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Employee Benefits 2003 |
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MID-TERM EXAMINATION
Winter 2003 Employee Benefits: Non-Retirement Plans LEX 7209 Professor Shpiece
Instructions: The following is the take-home mid-term examination that is an alternative to the project of drafting a plan. You may use whatever resources you deem appropriate, provided that they be inanimate. That is, do not consult with any other human being. The exam is somewhat long because I wanted to make it comparable in effort to the project. It is due by the end of class on March 19, 2003. The questions are worth the points shown. I would prefer it if your answers were typed (double spaced) and less than 20 pages. Use cites, as you deem appropriate. Please answer the question asked.
Questions: #1. (5 points) Describe the major differences between Medicare and Medicaid. MEDICARE: MEDICARE is a Federal Act established to provide hospital and medical insurance for aged persons under the Social Security Act 42 U.S.C.A. §1395. Medicare was created with the intent provide benefits for person’s age 65 and older and is funded by FICA payroll withholdings. The Medicare Act is comprised of Part (a) and Part (b). Part (a) discusses a recipients benefits and Part (b) discusses supplemental medical insurance, long term care and prescription drugs. The Medicare program was intended to benefit all persons age 65 or older regardless of need. That means millionaires can make a claim through it. Medicare is a cost-sharing program between patient and provider. Patient pays the co-pay first, and then Medicare pays the rest subject to care limits. Medi-gap insurance is supplemental medical insurance that is intended to cover the patient’s co-pay expenses. Medicare covers some nursing home expenses. Medicare does not cover some necessary patient expenses such as: prescriptions and long term care. Medicare secondary payor rules make Medicare secondary to no-fault and workers compensation for persons over 65 years of age. If the employer has over 100 employees then Medicare is secondary. The employer has to give the employee a choice of making Medicare primary or secondary. MEDICAID MEDICAID (Title XIX of the Social Security Act) is a federal entitlement program for health care specifically intended for low-income individuals. While it is a federal creation, Medicaid is administered in each state under a “State Plan” created by the state after following federal guidelines. However, states do have the discretion to establish eligibility and benefits. To qualify for Medicaid you have to demonstrate a financial need (i.e. must be “deservingly poor”). Both the state and federal government fund Medicaid. There is no co-pay or deductible. Medicaid covers condoms, birth control but not abortions.
#2a. (5 points) Define “key employee” as that term is used in life insurance non-discrimination testing.
A KEY EMPLOYEE is any participant in a qualified retirement plan who at any time during the plan year or the four preceding years is: (1) An officer of the employer having compensation greater than 50% of the amount under IRC § 415(b)(1)(A) for the plan year in question; (2) One of ten employees owning the largest interest in the employer and having annual compensation greater than the IRC 415(c)(1)(A) amount; (3) A 5% owner of the employer; or (4) A 1% owner of the employer having annual compensation from the employer of more than $150,000 IRC 416(i)(1)(A).
For purposes of determining ownership under subparagraph (2), (3) and (4), the constructive ownership (aka attribution rules) rules of IRC §318 apply.
#2b (7 points) Warren owns 65% of the James Hotel (the rest is owned by his brother, Jimmy); 82% of the stock of Dan Industries (Jimmy owns 5% of that company); and 20% of the stock of Gorgeous Gore’s Manikins. Dan Industries owns 20% of he stock of Marilyn Shoes. (Each entity is a “C” corporation.) Gorgeous has six employees, none of whom receive any benefits. The following are the employees of each company and their compensation (in $1000):
Dan Industries Gore’s Manikins Marilyn Shoes
Warren $10 E $15 M* $40 Jimmy* $150 A* 90 F 15 N* 80 R* 150 B 120 G 10 O* 140 S 10 C 60 H 10 P 10 T 85 D 20 K* 5 Q 100 U 250
Who are the key employees for each company?
***Question 2(b) is not answered because Professor Shpiece said it was “screwed up” and it will not be graded. Therefore no response to this question was attempted.
#3a. (5 points) Define the “Treating Physician Rule.” The TREATING PHYSICIAN RULE states that a Social Security disability claimant’s treating physician’s diagnoses and findings regarding degree of claimant’s impairment are binding on administrative law judges unless there is substantial contrary evidence. The claimant’s treating physician’s diagnoses is granted greater weight when determining claimant’s physical condition. Specific information such as the physician’s credentials and relationship with the claimant is relevant and should be sought from the treating physician.
#3b. (5 points) Is it applicable in ERISA cases? Why or why not? As discussed in class, the Circuit Courts are split as to whether the Treating Physician Rule is applicable in ERISA cases.
