous votes and is expected to be signed into law by the governor.

Among other things, the legislation allows for the formation of incorporated cell and special purpose captives, which will make Montana one of the most progressive captive domiciles in the United States.

The interesting backstory is the amount of meaningful consultation that took place between industry proponents and key regulators within the state auditor’s office in developing the legislative language. There was genuine push and pull over the course of several meetings spanning several months. The final product met industry’s objective in creating new opportunities for captive formations, while incorporating sufficient safeguards to provide the regulators with a level of comfort.

We will now be watching to see if companies take advantage of the new law.

In related news, an incorporated cell captive bill is now pending in the Vermont state Legislature. Perhaps they were inspired by Montana.

The long slog continues in South Carolina to push through captive legislation dealing with incorporated cell captives and other updates to the statute there. The outcome still remains uncertain but headwinds seem to prevail.

Rounding out our domicile legislative round-up, a captive bill has been introduced in the Tennessee Legislature that was put together by taking the best provisions from captive laws in multiple domiciles. It’s too early to say whether the legislation will pass this year, but if it does Tennessee is sure to attract national attention.

A new era of captive regulatory structures seems to be emerging across the country. Will our industry’s “big thinkers” be up to the challenge on delivering the next generation of innovative ART programs to prove the potential is real?

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Book Review: "The Retirement Savings Time Bomb... and How to Defuse it"

by Richard F. O'Boyle, Jr., LUTCF, MBA
"The Insider's Guide to Retirement and Insurance Planning"
http://www.retirementandinsurance.com

Thank goodness Ed Slott, author of “The Retirement Savings Time Bomb… and How to Defuse It,” has a good sense of humor, because while he looks harmless, his message is nothing short of apocalyptic. Your hard-saved retirement plan is at risk from something worse than inflation or stock market gyrations – the burdensome taxes you and your loved ones will have to pay once you start living off your savings or try to pass them on to your heirs.

Ed Slott, a nationally recognized tax expert, gives us a startling wake-up call – with careless planning, we can not only miss out on potential tax benefits, but punish ourselves (and heirs) with excessive tax bills. There are literally hundreds of “loopholes” and planning techniques mentioned in the book. It is an exceptional reference volume for the professional planner and the retiree alike. There is just enough information here to be dangerous for the person who thinks they can “do it themselves.” A word of caution: tax rules change frequently so don’t try these techniques without the close cooperation of your advisor and tax planner.

Throughout the book, Mr. Slott exposes us to the bewildering tax maze that applies to our retirement plans. It’s easy to get overwhelmed, but I advise the reader to not be alarmed, because many of the worst pitfalls can be easily avoided. Secondly, some of the complex strategies may never apply to your personal case. Nevertheless, it’s useful to open your eyes to some of these issues, just in case.

This book is like the manual for your DVD player. You probably won’t read it cover-to-cover, but you certainly should have it handy when:
- you open an IRA account
- you change jobs
- your spouse or parent dies
- you are setting a retirement date
Mr. Slott’s “Professional Publications” and “IRA Information Websites I Use” resources are solid gold. The appendices, likewise, are valuable, especially the glossary.

My clients would love to have massive IRAs that they don’t expect to exhaust in their lifetimes. Unfortunately, most people are more concerned with just having enough in this lifetime alone rather than maximizing their kids’ inheritance. Examples of valuable gems in the book include:
- Net Unrealized Appreciation (NUA): If your company retirement plan allows you to buy company stock, you can segregate it when you retire and possibly pay a much lower tax rate on it;
- Stretch IRAs for Beneficiaries: This simple concept is repeatedly emphasized as a way to allow a second generation of IRA beneficiaries drag out the requirement that they pay taxes on their inheritance while letting the account value compound over a longer period of time;
- Life Insurance Strategies: Mr. Slott is a vocal proponent of retirees holding life insurance as a means of leveraging assets and providing more options to both the spouse and children. For large estates, life insurance proceeds are an essential resource to pay estate taxes.
- Non-spouse Beneficiaries: We automatically assume that our legally married spouse is the logical beneficiary to our retirement plan. That’s not always the case, nor is it ever an option for gay and lesbian couples.
- Contingent Beneficiaries: Always name a contingent beneficiary to avoid the possibility that your estate will inherit your IRA, and also to give your spouse the option to disclaim the inheritance.
- Keep copies of your beneficiary designation forms since you can’t assume that your financial institution or bank will have them when your heirs need to prove that they are the rightful beneficiaries.

