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.

1. The ability to perform “any occupation.”

1. Can the employee perform “any occupation” where he could physically and/or mentally perform his work related functions?

2. The ability to perform your “own occupation.”

1. Does the employee have the ability to perform the work/functions, physically and/or mentally, as he did previously in his own occupation?

3. The “Social Security Act Definition”: The ability to perform any job in the country.

1. Is the employee capable of performing any job in the country where he or she can be employed and physically and/or mentally carry out the duties of his employment?

#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:

1. An uninsured health plan; and

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:

1. At least 70% of all employees

2. 80% of all employees eligible to benefit under the plan if 70% or more of all employee to benefit, or

3. A classification of employees found by the Secretary of the Treasury not to be discriminatory in favor of highly compensated employees.

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).

2. An insured health plan.

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:

1. Substantive Requirements:

2. HIPAA (Health Insurance Portability and Accountability Act of 1996)

1. Any pre-existing condition provision must comply with HIPAA and must evaluate and credit “Creditable Coverage.” ERISA §701, IRC §9801.

2. Special Enrolment periods. ERISA §701(f), IRC §9801(f).

3. Don’t condition eligibility/continued eligibility on health status. ERISA §702, IRC §9802.

3. Newborns’ and Mothers’ Health Protection Act. ERISA §711.

4. Mental Health “Parity.” ERISA §712.

5. COBRA. ERISA §§601 – 608. IRC §4980B.

6. A procedure for establishing and carrying out a funding policy and method. ERISA §402(b)(1).

7. The basis on which payments are made to and from the plan. ERISA §402(b)(4).

8. Medicare Secondary Payor rules. 42 USE 1395y(b), IRC §5000.

9. Qualified Medical Child Support Orders (QMCSO’s).

10. Medicaid interface. ERISA §609(b).

11. Coverage of adopted children and children placed for adoption. ERISA §609©.

12. Don’t reduce coverage of pediatric vaccines below coverage provided as of May 1, 1993. ERISA §609(d).

2. Procedural Requirements:

1. The plan must be in writing. ERISA §402.

2. Provide for one or more “named fiduciaries.” Id.

3. Procedure for allocating administrative and fiduciary responsibility. Id.

4. Amendment procedure and who can amend. Id. Cf. Curtis – Wright v Schoonejongen, 514 U.S. 73, 115 S.Ct. 1223, 131 L.Ed. 2d (1995).

5. How plans should be distributed upon termination.

6. Claim Procedure. ERISA §503, 29 CFR 2560.503-1.

3. Requirements found in collective bargaining or other employment contracts (including “promises” to retirees).

4. Tax Nondiscrimination Requirements – applies to non-insured plans only. IRC §105(h).

1. Prohibits discrimination in favor of “highly compensated” as to eligibility or benefits.

2. Broad definition of “highly compensated.”

3. Discriminatory benefits actually paid to highly compensated are includable in income.

#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:

1. To be Eligible:

4. The employees

1. Eligible employees must be full-time status.

2. Non-fulltime employees are not eligible. I want the full time workers to have the additional benefit.

3. Disability benefits can be limited to employees only. Employee’s spouse and dependants are not eligible for long-term disability benefits. To cover these persons would create an unnecessary drain on my business and if the employee’s spouse is working then he/she should be covered under his/her employers plan.

4. Independent contractors are also not covered. Independent contractors are not under my control and are therefore not award the benefits of receiving benefits from my business.

5. Retirees:

1. Retirees are not eligible for long-term care benefits because Medicare & Medicaid benefits are available to them. Also, providing long-term care to aged former employee would create a serious burden on business resources.

6. Other provisions:

1. Armed forces personnel are excluded from coverage because they will be covered by U.S. military plans.

2. Incarceration; if employees are incarcerated then they are not eligible for long-term care benefit. The prison will provide them with the necessary care.

7. Late and open enrollments have specific dates.

2. Beginning of coverage

1. Waiting period: There is a one (1) year waiting period before an employee is entitled to receive long-term disability benefits. Employees may want to hire in to my company just for the benefits; therefore I want to make sure that they are interested in working and committing to the company before I offer them an expensive benefit.

3. End of coverage

1. An employee is entitled to receive disability benefits until the age of 65. This is because providing benefits to aged former employees is too costly.

4. Extensions of coverage;

1. Extensions will be provided based on a case by case review for those totally and permanently disabled or those with newborn children.

