Health Plan Eligibility: Do’s and Don’ts

Eligibility Do’s

1. Do Follow the Terms of the Plan Document

ERISA requires group health plans to be maintained pursuant to a written plan document that clearly defines eligibility and benefit rules. The plan document should identify eligible classes of employees and dependents (such as spouses, children, or domestic partners), describe any waiting periods, and set forth enrollment conditions.

A plan document is often composed of multiple materials, including insurance policies, third-party administrator (TPA) documents, and an ERISA “wrap” document. Regardless of form, employers must administer the plan strictly in accordance with its written terms.

Following the plan document is a fiduciary obligation under ERISA. Failure to do so may expose the employer to fiduciary liability, discrimination concerns, and particularly for insured plans, unexpected claim liability if coverage is extended beyond eligibility terms and insurers deny claims.

2. Do Offer Affordable Coverage to Full-time Employees (ALEs Only)

Applicable large employers (ALEs), those that employed an average of at least 50 full-time employees (including full-time equivalents) during the prior calendar year, must comply with the ACA’s employer shared responsibility (“pay-or-play”) rules. ALEs are required to offer affordable, minimum-value health coverage to full-time employees and their dependents or potentially face IRS penalties. A penalty may apply if at least one full-time employee receives a premium tax credit through an ACA Exchange and the employer:

• Does not offer coverage to at least 95% of full-time employees and their dependents;
• Offers coverage but excludes the specific full-time employee receiving the credit; or
• Offers coverage that is unaffordable or does not provide minimum value.

For ACA purposes, a full-time employee is one who averages at least 30 hours of service per week or 130 hours per month. Proper classification and tracking of employee hours are critical to compliance.

3. Do Offer Coverage for Adult Children up to Age 26

Health plans that provide dependent coverage for children must make that coverage available until a child reaches age 26. For this purpose, a “child” includes a biological child, adopted child, stepchild, or foster child.

Plans may not restrict coverage for children under age 26 based on factors such as financial dependency, residency, student status, employment, or marital status. In addition, plan terms, including premiums and benefit packages, may not vary based on a child’s age (other than for individuals age 26 or older). Adult children must be offered the same coverage options available to other similarly situated participants.

4. Do Continue to Cover Medicare-eligible Employees

When an employee is eligible for both Medicare and employer-sponsored group health coverage, Medicare coordination of benefits rules determine which coverage pays first. For employers with 20 or more employees, the group health plan is generally the primary payer for employees age 65 or older.

Under the Medicare Secondary Payer (MSP) rules, employers sponsoring group health plans that are primary to Medicare must:

• Provide a current employee (or a current employee’s spouse) who is age 65 or older with the same benefits under the same conditions as employees and spouses under age 65;
• Not offer Medicare beneficiaries any financial or other benefits as incentives not to enroll (or terminate enrollment) in a group health plan; and
• Not consider the Medicare entitlement of an individual.

Accordingly, Medicare-eligible employees and spouses may not be excluded from coverage or discouraged from enrolling when the employer’s plan pays primary. Employers cannot offer any financial or other incentive for an individual entitled to Medicare to not enroll (or terminate enrollment) in a group health plan that would pay primary.

Eligibility Don’ts

1. Don’t Offer Coverage to Non-employees

Group health plan coverage should generally be limited to employees and their eligible dependents. Offering coverage to nonemployees, such as independent contractors or directors, can create significant legal and regulatory risks.

In some cases, expanding coverage to nonemployees may result in the creation of an unlicensed multiple employer welfare arrangement (MEWA), which is subject to extensive state regulation and, in many jurisdictions, severe penalties. Additionally, providing health coverage to independent contractors may undermine their classification as nonemployees and expose the employer to liability for misclassification, including back taxes, wages, penalties, and fines.

2. Don’t Impose a Waiting Period Exceeding 90 Days

The ACA prohibits group health plans from imposing waiting periods longer than 90 days for otherwise eligible individuals. A waiting period is the time that must pass before coverage becomes effective once all eligibility requirements are met, and it includes all calendar days, including weekends and holidays.

Employers may impose eligibility conditions that are not solely based on time, such as being in an eligible job classification. Employers may also require completion of a reasonable and bona fide employment-based orientation period, provided the orientation period does not exceed one month.

3. Don’t Overlook Nondiscrimination Requirements

Federal tax law imposes nondiscrimination requirements on certain types of employee benefits to ensure employers do not impermissibly favor their highly compensated employees. These rules currently apply to self-insured health plans and arrangements that allow employees to pay their premiums on a pre-tax basis, or Section 125 cafeteria plans. The nondiscrimination requirements for fully insured health plans have been delayed indefinitely.

Plans are more likely to satisfy nondiscrimination requirements when eligibility and benefits are applied uniformly. Designs that may raise concerns include:

• Limiting eligibility to certain employee groups (such as management or salaried employees);
• Applying different waiting periods or eligibility criteria to different groups; or
• Maintaining separate plans for different groups of employees.

Before implementing one or more of these plan designs, employers should confirm that the arrangement will comply with applicable rules prohibiting discrimination in favor of highly compensated employees. If a self-insured health plan or cafeteria plan is found to be discriminatory, highly compensated employees may lose valuable tax benefits.

4. Don’t Exclude Employees Based on Health Factors

HIPAA prohibits group health plans from discriminating against individuals based on health status-related factors, including medical condition, claims history, disability, genetic information, or receipt of health care.

Plans may not:

• Require medical examinations as a condition of enrollment;
• Exclude or limit coverage due to participation in risky activities or high claims;
• Charge different premiums to similarly situated individuals based on health factors; or
• Delay enrollment until an employee is actively at work if employees absent due to health factors are not treated as actively working.

Eligibility rules, such as enrollment timing and access to benefit packages, must be applied consistently without regard to health status.

Links and Resources

• IRS questions and answers on the ACA’s pay-or-play rules for ALEs
• Final rules on the ACA’s age 26 requirement for young adults
• Final rules on HIPAA’s nondiscrimination rules related to health status-related factors

Disclaimer: This content is provided for general informational purposes only and reflects federal health plan eligibility requirements as of the date of publication; because laws and regulations may change, employers should consult legal or benefits counsel for guidance specific to their circumstances.