Mr. Slott was gracious enough to take the time from his busy schedule to speak with me on March 9, 2011:

[Richard O’Boyle] One of your most important points in the book is your emphasis on properly designating beneficiaries. When you name a non-spouse as a beneficiary of a non-IRA retirement plan (either because your spouse predeceases you, or you are not legally married, for example), what are the issues to consider?

[Ed Slott] First of all, if you have a non spouse, they don’t have the same benefits and legal protections as a spouse. Even if you are remiss or sloppy, the proceeds of an account will likely go to the spouse any way. If you want a person to get the plan, make sure that they are properly listed as the beneficiary on the form. Everybody thinks that the banks or financial institution will have a copy of the form when the time comes, but institutions can be very sloppy. If the bank doesn’t find that form, big tax benefits can be lost, and your intended beneficiary may not ultimately get the account. A beneficiary form trumps the will and any other legal documents. When we think of “non spouse beneficiaries” we often think of our children – and I got this point from your blog – very few people think “unmarried partner”… a gay partner is a non spouse beneficiary. Even if they are married under state law, under the federal tax code, they aren’t. The most important point for same sex partners is to make sure they name each other as beneficiaries on the form.

[O’Boyle] Trusts can be inordinately complicated, even for the experts, which is why I suspect many families close their eyes to their value. How can non-married couples preserve their wealth without getting overwhelmed by complex documents and expensive legal fees?

[Slott] Again, using beneficiary forms is the most direct and foolproof was to make sure your wishes are followed. Maybe some other family members don’t approve of your relationship. Trusts are a way to make sure the property goes to your partner. If your main concern is to make sure they get it, it can get done simply through the beneficiary form. Trusts are for other issues, not necessarily tax issues. For example if the intended beneficiary is a minor, disabled or incapacitated, or it is a beneficiary who can’t handle money. If that’s an issue then you go the trust route. If these aren’t issues, then you might not need a trust. The beneficiary form is iron clad and it trumps even what may be stated in a will.

[O’Boyle] There actually still are plenty of people who have pensions provided by their unions or employers. How can gay couples get the same benefits as legally married couples when it comes to survivorship and continuation of pension benefits?

[Slott] The only way is to name them as a beneficiary. Now, I’m not an expert in all these plans and you will have to go plan by plan so see if you can even name a non spouse as a beneficiary. Another way to do it is to take some IRA or pension money out – you will have less pension benefit – but you transfer that money into a life insurance policy and the surviving partner gets a chunk of money through life insurance. That’s a much better way to make sure there is money than trying to go through a complicated pension plan.

[O’Boyle] Nobody knows where tax rates are headed, but the conventional wisdom is that they are headed higher. If rates increase dramatically, where should people shift their future retirement savings?

[Slott] That’s an easy one: a Roth IRA, because a Roth IRA is a hedge against the uncertainty of tax rates going higher. You don’t have to worry if tax rates go to 50 or 60%. You don’t have to worry because you have locked in a tax free asset. Of course you pay the taxes up front now. It really doesn’t matter how high they go. You can set that up right now.

[O’Boyle] I can count the number of “insurance positive” celebrity advisors on one hand. By that I mean the number of financial professionals who get significant air time who are strong proponents of cash value life insurance as a part of a retirement plan. Why does cash value life insurance get such a bum rap?

[Slott] I’m not an insurance guy, nor am I am expert in stocks, bonds or investments. I like life insurance as a tax vehicle. I believe it’s the single best benefit in the tax code because it gives you the ability to take small amounts of money and leverage it tax free. All I care about is the tax benefits and if it pays out at death. The kind of life insurance is up to you and your advisor. Some people just want the most insurance for the least money. But as you get older you probably will be better off with cash value life insurance. The term premiums get astronomical and you have nothing to show for it.

"The Retirement Savings Time Bomb... and How to Defuse It" is available from Amazon.com.

(c) 2011 Prism Innovations, Inc. All rights reserved.

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Digesting Health Care Reform

So we hurry up and wait.

That is perhaps the most apt description of how self-insured employers and their business partners have adapted to the new health care law and the ongoing reform process it has triggered.