5. Covered expenses:

1. Procedural requirement:

1. A doctor’s note with a diagnosis is required.

2. Coverage may only become effective on the first day of hire or have some waiting period.

3. Benefits are only for injuries occurring off the job. On the job injuries are covered under workers compensation.

4. Coordination of benefits; with Social Security and other benefits.

2. Limit disability to certain accidents. For example suicide is not covered.

3. Use a specific loss schedule for each body part. For uniformity.

4. Define whether stress is a disability. Even if it is vocational rehabilitation maybe proper and keep the employee productive.

5. The maximum benefits will equal a percentage of the employee’s wages: example 100% plus bonus. Don’t want to make it attractive to be on disability so that the employee will want to return to work.

6. Pre-existing condition

1. The employee may have to contribute to the payment of disability insurance. The portion that the employee pays a preexisting condition clause.

7. Claims

1. There will be an Appeal process

2. There will be a Deadline for making a claim (e.g. six (6) months from date of the accident).

3. This is a deadline for filing suit. (E.g. six (6) months from date of the accident).

#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:

1. The conditions under which a plan may contain and enforce preexisting condition exclusions.

2. The parameters for eligibility for coverage under a plan (in order to preclude discrimination on the basis of health status; and

3. The rules regarding enrollment periods under a plan.

As a result on compliance, ERISA authorizes plaintiffs to seek the following penalties:

1. Recover benefits promised by the terms of the health plan or a declaration of a participant’s or beneficiary’s right to future benefits under the plan;

2. Obtain statutory fines for reporting and disclosure violations;

3. Enforce the provisions of Title I or ERISA;

4. Redress breaches of fiduciary duties; and

5. Obtain any other appropriate equitable relief.

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?

1. Cost Sharing-high deductible health plan;

1. This approach subscribes to the method of having the employees pay a portion of the health plan costs.

2. Self Insurance;

1. Under a self-insurance the employer pays from his own assets all or part of the health claim that are incurred by their employees. By self-insuring, the employer gets to retain the use of money that would otherwise be payable to an insurance company. This may reduce the costs of providing health insurance.

3. Utilization review;

1. This is a review of treatment decisions by physicians and other medical personnel. The purpose is to identify unnecessary or inefficient medical care.

4. Resource-based relative value scales (RBRVS)

1. The effect of RBRVS is to shift Medicare reimbursements from a system based on reasonable charges to a system based on the amount of work and other resources needed to deliver services.

5. Alternative care;

1. This utilizes less expensive means of providing care than in-patient hospitalization. The alternative care may be in home nursing care, ambulatory surgery, where the patient goes home on the day of surgery instead of staying at the hospital.

6. Changing Plan Eligibility to include/exclude persons. By creating stricter eligibility standards, health benefits will be provided to only main employees. Thereby potentially reducing the number of persons covered by insurance and reducing the employer’s cost of providing benefits. The following eligibility standards maybe need to be implemented:

1. Health coverage is only available to full-time employees.

2. The employer can amend its plan to change or end coverage for retirees (a general reservation of rights provision should be provided without a specific reference to retirees. Any specific reference might not be enforced).

3. Domestic partners are not covered. IRC §105(b) states that health benefits are not includible in gross income if the benefits are provided to the employee or employee’s spouse or dependants. IRC §213(d) defines spouse & IRC §152(a)(9) defines a dependant. According to these statutes, a domestic partner is not a spouse (a spouse is a legal union of two people) but maybe a dependant (pay the majority of support for). Therefore a domestic partner is not a spouse or a dependant; no health benefits are entitled under law.

4. Other provisions:

1. Omit incarcerated persons from coverage.

2. Omit armed forces persons from coverage (because the military health plan covers them)

7. Change insurer from a HMO to a PPO. A HMO (Health Maintenance Organization) is comprised of groups of participating health care providers (physicians, hospitals, clinics) that provide medical services to enrolled members of group health insurance plans. A PPO (Preferred Provider Organization) is more restrictive in their choice of providers the insured will incur a greater cost unless he chooses a provider that participates in the PPO. PPO’s promote competition among provider to bid on PPO model. This helps to hold down costs.

8. Terminate Health Care Plan completely & “Pray”. By taking this extreme measure, the employer eliminates plan expenses but runs the risk of employees seeking alternative employment, which will result in a high turnover of qualified employees, and a decrease is productivity by hiring under-qualified replacements that will accept the job position without benefits. This action is not recommended unless the company is in financial distress.

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