The Vita Blog

Note: This comprehensive article is a long read, but we think it is worth it!

The latest generation of prescription drugs developed to help people manage Type 2 diabetes has been causing quite a stir for patients, health professionals, and benefit plans alike. In addition to their intended use in treating Type 2 diabetes, several GLP-1 drugs are also FDA-approved for weight loss, while others are being used for weight loss on an off-label basis.

As generally happens with innovative therapies, both health plan sponsors and insurance carriers face challenges in creating guidelines for coverage of the drugs. The majority of employers and insurance carrier plans currently exclude weight loss drugs from coverage; however, a small but increasing number of employers are jumping on board to offer coverage for this new class of medications.

Experts agree that the GLP-1 craze we are witnessing in both the general population and the pharmaceutical industry is not a short-term, acute phenomenon. Rather, it is expected to be a long-term issue that will continue to drive discussion, spark development, and impact health plan costs in the decade ahead.

 

A Roadmap to Understanding

Much has been written about GLP-1s and their impact on employer health plans. The intention of this article is to dispel the fog of information and synthesize key concepts employers need to know...essentially, to provide an easy roadmap to understanding this complex topic. In this article, we will address the following issues:
 

GLP-1s Made Easy

Marketplace and Drug Pipeline

Obesity – The Reality of the Need

Insurance Coverage Realities

The Wrong Question and the Right Question

Cost and Healthcare Spending

Prior Authorization Realities

Final Thoughts

GLP-1s Made Easy

What are the Drugs?

GLP-1 (Glucagon-Like Peptide-1) is a hormone that plays a crucial role in regulating blood sugar levels. As such, the category of drugs that target that hormone are also used to treat Type 2 diabetes. These drugs are known as GLP-1 agonists. That class of medications was the first to be FDA-approved for the treatment of Type 2 diabetes because of their effectiveness in regulating blood sugar in the body.

When GLP-1s were first developed, manufacturers intended for the drugs to be narrowly prescribed for those with Type 2 diabetes. However, after these medications were introduced, patients started to experience the unexpected side effect of weight loss. At that point, manufacturers dove into the underlying science behind the drugs and recognized the significant potential of these drugs as highly effective stand-alone weight loss medications to treat obesity.
 

In English . . .what do the drugs do?

GLP-1 medications increase insulin release, delay digestion, and decrease appetite.

• For diabetics, they help regulate insulin AND help prevent cardiovascular disease.
• For obese patients, they can help reduce body weight by an average of 15% (in conjunction with lifestyle changes such as diet and exercise).

It is important to note that the drugs are effective at weight loss only in the context of other behavioral changes, such as attention to diet and exercise. Without these underlying lifestyle changes, weight loss is unlikely to be permanent in the future.
 

Research Findings

Multiple clinical trials have demonstrated weight loss between 15%-20% of body weight compared to a placebo at 3-4%. One of the most extreme clinical trials resulted in an average weight loss of 52 pounds (22.5%). Essentially, all drug manufacturers are engaging in continued clinical trials to confirm the efficacy and unique value of their GLP-1 formulations.   

Importantly, research has also shown that upon discontinuing the medication, much, if not all, of the weight is regained. This is an important consideration for balancing the health and life benefits of GLP-1 medications with the long-term cost of the treatment. 
 

What are the drug names?

Many GLP-1 drug names have already become widely known because of broad direct-to-consumer advertising. There are currently nine GLP-1 medications approved for the treatment of diabetes and/or weight loss. The following chart (courtesy of CVS Health) provides an overview of the most popular brand names and their FDA approval status.
 

Marketplace and Drug Pipeline

The GLP-1 Pipeline

Pundits believe that we are at the very beginning of a GLP-1 wave. The exceptionally large potential target population for GLP-1 drugs and the known efficacy of the drug mechanisms, virtually guarantee further investment by pharmaceutical manufacturers. The biggest indicator of this is the current drug development pipeline. Pharmaceutical manufacturers are investing heavily in the development of new and novel indications of GLP-1 drugs, as well as GLPs that apply to more than one receptor.

Manufacturers are also working to develop new (and more patient-friendly) ways to administer the medications. Currently, all GLP-1s (except Rybelsus®) are administered by injections (once weekly or daily). Needle-phobia is real, and most patients do not like injected drugs. This reality has pharmaceutical manufacturers racing to develop new ways to administer the medications. There are currently a few pipeline products that are monthly injections that would further reduce that administration burden and provide a more convenient treatment option for patients.

Lastly, drug manufacturers are also studying the use of GLP-1s for the treatment of cardiovascular disease, as well as several other diseases that are often co-morbidities with diabetes (including heart failure, peripheral arterial disease, sleep apnea, and diabetic retinopathy).
 

Growth By Advertising and Social Media Influencers

The unique efficacy of the drugs is not the only reason for their rapid growth. Drug manufacturers have poured hundreds of millions of dollars into highly effective ad campaigns. In addition, many high-impact influencers with star-power names have shared their weight-loss “secret.” This has expanded reach and normalized taking GLP-1s for weight loss (absent a diabetes diagnosis). These forces have combined to create an interesting market dynamic with substantial demand for GLP-1 medications for weight loss purposes.
 

Obesity: The Reality of the Need

The Unspoken Debate: Chronic Disease vs. Lifestyle Disease

It is important to recognize the unspoken debate that is unfolding over GLP-1s. Diabetes is an industry-accepted chronic disease that, if left untreated, can result in not only disease progression (which is costly) but additional medical complications and exacerbation of underlying co-morbidities. These, in turn, can be even more costly.

On the other hand, obesity has historically been labeled as a lifestyle disease. Because of this, many plan sponsors have not and do not cover weight loss drugs under the pharmacy benefit, as the perception was it did not address a medical need. That said, in the wake of the GLP-1 craze, employers are being forced to re-evaluate their coverage for these popular weight loss drugs. The steep price tag of GLP-1s has created a complex web of financial and human consequences for employers to consider. At the center of this reality is the understanding of obesity as a health crisis in the United States.
 

Obesity as a Health Crisis: Current State

Neither the prevalence of obesity nor the impact of co-morbidities associated with obesity in our society can be ignored. Following are some current statistics relating to obesity in the United States

• 42% prevalence of obesity in U.S., 2017-2020 (www.cdc.com)
• 200+ diseases are associated with obesity (medicaleconomics.com)
• 73.1% of the population is overweight or obese

Future Projections of Obesity Prevalence

Unfortunately, trends are not in our favor for either obesity or diabetes prevalence.

• 1 in 2 adults will be obese by 2030 (www.nejm.com)
• 1 in 4 adults will be severely obese by 2030 (www.nejm.com)
• Prevalence of diabetes (Type 1 and Type 2) will increase by 54% from 35M people in 2015 to 54M people in 2030 (www.nih.gov)
• Growth in percentage of population with obesity and severe obesity from 1999-2018:

On the Positive Side

The American Medical Association has recognized obesity as a “chronic disease” because it can be the underlying cause of other medical conditions, such as heart disease, diabetes, and even some cancers. Obesity can even shorten life expectancy by up to eight years and cut healthy life by up to 19 years. As a result, there is a growing argument to be made that providing coverage under group health plans to address obesity may be medically necessary and appropriate...and potentially cost-efficient (to the extent that the cost to treat other co-morbidities would be curtailed by the reduction in the underlying co-morbidity/cause of obesity). These factors will likely also play into insurance coverage decisions by employers and insurance carriers.