#4. (5 points) Describe the major differences between a health insurer and Blue Cross and Blue Shield of Michigan. A HEALTH INSURER is the underwriter with whom the contract of health insurance is made. The health insurer is the one that assumes the risk or underwrites the policy. BCBS of MICHIGAN is a not-for-profit medical health provider.
#5a. (8 points) Identify three possible definitions of “disability” that might be used in a long-term disability policy. Describe each definition in a sentence.
#5b. (10 points) Pick one of the definitions and draft plan language defining “disability.” You do not have to discuss eligibility; that is, assume that the person who is disabled is eligible for coverage. Capitalize all defined terms.
Who is Eligible for Disability Benefits? You are eligible for disability benefits if you become disabled because of illness or injury. An illness or injury that qualifies for DISABILITY is: any injury or illness that creates an inability to perform some or all of his or her job function using an objective standard to determine impairment whether the impairment is physical or mental.
#6. (5 points) Discuss the tax non-discrimination rules applicable to self-funded long-term disability plans.
As discussed in class, there are NO tax non-discrimination rules regarding disability coverage. However, as mentioned in class there maybe morale problems. (This was also stated in the comments to the winter 2002 midterm exam question #6)
#7. (5 points each part) Define the group of employees that cannot be discriminated in favor of under:
Highly compensated employees may be taxed on reimbursements from discriminatory self-insured medical reimbursement plans. Self-insured plans are considered discriminatory if they favor highly compensated individuals with respect to either eligibility or benefits or if they discriminate in operation. Treasury Regulation §1.105-11(g)(1) contains a special exemption from nondiscrimination testing for all routine medical diagnostic procedures for an employee, including physical examinations. Under IRC §105(h)(3) a plan is considered discriminatory unless it benefits:
As stated in West’s Employee Fringe and Welfare Benefit Plans 2002 Edition, Michael J. Canan (Pages 359-361) a plan does not discriminate in operation merely because highly compensated individuals utilize a broader range of benefits that other employees. Discrimination in operation results from plan terminations that have the effect of discriminating in favor of highly compensated individuals by limiting the duration of the plan. Treasury Regulation §105-11©(3)(ii). If benefits under a self-insured medical reimbursement plan are available only to highly compensated employees the full amount reimbursed to the highly compensated employees under terms of the plan is taxable to them. IRC §105(h)(7).
No non-discrimination tests apply to medical plans that provide medical benefits through accident and health insurance policies.
#8. (10 points) List the provisions required by federal law to be included in a health plan.
This is a great question. This same question was covered in class. Professor Shpiece wrote an article titled: The Plan Document: Writing it Right, (Dated August 2, 1998). In this article Professor Shpiece outlined the legal requirements, both federal and state, which a plan document should have. Listed below are the federal criteria required by federal law as stated in Professors Shpiece’s article:
#9. (20 points) You are an employer who is about to adopt a long-term disability plan. At what level are you going to set disability benefits? Why?
As an employer I would want to seriously consider the level of benefits awarded to my employees. If benefits are too generous then individuals who could be working may attempt to claim disability benefits rather that engage in employment. This is why insurance companies often limit the amount of disability benefits to no more than 70% of pre-tax earnings from all available sources. Below are levels and qualifications for receiving long-term disability benefits:
#10. (15 points) You represent an HMO. Historically, the HMO has provided that it only covers cosmetic surgery or dental repairs required by an injury occurring during the year in which coverage is in force.
#10a. Is this provision legal? No. A HMO (insurer) cannot deny coverage to an insured because of a preexisting condition. It is understood that an employee with a preexisting condition may become a drain on a health program. The HMO along with the employer would like to control, which potential hires are taking a job just for the insurance and plan on quitting after the use the plan coverage. HIPAA (The Health Insurance Portability and Accountability Act of 1996) applies to health plans but no directly to employers. HIPAA amended Title I of ERISA by adding the portability and accessibility rules in a new Part 7, §§701 to 707 and by revising COBRA rules in Part 6 and imposes requirements regarding terms of group health plans including:
As a result on compliance, ERISA authorizes plaintiffs to seek the following penalties:
Under ERISA §701, the term preexisting condition is defined broadly. Michigan has a mini HIPAA: 6 months look back and 12 month look forward. An employer can’t require an employee’s spouse or employee’s dependant’s to prove or demonstrate insurability. This is because an employer can’t take health status into account in determining whether to cover them. Also, an employer can’t charge a higher rate for employees with preexisting conditions.
#10b. The HMO is concerned that without this provision, it might have to cover scar revisions/repairs occurring many years before coverage with the HMO began. What do you tell your client? Can you think of a solution?
#11. (20 points) You represent a small employer that provides health coverage to its employees. Your client is shocked by recent cost increases and says it cannot afford the additional costs. What options should the employer consider?
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