Overview

Many group health plan sponsors in the U.S. have operated on the “honor system” in managing dependent eligibility.  Generally at the time of enrollment, employees have not been required to provide evidence that any individuals they wish to cover under the plan satisfies the eligibility requirements.  As employers begin to closely examine their covered health plan populations, they are typically finding that 4-8% of covered individuals are ineligible for group health plan benefits, regardless of the industry, geography, or size of the employer.

The recently enacted Patient Protection and Affordable Care Act and related Health Care Education Reconciliation Act of 2010 (together, the Health Care Reform Law) will affect coverage of an employee’s children under an insured or self-insured group health plan and the ability of a group health plan or insurer to rescind, or cancel, such plan or coverage for any individual.  For calendar year plans, these changes were put into effect January 1, 2011, although a delayed effective date was applied for health insurance coverage maintained pursuant to one or more collective bargaining agreements (CBAs) ratified before March 23, 2010.  In view of these new developments, employers should carefully consider how to administer their plans and how DEVAs should be conducted under the Health Care Reform Law.

Ineligible Dependents

There are many reasons why an enrolled dependent may be ineligible for group health plan coverage.  For example, plan sponsors often do not have sufficient resources to continuously track and verify dependent eligibility.  In addition, while some employees may purposely arrange for coverage of ineligible individuals, many do not fully understand the plan’s eligibility criteria or forget to update eligibility information when there is a change in family circumstances.  Some categories of ineligible dependents found when performing DEVAs include:

• Children who exceed the maximum age limits permitted under the plan;
• Married children;
• Former spouses following divorce;
• Children who are no longer the employee’s eligible dependents (e.g., due to divorce). where coverage is not mandated by a qualified medical child support order;
• Grandchildren;
• Uncles/aunts;
• Live-in girlfriend/boyfriend/domestic partner and their children; and
• Children who obtain their own employer-based coverage after graduation from college

Health Care Reform Law – Relevant Provisions

Coverage of Adult Children:  The primary focus of the Health Care Reform Law is to provide affordable health coverage for Americans who are uninsured (or under-insured) and to institute certain insurance market reforms.  One of the key reforms is to allow adult children to enroll in, or remain on, their parent’s group health plan or health insurance coverage until their 26th birthday.  Adult children (under age 26) are eligible for this extended coverage regardless of their martial or student status, or whether they are claimed as a dependent on the employee’s federal income tax return.  Although the Health Care Reform Law applies to the adult child, it does not require coverage of the adult child’s child and does not appear to require coverage of the adult child’s spouse.

• Effective Date:  The Health Care Reform Law’s requirement to cover adult children generally applies to grandfathered plans (health insurance coverage and group health plans in existence on March 23, 2010) and non-grandfathered plans effective for plan years that began on or after September 23, 2010 or, if later (for health insurance coverage maintained pursuant to one or more CBAs ratified before March 23, 2010), the date on which the last of the CBAs relating to the coverage terminates.
• Special Rule for Grandfathered Plans:  For plan years beginning before January 1, 2014, the adult children coverage requirement applies to grandfathered group health plans only if the adult child is not eligible to enroll in another employer-sponsored health plan (a group health plan or group health insurance coverage offered by an employer to employees which is a governmental plan, or is any other plan or coverage offered in the small or large group insurance market within the state).  Therefore, the Health Care Reform Law does not require grandfathered plans to cover an adult child who is eligible for another eligible employer-sponsored health plan until the first plan year beginning on or after January 1, 2014.
• From a practical standpoint, not all adult children who are eligible to enroll in their parent’s plan will enroll when this Health Care Reform Law provision becomes effective.  They may not enroll due to inertia, insufficient knowledge about the plan, a belief that they do not need health coverage, or an unwillingness to pay any additional premiums.  Adult children, however, who lack other affordable group health coverage and have existing medical conditions, are likely to enroll.  Once enrolled, they are more likely to remain covered until they are no longer eligible due to a maximum age or ther eligibility conditions.

Unanswered Questions:  There are several questions as to how the adult children coverage provision of the Health Care Reform Law applies to plan sponsors, which may not be fully answered until future official guidance is issued.