 

Insurance Coverage Realities

Coverage for Diabetes

As a rule, most health plans have at least one GLP-1 medication on their formulary for the treatment of diabetes. The remainder of this discussion will focus on coverage for GLP-1s for weight loss without a diabetes diagnosis.
 

Are GLP-1s covered by insurance plans?

The web of insurance coverage (and non-coverage) for GLP-1 medications for weight loss is complicated. Social sources of coverage are inconsistent (based on state and program) and employer-sponsored insurance plans have inconsistent coverage rules. Some, but not all, employers are in a position to choose whether they elect to cover weight loss medications, including GLP-1s.
 

Medi-Cal Coverage in California

Historically, California Medicaid (referred to as Medi-Cal) has provided coverage for GLP-1s for the treatment of diabetes. Coverage of medications for obesity has historically been excluded. However, in the latest Medi-Cal Rx Contract Drug List (updated December 1, 2023), Saxenda® and Wegovy® are included as treatments for obesity.
 

Employer-Sponsored Coverage

In 2024, there is no mandate to cover GLP-1s for weight loss in California. As a result, employers and participants alike will continue to experience a patchwork of coverage depending on employer or carrier determinations (as outlined above).
 

California Obesity Treatment Parity Act

A bill known as the Obesity Treatment Parity Act (SB 839) has been introduced in the California legislature. The bill would mandate comprehensive coverage for the treatment of obesity, including coverage for intensive behavioral therapy, bariatric surgery, and FDA-approved anti-obesity medication (including GLP-1s).

The bill would require policies to provide coverage in the same manner as any other illness, condition, or disorder relative to deductibles, copayments, coinsurance, and out-of-pocket maximums. The whole of the law uses a mere 189 words to amend the CA Health and Safety Code and the Insurance Code to create full parity for the treatment of obesity with any other medical condition.

This will be a closely watched bill as it moves through the legislature in the coming session. If some form of the bill becomes law, employers will need to carefully consider and plan for expected health plan cost increases. Remember, however, if the law is passed, as a state law, the coverage mandate would only apply to fully insured plans, not self-funded plans. 
 

Fully Insured Plans: Employers Don’t Get a Vote

Here, it is relevant to understand the current marketplace for 2024. Please note some contracts may deviate from the standard provisions, and these contradicting provisions are a moving target. Market segment plays a part in determining potential coverage parameters. 

• Small Groups (<100 lives): The small group market is the most restrictive, as carriers have a library of pre-defined plans from which employers may choose.
• Mid-Market Groups (100 to 300 lives): The mid-market segment will typically mirror the small group marketplace with pre-defined plans.
• Large Groups (300+ lives): The large, fully insured employer marketplace will offer the most flexibility as employers have more say in plan design parameters in this market segment. Carriers are starting to address the actuarial assumptions and rate impact of these offerings. We have seen a wide range of potential rate impacts in the quoting process, from 0.5% to 3.0%.

Self-Funded Plans: To Cover or Not to Cover...That Is the Question

The decision of whether or not to cover GLP-1s for weight loss is important for plan sponsors, as the significant increase in utilization of GLP-1s for weight loss will place a substantial financial burden on employers. There is also the complex intertwined cost reality that, while there will be an obvious increase in cost when covering GLP-1s, plan sponsors also need to consider the potential longer-term benefits for members’ improved health, such as the avoidance of disease complications related to obesity.

It is difficult to find reliable information on how many employers cover GLP-1s for weight loss at this time. What we do know is that while the drugs have surged in popularity over the past year, coverage for the drugs has not tracked that popularity. The best survey numbers seem to show that very large employers remain split, with the number providing coverage hovering at less than half (46%). Smaller employer plans are less likely to cover the medications. A significant number of employers indicated they are considering whether to add the coverage in the future, citing cost as the major consideration. Expect continued discussions among self-funded employers about the pros and cons of adding GLP-1 coverage for weight management.
 

Taking the Temperature of Employers

The high immediate costs to health plans as well as the potential for sustained increases in healthcare spend over the long term (assuming employees will stay on the drug for longer periods) are cited as reasons for more employers wading slowly into the GLP-1 waters. That said, GLP-1s are not going away, nor will the decisions employers need to make regarding how they balance the high cost with health benefits and employee relations considerations.

 

The Wrong Question and the Right Question

A Common Question

Employers and employees alike are asking the question, “Are GLP-1s covered?” It seems like a reasonable question, however, it’s a question that often begs an incorrect answer . . . or at least not an answer to the specific question that the inquirer truly intended.
 

The Wrong Question

“Are GLP-1s covered under our plan?” is the wrong question to ask. It’s the wrong question because most plans will answer, “Yes, but coverage may be only available in limited circumstances.” For example, most plans today do cover GLP-1s when a diabetes diagnosis exists. However, typically when the question is asked today, the intention is to clarify if GLP-1s are covered for weight loss . . . and that is an entirely different question. 
 

What’s the right question?

The right question to ask is actually two questions. 

Question #1: Are GLP-1s covered for weight loss without a diabetes diagnosis? 

Question #2: What are the criteria for covering GLP-1s for weight loss? 
 

How do I figure out GLP-1 coverage details?

Vita maintains a Resource Guide for coverage and pre-authorization requirements for the major carriers for fully insured plans. It is important to note that each carrier has established detailed criteria for how they cover GLP-1s for weight loss. In addition, coverage and criteria differ between small-group and large-group plans. Vita has consolidated summary information for easy reference as well. For detailed information on coverage standards through your carrier, complete this form to request a consultation or reach out to your Vita Account Manager.

 

Cost and Healthcare Spending

What is the cost?

The reality is that GLP-1 drugs, as a class, are very expensive. This is partially because of their efficacy and the increasing demand for the medications. However, it is also important to recognize that there are no generics available for GLP-1 medications. It is unlikely that substantial generics will be available until well into the 2030s when initial patent protections expire.

Much has been written about the cost of GLP-1s and the potential healthcare spending increase for employers and health plans if widespread coverage and utilization were to be adopted. For this article, we will simply outline the raw retail costs and some basic realities about rebates, which can reduce the cost for some plan sponsors.

Consider the following:

• The cost for GLP-1 treatment is between $700 - $1,400 per month (retail cost).
• Expert analyses have projected that weight loss drugs have the potential to increase health costs up to $300 per employee per month, depending on how widely coverage is offered and the overall percentage of overweight and obese participants who elect to seek treatment.

Following is a summary of the retail and typical pharmacy prices for GLP-1 drugs. For those who have heard they are “expensive” but haven’t seen the real numbers, this is often a “Wow” moment.

*Gross annual cost reflects a rounded calculation of 12x the typical pharmacy cost. It does not take into account drug rebates for employers/carriers or discount coupons for participants.
 

What about rebates?

Rebates have a large impact and are an important element of the total cost for GLP-1 drugs. While the details of rebate contracts are very closely guarded by Pharmacy Benefit Managers (PBMs), it is generally accepted that rebates for GLP-1 drugs are in the 40%-50% range (based on retail pricing). Notably, this is another area where the experience of self-funded and fully insured employers will differ:

• Fully Insured Employers: Rebates will be paid to the insurance carrier (employers will not directly participate). While it is said that insurance carriers will use the rebates to offset overall fully insured premiums, the lack of transparency around these rebates is concerning to many employers.

• Self-Funded Employers: Rebates are typically passed through (at least in some measure) to self-funded employers. Therefore, self-funded plans will have the potential of direct cost impacts due to rebates (albeit delayed as rebates are paid in arrears).
   

What about drug coupons?

