PPA Health Plan Relief

One of the more obscure provisions of the Pension Protection Act is Section 843, which amends IRC §419A(c) by adding new subsection (6). The new provision permits a health benefit plan sponsored by a “bona fide association” (as defined in 42 U.S.C. 300gg-91(d)(3)) to maintain a reserve of up to 35% of current operating costs. Prior to the amendment no reserve was permitted.

So, is this just another special interest goodie that slipped in under the radar? Not really. It actually provides much needed relief for many small business association health programs. Here’s the reason why. Under IRC §419A annual deductions for contributions to funded health benefit plans (other than retiree medical plans) are limited to “qualified costs,” which are defined as current claims and related administration expenses for the year, plus a reasonable cost for “run out” claims, sometimes referred to as IBNR - incurred, but not reported claims. The run out cost must either be actuarially determined or limited to a percentage of current claims, as set by statute. An exception to the annual deduction limitation is available to “10 or more employer” plans. (IRC §419A(f)(6)). However, as the statute states and the final regulations issued by the IRS and Treasury in 2003 (§1.419A(f)(6)-1) clearly explain, a plan which “experience rates” claims or costs cannot be a 10 or more employer plan. Many small business associations maintain health benefit programs for their members, some have for 50 years or more. These programs typically allow participating members to obtain health care for their employees at reduced cost through a group purchasing or funding arrangement. In order to obtain the lowest rates these programs often provide health coverage under a tiered premium arrangement, which is then made available to members from year to year according to prior usage - a clear experience rating arrangement under the final regulations.

As many who are familiar with this area know, one of the primary purposes of the (f)(6) regulations was to curb welfare plan abuses, particularly in the area of life insurance (death benefits) and severance pay plans. Unfortunately, the wide net cast by the regulations also put the association health plans in a difficult position: either they operated at break-even or at a loss each year (which created significant concerns for the plan fiduciaries under ERISA’s prudent man standard) or they had to inform their participating members that portions of their annual heath premiums paid to the group plan were non-deductible. A number of the affected associations approached their congressional representatives about the problem, and with the help of Treasury, hammered out the statutory language which is now part of the PPA. The new law will permit bona fide association health plans that experience rate their members to maintain a reserve of slightly more than 4 months’ annual premiums, enough to help these plans keep a cushion available for contingencies, while retaining competitive lower cost and fully deductible health benefits for their members. (Under the Public Health Service Act a “bona fide association” must (A) have been actively in existence for at least 5 years; (B) have been formed and maintained in good faith for purposes other than obtaining insurance; (C) not condition association membership or health insurance coverage on any health status-related factor or offer coverage to non-members; and (D) meet any additional State law requirements.

Kudos to Senators Hatch, Grassley, Baucus, Snowe and Bennett, who all worked to get Section 843 included in the PPA. Of course, Senator Snowe has long championed the right of small business associations to provide low cost health care to their member employers. Does this new provision signal possible help for her much-beleaguered proposed legislation which she touts as “giving small businesses greater access to medical care for their employees"? We will see. jeffclayton@cnmlaw.com (Submitted by my partner, W. Waldan Lloyd)