Expert Commentary

Captives and Employee Benefits

With the passage of the Affordable Care Act this spring, many more firms are inquiring about the possibility of using a captive to finance their healthcare programs. In this article, I will offer some thoughts on that matter.

July 2010

Offering healthcare payments to employees is a costly proposition. Once offered, it is assured to be accepted, so claims are guaranteed. Paying for those claims becomes the challenge. Until now, the payment to any employees who have any connection to funds subject to regulation by the U.S. Department of Labor under Employee Retirement Income Security Act (ERISA) rules required a lengthy and expensive process for approval in order to use a captive.

Some employers have used Multi-Employer Welfare Associations (MEWAs) and association and group captives to offer coverage. Some have offered reduced coverage known as mini-meds. All of these structures are now questionable as to whether or not they will be allowed.

As with so much else in the wake of healthcare reform, the old rules are out the window. Probably. The central issue now is clarity, and there is none. Over 50,000 pages of regulations are yet to be written. The people required to write the regulations have yet to be hired and trained.

Some large firms can elect to keep their existing programs, "grandfathering." However, the rules governing the maintaining of that election are very restrictive, and some firms will not be able to keep their plans.

The Role of Captives

A central thought is that whenever there is uncertainty, there is opportunity, and those who jump at opportunity often want maximum control of their situations. That means a captive.

Captives have been used successfully in writing the stop-loss coverage over self-insured programs and that appears to remain a valid option. The stop-loss policy in a captive can limit costs to some extent until rules are set, tested, and clarified. For instance, while there is no longer a lifetime maximum limitation of costs to be reimbursed, there remain annual limits in some cases. Go figure.

At this point, there is no specific regulation applying to captives offering health insurance. It is likely that the domicile regulator will offer some resistance principally due to the widespread lack of information. Nevertheless, a well-financed plan should gain approval. As always, care will be required.

Some requirements will be the addition of children under the age of 26. There is discussion as to whether this means through age 25, or through age 26. There is also a question as to whether or not it includes a spouse, but it is clear that the "child" need not reside in the home of the parents. At this time, it does not apply to the children of the covered child.

There are also no longer any preexisting conditions that can be excluded, including some which were allowed under the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Several actuaries have opined that, from a numerical and statistical standpoint, such elimination does not materially add to cost. Of course, in specific situations it could well add to cost.

Most requirements, such as individuals buying coverage and firms being subject to "play or pay" mandates, do not take effect until 2014. This is not as far away as it might seem to be, but it does allow some time to plan. By using a captive there is a good probability that the coverage can be offered in multiple states as long as licensing laws are followed. Further, by using a captive, it is possible to include coverage that is not clearly required now but may be required later. There is risk in this approach, and that risk must be weighed against offering coverage as a competitive advantage to acquire and maintain excellent staff.

As of now, an individual will be required to "buy" "minimum essential coverage," and in 2011, no restrictions can be placed on "essential health benefits." It is important to note that there are no definitions of those two terms. This is a huge uncertainty in which a captive may be used to plug that exposure. If the captive is excess of a self-insured plan, and serves to fill holes, plug gaps, remove regulatory uncertainty, and provide some manner of financial planning, there is a good chance at this time that it will be very useful.

Some insured plans have provided benefits to highly compensated employees that are addressed under IRS Section 105 (h). These nondiscrimination rules now apply to self-insured plans and can have devastating tax consequences for the covered highly compensated employees.

Clearly, with all of this uncertainty, it is difficult to plan and to finance. Nonetheless, it is upon us and every employer to address the situation. It will take careful planning, knowledgeable partners, and lots of financial resources—but a captive may well be the solution you seek.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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