Essentially, all manufacturers have coupon offers that make the drugs significantly more affordable for plan participants. These coupons effectively waive or limit what would otherwise be high participant cost sharing for these medications. Manufacturers and PBMs arrange to accept a lesser copay or coinsurance amount from plan participants but “make it up” on the plan payment side where drug costs are not discounted. Traditionally, drug coupon programs are means-tested and reserved for those with limited income. However, with the potential dollars on the table for GLP-1 drug manufacturers, it may be that we see fewer such restrictions in the future.

There has been significant regulatory back and forth about whether the value of drug coupons should be counted toward the deductible and out-of-pocket expenses. Regulatory guidance has recently been clarified that the value of such coupons (which can be substantial) does NOT count toward a participant’s deductible and out-of-pocket expenses. The deductible and out-of-pocket expenses must be met by the participant paying in “real” dollars, not in coupon-equivalent dollars.
 

Manufacturer Direct-to-Consumer Model

Due to the tremendous potential market size, Lilly (the manufacturer of Zepbound™) has created a direct-to-consumer channel whereby individuals can obtain GLP-1 drugs while bypassing the traditional insurance plan and pharmacy channel. This new option combines a "convenience play" with a substantial direct discount if insurance is not available. The strategy aims to monetize direct consumer payments as full payment with the goal of lowering the “barrier to entry” and thus increasing sales volume.

There are also other companies and weight loss centers popping up as “Wellness Companies” that are promoting "compounded" versions of the active ingredients in GLP-1s. These are available at a reduced price, but consumers should beware that compound medications are not approved by the FDA or guaranteed.
 

Cost is THE Thing

Employers and insurance carriers everywhere are looking carefully at the issues of cost and efficacy. Essentially all stakeholders are working to understand the complex issues and to create a strategy around the cost of offering GLP-1 coverage for weight loss.

 

Prior Authorization Realities

Can everyone get the drug?

No. There is significant treatment alignment and cost-containment measures applied to GLP-1 medications for weight management. When GLP-1s are covered for obesity, the goal is to ensure that the medication is authorized only for those who meet the specific criteria. This assures both optimal clinical effectiveness for the patient and appropriate cost containment for plans.
 

Cost Containment Measures

Pharmacy Benefit Managers can and do apply the standard three cost containment “tools” to GLP-1s. These standard tools have varying degrees of effectiveness in containing costs based on the diagnosis and how the programs are structured.

Quantity Limits: This typically ensures that the supply prescribed does not exceed the FDA-approved label of the drug. It confirms that prescribers and patients aren’t using the drug at higher dosages than the indication calls for. In general, this isn’t likely to be a big cost-saver for employers. That said, it is reasonable to understand that typical quantity limits for GLP-1 medications range from 16-28 weeks for the initial prescription, with subsequent limits at 6-month intervals.

Step Therapy: In standard step therapy programs, patients are required to try one or more therapies prior to stepping up to a more expensive therapy. In the case of a diabetic patient, Metformin has been the standard first line of defense medication for decades. Initially, plans required patients to “step through” the less expensive Metformin treatment before taking GLP-1s; however, due to updated diabetes treatment guidelines, GLP-1s are being used earlier in diabetes treatment progression today. With regard to obesity, there are several other weight loss medications that could be used in a step therapy requirement prior to using GLP-1s. However, the other medications have not been shown to provide the level of weight reduction that the GLP-1s have. Thus, whether step therapy programs are required for an obesity diagnosis (providing the plan provides coverage for weight management drugs) is very plan-specific.

Prior Authorization: This is “the big thing” for GLP-1 therapy management. As such, it is addressed in more detail below.
 

Prior Authorization: Defining the Hoops to Jump Through

Plan sponsors, PBMs, and insurance carriers alike require a stringent pre-authorization process to qualify for GLP-1 treatment for weight loss. As an important point of distinction, across the board, pre-authorization (while still required under many plans) is becoming much more streamlined for plan participants with a diabetes diagnosis.

Plans can take various approaches to who they define as eligible and, thus, how the pre-authorization process is defined. The following outlines a progression of criteria that might be applied by a plan as part of the prior authorization process, in order from more lax to more strict.

• No Criteria: The plan contains no specific criteria for a non-diabetic individual to receive a GLP-1. (This option is rarely utilized.)

• BMI Only: The plan requires medical documentation of a BMI exceeding a specific threshold, typically greater than 30.

• BMI + Co-Morbidity: The plan requires medical documentation of a BMI exceeding a specific threshold (often greater than 27) AND medical documentation of a co-morbidity that is related to obesity. Examples include high blood pressure, dyslipidemia, heart disease, sleep apnea, cardiovascular disease, etc.

• BMI + 2 Co-Morbidities: As above, only the plan requires at least two co-morbidities related to obesity.

• BMI + Co-Morbidities + Lifestyle Modification: As above, only the plan requires proof of a diet plan and exercise regime (sustained for some period of time, typically six months).

• BMI + Lifestyle Modification Failure: The plan requires medical documentation of a BMI exceeding a specific threshold, typically greater than 30, AND medical documentation that lifestyle modification measures (diet and exercise) have been attempted for at least six months with no measurable results.

• BMI + Co-Morbidity + Lifestyle Modifications: As above, with a commitment that the participant will pair the drugs with lifestyle modifications.

• BMI + Co-Morbidity + Structured Weight Management Program: As above, with ongoing participation in an employer-sponsored weight management program. In some cases, employers are working with specialty vendors to provide structured programs that include resources such as behavior coaching, nutrition counseling, and exercise plan development.

There are usually specific variations of the adult criteria that apply to children (ages 12-18).
 

Re-Authorization

Higher BMI Requirement

Some employers see the benefit of adding coverage for GLP-1s for weight management but are concerned about the reality of the potential plan cost increase. To offer the benefit but better manage the cost, employers may increase the requisite BMI to 35 or higher, thus providing the benefit, but restricting availability (and cost exposure) to those with more severe obesity (and thus greater potential impact).
 

Lifestyle Coaching Programs as Gatekeepers for GLP-1s

When used as a treatment for obesity, GLP-1s are designed to be used in conjunction with diet and exercise behavior modifications. Essentially, all pre-authorization programs require at least concurrent commitment to lifestyle modifications, and many require 3-6 months of diet and exercise modification prior to gaining access to the medications.

Structured Programs: Many employers are considering providing additional support tools and programs for employees with obesity. In most cases, this comes in the form of partnering with an outsourced specialty vendor that provides structured virtual programs that include such resources as behavior coaching, nutrition counseling, and exercise plan development. In some cases, employers use active participation in these programs as a criterion for pre-authorization (thus taking some of the guesswork out of whether an employee is actively participating in the necessary lifestyle changes to support successful GLP-1 treatment).

The Challenge: The challenge comes in how such efforts are to be measured. Is self-attestation enough? Should they be measured by weight loss results over time? Is an improvement in biometrics relating to a co-morbidity (such as cholesterol or high blood pressure) sufficient? Or is active participation in a formal program of some sort required? Employers and PBMs alike are grappling with the questions of how to gauge satisfactory commitment to behavior modifications and what is considered an acceptable improvement as a result of such efforts in order to gain access or maintain access to GLP-1s.