• It is not entirely clear whether an employer may require adult children to complete a formal enrollment application, a separate election, to obtain coverage on their pairent’s plan.
• How much employers will be permitted to charge employees for the extended coverage of an adult child is not presently known.
• It is not entirely clear whether the age 26 adult children coverage provision of the Health Care Reform Law will apply to any otherwise eligible dependent who has reached a lower plan-imposed maximum age limitation (e.g., not only the employee’s natural born, step, adopted or foster child, but also a child of a live-in partner, niece or nephew, grandchild, etc.).
• Employers will need to determine how to coordinate this adult children coverage requirement with the various state insurance laws that currently permit individuals to cover adult children under certain circumstances (e.g., subject to certain restrictions regarding age, marital status, student status, financial dependence, etc.).  Prohibition on Recessions:  The Health Care Reform Law also provides that a group health plan and health insurance issuer offering group or individual health insurance coverage may not rescind the plan or coverage with respect to any covered individual, unless the individual has committed fraud or made an intentional misrepresentation of a material fact as prohibited by the pan or coverage.  In addition, coverage cannot be cancelled unless there is prior notice to the covered individual and certain other requirements, as set forth in the Public Health Service Act (PHSA), are satisfied.
• Effective Date:  This provision of the Health Care Reform Law applies to grandfathered and non-grandfathered health plans effective for plan years that began on or after September 23, 2010 (however, a later effective date may apply in the case of health insurance coverage maintained pursuant to one or more CBAs ratified before March 23, 2010).

Unanswered Questions:  The application of this rescission provision to group health plan coverage is not entirely clear (the restriction on recessions was largely a legislative response to instances where insurers have cancelled individual health coverage of insured individuals with major medical problems).  Moreover, what Congress intended by the use of the term “rescind” is subject to interpretation until regulatory guidance is issued.

• Meaning of “rescind”.  The Health Care Reform Law does not define the term “rescind”.  The Congressional Research Service (CRS), which supports congressional committees and members of Congress and assists throughout the legislative process, has stated, “A rescission generally refers to the practice of cancelling a health insurance polity after a plan member or policyholder has submitted medical claims.” (See CRS, Private Health Insurance:  Changes Made by H.R. 4872, the Health Care and Education Reconciliation Act of 2010, March 23, 2010).  This implies that coverage could be rescinded before any claims have been submitted.  Generally, rescinding a contract meant undoing it from its inception, due to a default by one of the parties.  As a result, all parties are placed in the same position they would have been in if the contract had never existed.  Recessions have been permitted in a variety of situations, including instances involving unintentional misrepresentations that the insurer has relied on.

Future guidance under the Health Care Reform Law on this issue is expected.  It may be that this rescission provision is not intended to prohibit the retroactive or prospective removal of coverage of any ineligible dependent, regardless of fraud or intentional misrepresentation.  Alternatively, this provision might be interpreted to permit a retroactive voiding of coverage only where the individual has committed fraud or made an intentional misrepresentation of a material fact as prohibited by the plan or coverage, but would permit prospective cancellation of an individual’s coverage if the individual does not satisfy plan eligibility conditions.  Merely being an ineligible dependent does necessarily mean that any fraud or intentional misrepresentation was committed.  For example, an employee may have incorrectly assumed that the dependent is eligible, and the employer neglected to verify eligibility when the dependent was first enrolled.

• ERISA and PHSA Applicability.  It is unclear how this rescission provision applies to self-insured plans governed by the Employee Retirement Income Security Act of 1974, as amended (ERISA), since it permits cancellation of coverage only in accordance with certain provisions of the PHSA that relate to cancellation by an insurer of coverage in the individual or group markets.
• ERISA Fiduciary Concerns.  From an ERISA fiduciary perspective, plan fiduciaries must administer their health plans in accordance with plan terms.  It is unclear how this rescission provision affects the general right of plan sponsors under ERISA plans to establish the plan’s eligibility terms, or the obligation of plan fiduciaries to follow those terms (including ceasing coverage for ineligible dependents).
• Rescission under ERISA.  The effect of this rescission provision on the existing right of rescission under ERISA is unclear.  For example, several courts have held that federal common law allows for the equitable rescission of an ERISA-governed insurance policy that is obtained though the material misstatements or omissions of the insured.  DEVAs after Health Care Reform Conducting a DEVA remains an appropriate, viable, effective, and (in many cases) necessary tool to reduce costs for self-insured and fully insured group health plans, even after enactment of the Health Care Reform Law.
• DEVAs can significantly reduce costs attributable to coverage of any ineligible dependents, not just ineligible children (we have found that removing ineligible dependents may potentially achieve employers a cost-savings of 2-10% in health plan costs).
• DEVAs are particularly important, for example, where plan terms have changed, there are known eligibility issues, or there have been corporate transactions resulting in newly eligible groups.
• A DEVA is an effective method of complying with ERISA by ensuring that plan eligibility terms are being followed.  Employers generally have a fiduciary obligation to ensure that an ERISA-governed self-insured or fully insured group health plan is operated in accordance with its terms.  This includes confirming that only eligible individuals receive plan benefits and, upon learning that an ineligible person is participating, notifying that individual of his or her ineligibility.  A DEVA can help ensure that the plan operates only as intended by the sponsor.
• DEVAs may help avoid the need to provide continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (COBRA), for ineligible dependents if they are removed from coverage before a qualifying event occurs; it is unsettled whether a group health plan must provide COBRA continuation coverage for ineligible individuals who are covered when a qualifying event occurs.