For obvious reasons, we saw a flurry of activity immediately after the passage of PPACA to first determine what was actually in the legislation and then to move forward with compliance planning. This stage seems to have largely passed and now we are in an extended waiting period until 2014, which is when the health insurance exchanges are scheduled to come on-line and the next wave of regulatory requirements, such as the employer mandate, are upon us.

With that timeline framed, let’s take a look at where things stand today and possible legislative/regulatory developments over the next three years.

Clearly there is curiosity with regard to self-insured employer reaction to PPACA as we approach the first anniversary of the law’s enactment. A recent outreach effort to employers of various sizes generated feedback that concluded the law has not created any significant hurdles for them to continue to self-insure, at least in the short run.

The biggest issue seems to be whether or not employers want to retain grandfather status of their health plans. Although unscientific, the feedback suggests it is almost an even split regarding grandfather status decision.

We also received feedback on other issues such administrative burdens, plan design changes, wellness programs and stop-loss cost. When this information was aggregated, the observation is that while there is general discomfort with adapting to the new law, employers are sticking with self-insured health plans, at least for time being.

More on the longer term employer view later, but first we need to stay focused on health care reform developments that will play out in the coming weeks and months, which could influence events before 2014.

Separate HHS and DOL reports dealing with self-insured health plans will likely be released this month and despite efforts to ensure that the regulators are fully educated about self-insurance, there is probably a better than average chance that these reports will contain negative commentary.

Key members of Congress and their staff have already been briefed in advanced about possible biased findings, and we have been generally encouraged by the supportive responses. That said, we could very well see self-insured health plans being one of the focal points in future legislative developments if official government reports conclude that such plans impede overall health reform implementation efforts.

The most likely threat would be legislation to restrict smaller employers from self-insuring, similar to a provision actually included in an early version of the PPACA legislation that SIIA was able to have stripped.

As previously reported, the IRS is also looking to define stop-loss insurance, which was an unanticipated consequence of the health care law. We expect a face-to-face meeting any day to get a better understanding of the agency’s thinking and I will be sure to publish a recap of this meeting, so be sure to check back regularly.

It was interesting to hear President Obama’s comments at the National Governors Association meeting this week that he is agreeable for moving up the timeline for states to be available to apply for waivers to the health care law if they develop their own reform plans that achieve the same access and affordability outcomes as the administration anticipates through PPACA implementation.

This offer was made in response to complaints from numerous governors that the new health care law will greatly increase costs to the states due to expanded Medicaid obligations. And of course, it was classic Obama rhetoric – a politically appealing sound bite that doesn’t square with reality.

Of course, the hitch with this offer is that a state-based plan must meet an artificially high bar for outcomes in order to be approved, so the reality is that it is unlikely that any waivers will actually be granted. As such, it is probably premature to be concerned about ERISA preemption issues, but we will certainly keep an eye on things.

In a bit of positive news, some of our reliable sources in Congress have signaled a renewed interest in association health plan (AHP) legislation, which would include a self-insurance option. They tell us, however, that the one hurdle to overcome is the perception that AHPs would contribute to adverse selection and therefore compromise larger health care reform objectives.

We are working to address these concerns now, so stay tuned for a possible return of AHPs as a serious topic for discussion on Capitol Hill.

Then there are the legal challenges to PPACA. Just today, Florida Federal Judge Robert Vinson put the Obama on notice that they have seven days to file an motion for expedited appellate review of the individual mandate constitutionality question or 26 state will be allowed to hold off on any PPACA implementation actions pending a final ruling by the Supreme Court. This has made things even more interesting.

There will be more short term health care reform legislative/regulatory developments for sure, but I thought it would be useful to highlight those on the radar screen today.

Now let’s return to the longer view of PPACA from the self-insured employer perspective. The real uncertainly arrives in 2014 when companies are required to provide health coverage or pay a penalty (play or pay).

From talking with several employer representatives, we have learned that most companies have been running numbers to test both scenarios, but are generally keeping tight-lipped about any conclusions at this early date. So essentially, the self-insurance marketplace has moved quickly to adapt to the new health care regulatory environment and now the waiting begins for potentially bigger shoes to drop going forward and the resulting reaction from self-insured employer and there business partners.

Settle in…it’s going to be a long ride.

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