A New Trend: Enter a new product in the marketplace. There is a new trend developing where employers are looking toward formal virtual lifestyle coaching or weight management programs to assist in managing access to GLP-1s for weight loss. Formal virtual lifestyle coaching programs are being developed, specifically to fill the role of both supporting employees in their behavior modification efforts and being the gatekeeper to the expensive GLP-1 medications. From the employer’s perspective, it takes some of the guesswork out of the process. An employer would sponsor the program and then plan participants interested in taking GLP-1s for weight loss would engage with the weight management program that involves diet and exercise for six months before they can get a GLP-1.

Ongoing Gatekeeping: The programs then also manage participants, ensuring they meet ongoing diet and exercise requirements to continue being prescribed the drugs.

Cost Issues: It is also important to recognize two cost impacts of this strategy. First, when access to GLP-1 medications for weight loss is “pushed off” for six months while behavior modifications are being kicked off, the plan is not incurring the monthly cost for the medications. Second, we must recognize that some participants will not “pass the test” and thus not get access to the expensive medications. This will both save employer claims dollars and focus the expenditures where there is a higher potential for success. Lastly, formal weight management or coaching programs are much less expensive than the cost of the GLP-1 drugs, so such a strategy can be seen as cost-effective.

The Goal: By using formal lifestyle and weight loss programs, employers are provided more assurance that the cost of the drug would be an investment worth making. Formal monitoring of the concomitant lifestyle modification requirements would provide plan oversight, and participants would have important support in making lifestyle modifications more possible.
 

Pre-Authorization Criteria Summary

As a rule, plans that cover GLP-1 medications for weight loss typically require some variation of the following three criteria to be met:

1. Participants qualify as obese (based on specific BMI measurements)

2. Participants have at least one additional, related health condition

3. Participants commit to pairing the drug treatment with the necessary lifestyle/behavior changes as a condition of receiving the medication. In some cases, structured weight management program participation may be required (including behavior management coaching and nutrition counseling).

As a reminder, the intention of the pre-authorization process is to balance cost and access to the treatment, specifically to reserve the treatment (and cost expenditure) for those who have met the criteria for a potentially positive outcome.

 

Final Thoughts

Conclusion

The landscape of GLP-1s for weight management is evolving rapidly. Employers will be called upon in the years to come to consider their approach to managing obesity, both from a pharmacy benefit perspective and from an overall population wellness perspective.

Plan design choices for smaller fully insured employers will be constrained by insurance carrier decisions. However, if a state coverage mandate passes, the costs for weight management drugs will be required to be borne by all.

Plan design decisions for larger, self-funded employers are a current decision point. Careful consideration should be given to projected costs and potential health and wellness benefits for the employee population.

Overall, employers should keep their ears to the ground on this issue. Tackling the obesity epidemic will not be a short-term endeavor, nor will it happen without significant cost and social change. That said, today’s employers and HR professionals are on the “ground floor” as critical decisions are made in how we address healthcare coverage and costs of treatments for obesity. Stay tuned!
 

References

California Obesity Treatment Parity Act

National Institutes of Health Overweight and Obesity Statistics

Diabetes 2030: Insights from Yesterday, Today, and Future Trends

Projected U.S. State-Level Prevalence of Adult Obesity and Severe Obesity



 

Administration

2023 Year-End Testing Time

It’s that time again! The beginning of the year is the kickoff for submitting your year-end census data for compliance testing. Sponsors of calendar-year 401(k) plans subject to the Average Deferral Percentage (“ADP”) or Average Contribution Percentage (“ACP”) Tests (i.e., all Non-Safe Harbor Plans) must submit their 2023 census data now to ensure timely results.

Be sure to submit your annual census data and compliance questionnaires to your recordkeepers by their specific deadlines. Providing your census data timely allows recordkeepers sufficient time to process the compliance tests and deliver results to you before March 15th, which is the deadline for employers to process corrective refunds (for failed ADP tests, if applicable) without paying a 10% excise tax. Please contact Vita Planning Group if you have questions regarding your recordkeeper’s year-end requirements. For other important dates on the horizon, download our online Compliance Calendar.
 

401(k) News

2024 Contribution Limits

The employee contribution limits for 2024 are:

2024 Elective Deferral Limit: $23,000

Additional Catch-Up Amount (age 50+): $7,500
 

Audit Threshold Methodology Change

As a reminder, last year, the Department of Labor issued a change to the methodology for determining if a retirement plan is considered “large” for the purpose of Form 5500 reporting and the need for an independent audit of a retirement plan.

The new guidance indicated that the 100-participant threshold for determining large plan status will be based only on the number of participants (actively employed and/or terminated) with balances as of the first day of each year. Previously, this threshold included all eligible employees, even those with no balance. The revised methodology is generally seen as a welcome change for those smaller employers on the cusp of being considered a large plan. This change took effect for plan years beginning on or after January 1, 2023.

We expect recordkeepers and/or third-party administrators to incorporate this new counting method in their compliance review and determination of audit requirements for plan year 2023.
 

Market Update¹

Despite numerous predictions of economic and market decline at the beginning of the year, both equity and bond markets rose substantially in 2023. Much of the rise was due to improving inflation figures in the second half of the year and the expectation of central bank easing in 2024 in the US and overseas. The US S&P 500 Index was up 26.6% in 2023, and the Bloomberg US Aggregate Bond Index was up 5.5% after having declined 18% and 13%, respectively, in 2022. These results are all the more remarkable as the S&P 500 fell 10%, and the Aggregate Bond Index declined 7% between July and October 2023. While US economic conditions are generally supportive of asset markets as we enter 2024, the biggest unknown is the US presidential election, which has historically heightened volatility throughout the year.

The US Bureau of Economic Analysis (“BEA”) announced that the US economy grew at an annual rate of 4.9% in Q3 2023, well in excess of the revised 2.1% growth in Q2². The Philadelphia Federal Reserve Bank’s survey of forecasters' median forecast for Q4 2023 GDP growth is unchanged at 1.2%, while the median forecast for the full year 2024 has crept up to 1.7%.³ The labor market continues to be strong. December 2023 saw non-farm payrolls grow by 216,000, and US unemployment was 3.7%, making this the longest period with unemployment below 4% since the 1960s⁴. The data would indicate that both American consumers and American businesses have shown great resilience during 2023 in maintaining consistent economic growth and healthy profit margins even with the current high level of interest rates.

Inflation has fallen from its most recent peak of 9% in June 2022 to 3% in December 2023, and the FED is now forecasting Core PCE inflation to be at 2.4% by the end of 2024. Lower inflation plus continued economic growth will allow the FED more leeway in determining its interest rate policy in 2024. The FED is still wary of the short-term impacts on inflation, such as OPEC production reductions that led to a spike in gasoline prices in the middle of 2023, but has stated its current round of interest rate increases is at an end with the possibility of cuts in interest rates in 2024 should the need arise.

Asset markets rallied strongly in Q4 2023. As we enter 2024, high equity and bond valuations may make it difficult to maintain the pace of asset market appreciation that we saw in the second half of 2023 into the first half of 2024. In addition to the heightened volatility that comes from a US election year, several market analysts think a mild recession is possible in 2024⁵. For example, Germany (Europe’s largest economy) is experiencing a contraction in economic activity due to a slowdown in the manufacturing sector and a decrease in demand from China⁶. In the short term, we will look to the consumer to sustain economic growth in the US while keeping an eye on geopolitical developments and their possible impact on markets. Wishing you health and prosperity in the new year. Please reach out to the Vita Planning Group with any questions or concerns.

Sources:

1. Unless otherwise indicated, data and commentary for the Market Update is sourced from two JPMorgan Asset Management sources: 1) Guide to the Markets – U.S. Economic and Market Update, 1Q 2024, December 31, 2024, and 2) the “1Q 2024 Guide to the Markets Webcast” on January 2, 2024.
2. https://www.bea.gov/data/gdp/gross-domestic-product
3. https://www.philadelphiafed.org/surveys-and-data/real-time-data-research/spf-q4-2023
4. https://www.bls.gov/news.release/pdf/empsit.pdf 5https://www.cnbc.com/2023/12/26/the-us-avoided-a-recession-in-2023-whats-the-outlook-for-2024
5. https://www.capitalgroup.com/advisor/insights/articles/2024-economic-outlook

Disclosures:

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.

+The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock's weight in the index proportionate to its market value.

++ Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.

The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market.

The MSCI All Country World Index ex USA Investable Market Index (IMI) captures large, mid and small cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 23 Emerging Markets (EM) countries*. With 6,062 constituents, the index covers approximately 99% of the global equity opportunity set outside the US.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.

The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

The FTSE NAREIT All Equity REITs Index is a free-float adjusted, market capitalization-weighted index of U.S. Equity REITs. Constituents of the Index include all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property.

The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies.


 

Summary: This applies to all employers offering medical plan coverage with a plan renewal date of January 1. The online disclosure must be completed by February 29, 2024 (assuming a calendar year medical plan contract).
 

Overview

Federal law requires that employers provide annual notification of the Medicare Part D Prescription Benefit "creditability" to employees prior to October 15th. However, that same law also requires plan sponsors to report creditability information directly to the Centers for Medicare and Medicaid Services (CMS) within 60 days of the first day of the contract year if coverage is offered to Part D-eligible individuals. Many employers have a January 1 renewal plan year. So, for many employers, the deadline is in a couple of weeks! If your plan renews sometime other than January 1, you have 60 days after the start of your plan year to complete this disclosure.
 

Mandatory Online Creditable Coverage Disclosure 

Virtually all employers are required to complete the online questionnaire at the CMS website, with the only exception being employers who have been approved for the Retiree Drug Subsidy (RDS). This disclosure requirement also applies to individual health insurance, government assistance programs, military coverage, and Medicare supplement plans. There is no alternative method to comply with this requirement! Please remember that you must provide this disclosure annually.

The required Disclosure Notice is made through the completion of the disclosure form on the CMS Creditable Coverage Disclosure web page. Click on the following link: CMS Disclosure Form.

Employers must also update their questionnaire if there has been a change to the creditability status of their prescription drug plan or if they terminate prescription drug benefits altogether.
 

Detailed Instructions and Screenshots are Available

If you would like additional information on completing the online disclosure, a detailed instruction guide is available online. The instructions also include helpful screenshots so that you will know what data to have handy. More info here: CMS Notification Instruction Guide.
 

Helpful Tip for Vita's Clients

The Medicare Part D creditability status of your medical plans is outlined in the Welfare Summary Plan Description that we provide to all clients. Please refer to this document as you will need this information to complete the online disclosure. 

Health and Welfare Benefit Plans

401(k) Plan Penalties

Genetic Information Nondiscrimination Act (GINA)

Other Penalties

Penalty Reality

The reality is that the DOL retains discretion to impose lower penalties, and, in certain circumstances, they do. It is, therefore, true that not all violations will result in maximum penalties being applied. That said, out-of-compliance employers should not bank on leniency in the assessment of penalties without a compelling reason for their non-compliance. While a certain measure of penalty moderation has been seen in the past, we think that the DOL’s enforcement efforts will continue to tighten in the future. 
 

References

Federal Civil Penalties Inflation Adjustments




 

California AB 716 will end “surprise” billing for ground ambulance services. As a state law, it applies to fully-insured plans written in the state of California. However, because of the ERISA pre-emption, it does not apply to self-funded plans.
 

Background

The federal No Surprises Act was passed by Congress in December 2020. In a nutshell, the law prohibits most surprise billing situations. Surprise billing situations can include: a patient who receives out-of-network services during an emergency room visit or while receiving care at an in-network hospital, as well as air ambulance charges. However, the protections in the No Surprises Act (as passed) do not extend to ground ambulance services.
 

What does the law require?

Payment Cap of In-Network Amount: The new law limits the amount that a non-network ambulance provider can charge, limiting charges to the amount a patient would pay for an in-network ambulance.

Must Count Toward Out-of-Pocket Max: The in-network cost-sharing amount paid by the insured must count toward the out-of-pocket maximum and count toward any deductible in an equivalent manner as for other in-network services.

No Balance Billing: Ambulance providers may not balance bill any portion of fees in excess of the in-network contracted payment amount.

Uninsured Individual Protections: The law also caps ambulance bills for uninsured individuals. Specifically, providers may not charge more than the Medi-Cal or Medicare rate, whichever is greater.

Payment Amount for Ambulance Providers: The bill specifies that if an ambulance provider does not have a contract agreement with the patient’s insurer, the health plan will pay the ambulance providers at rates negotiated and set locally through city or regional governments (also known as the Local Emergency Medical Authority or LEMSA rate).

Collections Restrictions: The law prohibits ambulance providers and debt collectors from reporting patients to a credit rating agency or taking legal action against them for at least 12 months after the initial ambulance bill (and then collection action is limited to the in-network contracted fee amount). In addition, wage garnishments or liens on primary residences may not be used as a means of collecting unpaid ambulance bills.
 

Is there an arbitration process?

The federal No Surprises Act included a process by which providers and insurers can enter into binding arbitration when an agreed-upon reimbursement rate cannot be achieved. The No Surprises Act arbitration process has been the subject of much effort, debate, and legal challenge since the inception of the act. Notably, there is NO equivalent clause in California’s AB 716. Rather, the bill simply states the amount insurers are to pay out-of-network ambulance providers.
 

So, are there no surprise ambulance bills anymore?

Not quite. The new law is projected to protect approximately 14 million individuals covered by fully insured health plans. Existing laws already protect Medicare and Medi-Cal beneficiaries from surprise ground ambulance bills. However, AB 716 does not apply to the nearly 6 million Californians enrolled in self-funded health plans. Recall that self-funded plans are exempt from state regulation and subject only to federal regulation under ERISA.
 

Effective Date

The law becomes effective for health insurance policies issued, amended, or renewed on or after January 1st, 2024.
 

References

AB 726 Ground Medical Transportation


 

The initial SECURE Act created a new class of plan participants called Long-Term Part-Time Employees or LTPT Employees. Employees in this new class must be given the right to make deferrals to 401(k) plans.

Certain plans may need to allow LTPT Employees to enroll starting January 1, 2024. The Treasury Department released proposed regulations to implement rules relating to LTPT Employees on November 27, 2023.
 

Definitions and Requirements

LTPT Employee: An LTPT employee is an individual who meets the following criteria:

• Worked three consecutive 12-month periods
• Worked at least 500 hours of service in each of those three 12-month periods

Hours/Years of Service: Hours and years of service are generally calculated the same as hours and years of service for other plan eligibility rules.

Exclusions: The rule does not apply to employees covered under a collective bargaining agreement and non-resident aliens with no U.S.-source earned income. 

Age 21 Criteria: Plans may also add additional criteria for employees to qualify for LTPT status that requires employees to reach age 21 by the end of the three-consecutive-year period to qualify. 

Election Rights: Plans are required to give qualifying LTPT Employees the ability to make elective deferrals in retirement plans. 

Qualification Timing: The initial 12-month period to determine eligibility for LTPT employees must be based on the employee’s date of hire. Subsequent 12-month periods may be determined by the first day of the plan year.

Entry Dates: Plans may use the same entry date timing for LTPT employees as applied to other eligible employees.

Employer Matching: Plan sponsors are not required to provide matching or non-elective contributions to LTPT employees. However, plan sponsors may elect to do so. This employer discretion is completely independent of whether the plan sponsor makes such contributions to other employees. A differential in matching contributions (between LTPT employees and other employees) would also not cause a 401(k) plan to fail the nondiscrimination tests.

Vesting: LTPT employees obtain a year of vesting service for each 12-month period in which they are credited with at least 500 hours of service. LTPT employees incur a one-year break in service when they have not completed at least 500 hours.

Top Heavy Considerations: Plan sponsors may exclude all LTPT employees from the application of top-heavy testing. However, LTPT employees are not excluded in determining whether the plan is a top-heavy plan.
 

Three-Year Rule Becomes Two-Year Rule

The duration requirement for LTPT employee qualification drops from three years to two years based on amendments enacted in the SECURE 2.0 Act.

Plan Years Before 2025: For plan years beginning before 2025, LTPT employees must meet the 500-hour threshold for three consecutive years. (As enacted in the initial SECURE Act.) 

Plan Years 2025 and Beyond: For plan years beginning after December 31, 2024, the three-consecutive-year requirement drops to a two-consecutive-year requirement. (Reflecting changes enacted in the SECURE 2.0 Act.)
 

Employer Action Item

Plan sponsors should review employment records from 2021 through 2023 to determine whether any LTPT employees should be given the opportunity to make elective deferrals in 2024. Note that 12-month periods starting on or after January 1, 2021, would count in determining if an employee qualifies as an LTPT employee.
 

References

Notice of Proposed Rulemaking: Long-Term, Part-Time Employee Rules for Cash or Deferred Arrangements Under Section 401(k), 26 CFR Part 1, 88 Fed. Reg. 82796 (Nov. 27, 2023).



 

The last of the employee benefits annual limits have now been released by the IRS. This summary includes recently released limits for Health FSAs, Dependent Care FSAs, Commute, and QSEHRA plans. Following is a recap comparing the 2023 numbers with the finalized 2024 numbers.

References

IRS Rev. Proc. 2023-23 (Covering HSA, HDHP, and EBHRA limits)

IRS Notice 2023-75 (Covering Retirement plan limits)

IRS Rev. Proc. 2023-xx (Covering FSAs, QSEHRAs, and Commute Plans)

Terms

HSA

The HSA is an individual Health Savings Account that is owned by the employee and may be used for the payment of medical expenses that are not covered by a qualified High Deductible Health Plan (HDHP), including expenses that go toward satisfying the deductible. This maximum is inclusive of employer and employee contributions.
 

FSA

A Health or Dependent Care Flexible Spending Account (FSA) allows participating employees to reduce their earnings on a pre-tax basis to pay for certain qualified expenses. Salary reductions provide significant tax savings to both the employee and the employer.
 

FSA Rollover (Carryover)

Employers may offer employees the option of rolling over a portion of their remaining Health FSA balance each year to be used in the same type of plan during the following plan year. The final balance that is available for rollover will be determined after the current plan year’s claim submission deadline.
 

Transit

The Transit Plan allows employees to set money aside on a pre-tax basis for mass transit expenses. Employees get to use tax-free money for their commuting expenses when traveling to and from work.
 

Parking 

The Parking Plan allows employees to set money aside on a pre-tax basis for work-related parking expenses. Employees get to use tax-free money for parking at or near an office location or mass transit hub.
 

Educational Assistance

Funds received through Employer-sponsored tuition assistance plans and educational assistance programs (EAPs) allow employees to generally exclude such amounts from their income when the funds are used to finance employee education-related expenses.

A new California law (SB 951) made two significant changes to the State Disability Insurance (SDI) and Paid Family Leave (PFL) programs.

1. Increased Benefit Levels: SDI and PFL benefit percentages are increased as follows. Unlike previous benefit increases, these benefit increases do not include a sunset provision.

• In 2024: Benefit levels of 60%-70% of Average Weekly Wages (AWW), which were initially effective in 2018, have been extended through the end of 2024. These increases would have reverted absent this legislation.
• In 2025: Benefit levels will be further increased to 70%-90%.

2. Elimination of Wage Cap: These benefit enhancements are funded by the elimination of the taxable wage limit on individual wages subject to the annual SDI withholding rate, effective January 1, 2024. The wage cap in 2023 was $153,164. In 2024, there will be no cap. 

Higher Benefits for Lower Wage Earners in 2025

The new program retains the current structure that reflects two tiers of benefits based on wages earned by employees. Higher benefit percentage levels are provided to workers who earn lower wages. The specific calculation is based on an employee’s quarterly wages compared to the average state wages. The formula is a bit convoluted, but a simplistic summary of the calculation can be expressed as follows: 

• Employees Earning Less than 70% of Average Weekly Wage: Benefits will increase up to 90% income replacement under both the PFL and SDI programs (up from the current 70%).
• Employees Earning More than 70% of Average Weekly Wage: Benefits will increase up to 63% income replacement under both the PFL and SDI programs (up from the current 60%).

The average wage figure is calculated based on employees covered by unemployment insurance in California, as reported to the Department of Labor. For context, in 2021, the average wage figure was approximately $70,000 (based on Bureau of Labor Statistics OEWS reporting). Currently, low-wage earners are eligible for 70% income replacement of their regular wages under the programs.
 

How does all this work in real life?

Frankly, the minimum benefit of 63% of AWW can be a bit confusing. It exists to protect people from getting a lower benefit if their income is just slightly over the 70% of AWW level.

The best way to understand this is to look at examples at various income levels. The following examples assume the AWW for 2025 is $1,642. This happens to be the 2024 AWW. This number will change in 2025, but we will use it for the purpose of these examples.

Note that the minimum benefit level of 63% of AWW creates a floor of benefits for individuals earning between 70%-90% of AWW. In short, it assures that no one will be financially penalized if their wages fall in the gap between the 90% and 70% benefit levels. Note the row in blue highlights the “crossover point” between the two benefit levels.

For reference, the average wage figure is calculated based on employees covered by unemployment insurance in California as reported to the Department of Labor. For context, in 2021, the average wage figure was approximately $70,000 (based on Bureau of Labor Statistics OEWS reporting). Currently, low-wage earners are eligible for 70% income replacement of their regular wages under the programs.
 

How is this funded?

SDI is funded by employee payroll contributions at a rate that varies each year. The required contribution has historically applied only up to a specific wage threshold (for example, in 2023, the wage limit is set at $153,164). To pay for the increase in benefits, SB 951 repeals the wage ceiling for contributions. This change makes all earned income subject to SDI contributions.
 

Effective Dates

January 1, 2024: For employee contribution increases (via repeal of wage ceiling).

January 1, 2025: For increased benefits for disability or family leaves.
 

When can this benefit be used?

Employees can apply for PFL or SDI benefits during an otherwise unpaid leave. This includes leaves for disability or medical needs, as well as leaves under California’s Pregnancy Disability Leave law, the California Family Rights Act, and the Family Medical Leave Act (FMLA) leave.
 

Contributions and Benefits by Year

The current benefit structure remains in place for 2023. Following are the updated wage and benefit thresholds. 

Impact of No Cap on High-Income Earners

The elimination of the wage cap will have a significant impact on high-income earners. Consider the following example:

Voluntary Disability Insurance (VDI) Plan Option

The California Employment Development Department (EDD) allows employers to opt out of the mandatory state program and offer a self-funded, voluntary disability and paid family leave program (VDI) to its California employees. This serves as a legal alternative to the mandatory SDI coverage (which includes paid family leave).

The EDD has created the Employer’s Guide to Voluntary Plan Procedures, which outlines the VDI process and considerations for employers. VDI plans must meet the following requirements: 

• Plans require written approval (a vote) from the majority of employees eligible for coverage.
• It cannot cost employees more than SDI.
• Provide all the same benefits as SDI plus at least one element that provides a benefit enhancement. (It should be noted that the EDD is approving what can only be called “micro-enhancements” to plans as acceptable enhancements.)
• Employees can reject the VDI and choose SDI coverage.
• Covered employees must be given a written document that outlines their benefits.
• Must be offered to all eligible California employees of the employer.
• Must be updated to match any increase in benefits that SDI implements due to legislation or approved regulation.

Employer Considerations

Employers will want to be aware of the elimination of the wage cap, noting the impact on higher wage earners and the payroll processing changesrequired. Additionally, larger employers will want to consider whether implementing a VDI program may be a suitable option moving forward. From a marketplace perspective, SDI administration vendors are focused on employers with more than 500 California employees. Careful consideration will need to be given to both EDD’s requirements and marketplace availability of VDI options.  Consideration will include a feasibility study which would include calculation of the security deposit and quarterly assessment paid by the employer to the EDD as the EDD still has oversight on VDI plans.

References

California SB951

EDD Voluntary Plan Procedures

Several years ago, the Department of Labor (DOL) investigated Prudential Life Insurance Company’s practices involving voluntary, supplemental group life insurance coverage. The issue was that premiums were paid by plan participants (via salary reduction) for extended periods of time, but after participants died, claims were denied on the grounds that the participants failed to provide evidence of insurability at the time they applied for the insurance.

Parallel investigations found that other life insurers also engaged in similar practices. The marketplace reality is that, absent this recent spotlight on these issues, many insurance companies have been guilty of varying degrees of sloppiness in syncing payroll deductions with underwriting approvals.
 

Settlement

In the settlement agreement, Prudential agreed to revise this practice and ensure that beneficiaries are not harmed in the event employers fail to verify that participants’ evidence of insurability was approved prior to collecting premiums. The specifics of the settlement prohibit Prudential from denying a beneficiary’s claim based on the lack of evidence of insurability when premiums were collected for more than three (3) months. In addition, formerly denied claims based on lack of evidence of insurability have been reprocessed.
 

Forward Guidance to All Insurance Companies

The DOL encouraged all insurers to examine their practices to ensure they are not engaged in similar conduct. Practically, it’s more correct to say the DOL issued a stern warning as they are greatly concerned about protecting participants and curtailing these types of practices.
 

Roadmap for Employers

This activity signals the DOL’s clear interest in protecting beneficiaries and presents an outline of DOL expectations for insurers and plan sponsors/employers in their administration of voluntary life insurance benefits. 

Importantly, what is at issue here is not that insurance companies have the right to deny applications for supplemental, voluntary life insurance (if a participant does not pass the insurability requirements). Rather, it is a problem when employees perceive that they have insurance (because they are paying premiums via salary deductions), but their coverage is not really in force because their evidence of insurance documentation was not submitted.
 

The Often-Missed Step: Split Salary Deductions Into Two Parts

Historically, errors were made by simply starting premium salary deductions for the entire life insurance benefit and the employer forwarding the full premium to the insurance company rather than withholding and forwarding just the premium amount due for the Guaranteed Issue (GI) benefit level. This simple administrative error created a disparity in how much insurance an employee was paying for – and believed they owned - vs. how much had been approved by the insurance company. 

The lesson for employers administering voluntary life insurance plans is that salary deductions must be split into two parts:

• The premium/salary deduction associated with any Guaranteed Issue (GI) insurance coverage, and
• The premium/salary deduction associated with any coverage that requires Evidence of Insurability (EOI). The following graphic illustrates the steps in the process for administration of this portion of the insurance coverage.

Employer Action Item

Employers should review their internal procedures as well as how they coordinate with their voluntary life insurance company. Specifically, employers should confirm that the following process elements are defined and implemented:

1. Split Premium: Split voluntary life premium into two parts. Commence salary deductions for the guaranteed issue portion only and delay salary deductions for any portion of the premium attributed to insurance that requires evidence of insurability.
2. Coordinate with Payroll: Coordination and communication between benefits and payroll departments are critical in defining and implementing processes.
3. Confirm Insurance Decision: Obtain documentation of insurance approval (or denial).
4. Commence Additional Deductions: Upon insurance approval, commence additional salary deductions.

References

 The settlement agreement can be referenced here.

There is a lot of noise in the news about long-term care. Some individuals, especially high-income earners, are urgently purchasing personal long-term care (LTC) policies. Some employers are considering implementing LTC policy offerings to aid employees who want to purchase individual policies. Still, others are suggesting that employers and individuals alike take a “wait and see” approach. So . . . what is going on, and why are there so many conflicting recommendations?
 

Let’s Start at the Very Beginning

Starting at the very beginning means understanding the long-term care problem in the United States. The problem is caused by a convergence of multiple social, economic, and financial challenges.

• The Cost of LTC Services: The cost for long-term care of all types has increased significantly over the past decades. In fact, costs have risen to levels that are not affordable for many, if not most individuals. While the actual cost of long-term care can be very location-specific, approximate costs fall as follows:

$7,600 per month for care in a long-term care facility (a.k.a. nursing home)

$3,600 per month for care in an assisted living facility

$68 per day for adult daycare

$20 per hour for home health aide

• Aging Population: There is a significant demographic shift in the population. The baby boomer generation is entering the stage where they begin needing long-term care services. The increasing percentage of elderly leads to concerns about the sustainability of care systems.
• Health Insurance Does Not Cover: Traditional health insurance plans do not provide coverage for long-term care services, because long-term care services are defined as custodial in nature, not medical in nature. Since services for long-term care are not considered medically necessary, they are not covered by health insurance or Medicare.
• Inadequate Home Care Infrastructure: While there is a decided preference for “aging in place,” there aren’t always sufficient resources or infrastructure to support this. The ultra-mobility of our society often means that families are spread far apart, a reality that does not lend itself easily to family care. In addition, for families with young children or career-focused individuals, changing lifestyles to care for a parent (as may have been the custom in prior generations) is not often considered a realistic solution.
• Financial Strain on Families: Families often bear the financial burden when institutional care is needed. This can lead to significant financial strain, forcing families to dip into savings or retirement funds.
• Lack of Awareness of Issues: Many people are unaware of the costs and needs associated with long-term care. As such, families are frequently unprepared for both the social and financial realities when a family member needs long-term care services.
• Lack of Funding for Social Services: Medicaid does provide long-term care services for individuals who have no assets and extremely limited income (and for many who have spent down the assets they did have paying for care). However, state budgets are also constrained and with LTC future cost projections rising, state governments are going to have to be creative in how they find ways to both pay for necessary long-term care services (for those on Medicaid) and ensure that facilities are available to meet the need.

Collectively, these challenges paint a bleak picture of the long-term care horizon. This is why there is a problem. This is why many people and states are seeking solutions. This is why you are hearing so much “noise” about long-term care in the news!
 

What happened in Washington state?

To solve their long-term care problem, Washington passed legislation that created the WA Cares Program. It is a mandatory long-term care program established to help residents afford long-term care services. Requiring mandatory participation helps to promote a broad coverage base.

• Funding: Funded by a payroll tax on employees. The tax is currently set at 0.58%. There is no wage cap, thus all earned income is taxed under the program.
• Benefits: $36,500 lifetime benefit to pay for long-term care services.
• Criticisms: Some actuarial projections indicate that the program will not remain solvent over the long-term given the aging population. There are also concerns about the adequacy of the lifetime benefit, given the rising costs of care. Lastly, there are design criticisms given that the tax must be paid by all residents. However, benefits are not available for residents who have paid the tax but later move out of state.
• Opt-Out Provision: The law allowed residents to opt out of paying the payroll tax if they purchased and maintain an “equivalent” individual LTC policy. The law allowed a six-month window in which to purchase an individual policy prior to the effective date of the program. The effect of the purchase window caused a run on policy purchases. Over 500,000 Washington residents purchased policies during the six-month window to opt out of the payroll tax. Who were those individuals? As a rule, they were residents with high incomes . . . for whom the payroll tax would typically be higher than the cost of the LTC policy premium. The knock-on effect of the mass opt-out is that many high-income earners will not be paying into the WA Cares program, thus, the program is at some risk of being underfunded or needing to raise the premium in the future.

What is happening now?

Many states across the country are considering following in Washinton’s footsteps and implementing a state-sponsored, mandated long-term care program. There are currently twelve (12) states considering such a program. These include Alaska, California, Colorado, Hawaii, Oregon, Illinois, Michigan, Minnesota, New York, North Carolina, Pennsylvania, and Utah.

States typically start with a “Feasibility Study” to review plan designs, actuarial cost projections, various taxation structures, and overall feasibility. The next step is to propose a bill for consideration by the legislative body. As an example of the process, California recently completed their Feasibility Study and Actuarial Analysis. No legislation has been proposed, but it is expected that a bill will be submitted in the 2024 legislative session. Then, there is the issue of the passability of the legislation. This is a matter that is unique to each state, where social needs, financial/tax cost, and political realities must be balanced in the various branches of state legislature. For most states, this process may take years. For some, it is possible that legislation may move quickly, intending to learn from Washington’s experiment and act swiftly to get a jump on the problem.
 

Will my state have an opt-out provision?

The one lesson most states will surely learn from Washington is that providing a future window to purchase a policy and secure an opt-out from taxation is not viable because of the potential to compromise the funding base for the program. In lieu of a future window, states will likely consider three potential options:

• No opt-out
• Opt-out if the private policy is in force prior to law passage
• Opt-out if the private policy is in force during the lookback period (12 months)

The reality is that no one knows which option may or may not be included in the legislation for any given state. This is why we see some recommendations to purchase a policy (just in case) and others that suggest a wait and see approach.
 

Why does income level matter?

The higher the income, the higher the payroll tax payment if your state passes a mandatory LTC program. Thus, the higher the income, the more advantageous it will be to purchase an individual policy that will allow an individual to opt out of the payroll tax.
 

Individual Considerations

What should I do? There is a high likelihood that, at some point, most people are likely to need long-term care services. The question is, how are you going to deal with that? There are multiple strategies to consider:

• Kick the Can: You can kick the can down the road and decide to simply deal with it later in life. The negative consequence of this strategy is that for too many people, “later” never really comes, and you end up not really having a solution. Also, LTC policies are significantly cheaper for younger people, so the kick-the-can-down-the-road strategy means that if you do choose to purchase a policy later, it will be more expensive.
• Run the Risk: You can wait to see if your state passes a mandatory LTC program and run the risk that enough pre-information will be available to make an informed decision before any deadline in your state.
• Bite the Bullet: The bite-the-bullet option means recognizing the reality that you will likely benefit from purchasing a private policy, both to protect your assets and to avoid any potential taxation from a mandated program. It entails considering your long-term risk and needs, reviewing policy options, and purchasing a personal LTC policy sooner rather than later. This strategy will put in place financial protection against future long-term care expenses. Depending on policy provisions and timing of purchase, this option may also allow you to opt out of taxation for a state program (depending on what the state program allows).

How much should I buy? Here, our recommendation is to purchase all that you NEED . . . and NO MORE. We are fans of “corridor insurance,” meaning purchase insurance for a portion of your expected need and plan to pay out of pocket for some portion of it as well. This keeps the policy premium lower and allows you to self-insure a portion of the risk. As an example, if you project that you will need a LTC services that cost $6,000 per month, you might consider purchasing a policy that covers $3,000 or $4,000 per month and then know that when you need LTC services, you will pay the balance out of your savings or assets. If you never need the services, then you save on premiums. If you do need the services, you have insurance for a portion of the expenses, and the remainder can more easily be taken from savings or assets without compromising the long-term viability of your financial profile.

Where should I buy LTC? The very first place to look is through your employer. If your employer offers a group option (either partially funded by your employer or fully paid by employees), this is usually the best place to start. Policies offered in the group marketplace are often more competitively priced (and they are portable when you leave your employer).
 

Employer Considerations

Depending on the phase of state legislative consideration, employers that are considering adding LTC to their benefits offering may want to do so sooner rather than later, as private LTC plans will likely need to be in place prior to the effective date of any state-wide program (if not sooner) for employees to opt-out of the state program (if opt-outs will be permitted). There also may be some concern over carrier capacity if there is a rush to implement a private plan, like what happened with the WA Cares program. 

There are multiple ways employers can implement LTC coverage.

• Sponsored Benefit: Employers can offer coverage with a subsidized base benefit and the option for individuals to buy-up to a more comprehensive policy (for themselves or their family members).
• Carve-Out Benefit: Employers can offer coverage with a subsidized base benefit for a subset of their population. For example, management or executive-level employees. Most insurance carriers require a minimum number of employees in the carve-out to offer coverage.
• Voluntary Benefit: Employers can launch a fully voluntary LTC benefit offering for their employees. This allows their employees to hop onto a group policy at the employees’ own expense. However, in all cases, insurance carriers require a minimum level of participation to offer any guaranteed issue coverage; otherwise, the policies would be fully underwritten individually. All such policies would be fully portable for employees upon termination.

It should be noted that there is no requirement for employers to offer LTC coverage to employees.
 

California Current State

In 2019, the California Assembly passed A.B. 567, which established a Long-Term Care Task Force within the California Department of Insurance to assess the feasibility of developing and implementing a culturally competent statewide insurance program for long-term care in California.

The Feasibility Report summarizes the program recommendations made by the Task Force and outlines the financial, administrative, and political feasibility considerations.

The Task Force proposed a progressive payroll tax, but declined to provide definitive direction on whether it would be imposed on employees, employers, or shared. Five (5) potential plan designs were defined, from basic coverage with a $36,000 benefit level to a very robust option with a $144,000 benefit level. The projected tax ranged from 0.50% to 2.4% of payroll for the plan design options outlined by the Task Force.

Various opt-out provision possibilities were addressed in the feasibility study, from none, to partial, to full. Timing options considered for the potential opt-out provision include a requirement to have private coverage in place prior to the law passing or having private coverage in place during a 12-month lookback period. In addition, consideration was given to a partial opt-out for individuals purchasing private coverage after the law was passed.

Importantly, whether there is sufficient political incentive to pass a law implementing a mandated LTC program (once proposed) is an entirely different matter. Pundits disagree on whether the political will and focus will exist to pass such legislation in the 2024 legislative session.
 

References

California AB 567
Feasibility Report
Feasibility Report FAQ
CA DOL Long Term Care Task Force