Products August 7, 2019

Mercer, Club Vita Team Up to Offer ZIP Code Model for Longevity

Honing in on each participant’s ZIP+4 code to capture a wealth of lifestyle information, and analyzing them alongside factors such as gender, annuity amount and retirement health, can help plan sponsors make more informed decisions on funding and risk management, often reducing costs.

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Club Vita, a provider of longevity risk data, has produced a new white paper, “Zooming in on ZIP Codes,” which explains how integrating CIP codes and identifying other socioeconomic factors can help pension plan sponsors have a better handle on the life expectancy estimates for their participants.

Club Vita teamed up with Mercer to develop a proprietary model, VitaCurves, that uses the nine-digit ZIP code, or ZIP+4 code. Employing the nine-digit ZIP code offers significantly more detail on geographical differences in life expectancy than other methods.

By honing in on each participant’s ZIP+4 code to capture a wealth of lifestyle information, and analyzing them alongside factors such as gender, annuity amount and retirement health, Club Vita can help plan sponsors make more informed decisions on funding and risk management, often reducing costs.

Statistics from the VitaCurves model identified specific characteristics of individuals within pension plans that resulted in increases and decreases of liabilities of up to 6% relative to the standard Society of Actuaries tables. With a reduction of liabilities on average, the paper says most plans could be over-valuing their liabilities.

Mercer has previously contended that industry-specific mortality tables also are more accurate for use in defined benefit (DB) plan assumptions.

“ZIP code modeling has several practical benefits for the risk management of pension promises for groups of individuals,” says Dan Reddy, CEO of Club Vita US. “Not only are ZIP codes insightful for assessing how healthy the lifestyles are of people living in different neighborhoods, but they are also readily available, so there is no need to collect sensitive individualized health information.”

Club Vita’s ZIP+4 code model will also facilitate the development of new products, allowing pension plans to prepare themselves for extreme longevity events, such as medical breakthroughs, while keeping control of plan assets. In addition, Douglas Anderson, founder of Club Vita, points out the reduction in uncertainty enables insurers of blocks of pensions to offer lower prices to take on this risk, which makes insurance more affordable and long-term pension promises more secure.

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Anderson adds, “The barrier to many pension plan sponsors using life insurers to secure participants’ benefits is the confidence in getting value for money, and that’s where ZIP code modeling helps. The amount of each retiree’s pension is unaffected and the security of the promise is strengthened.”

Club Vita’s ZIP code model will be available for use on September 1, 2019 by Mercer clients and any pension plan that signs up directly with Club Vita.

Opinions August 7, 2019

New Individual Coverage HRAs—Don’t Forget About ERISA

Damian A. Myers, with Proskauer Rose LLP, says employers can inadvertently subject individual market insurance policies to ERISA if they have too much involvement in selecting which policies are purchased through an individual coverage HRA.
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New regulations issued by the Departments of Labor, Treasury, and Health and Human Services have expanded the use of health reimbursement accounts (HRAs) by allowing reimbursements for individual market insurance premiums.

These new “individual coverage HRAs” are likely a welcome development for many employers, as they present a new opportunity to manage escalating health care benefit costs. Nevertheless, individual coverage HRAs are still subject to many legal requirements, such as the Employee Retirement Income Security Act (ERISA). Because ERISA applies to these HRAs, employers must be cognizant of the fiduciary duties, disclosure requirements—i.e., plan documents, summary plan descriptions (SPDs) and other communications—claims and appeals procedures and annual reporting that the act requires. Being subject to ERISA also means the HRAs must comply with the Consolidated Omnibus Budget Reconciliation Act (COBRA) and Health Insurance Portability and Accountability Act (HIPAA) requirements.

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But what about the individual market insurance policies that employees use HRA funds to purchase—could those be subject to ERISA? At a quick glance, one would think not. After all, individual market coverage can already be purchased without the use of an HRA and that coverage is not subject to ERISA. However, employers can inadvertently subject individual market insurance policies to ERISA if they have too much involvement in selecting which policies are purchased through an individual coverage HRA. ERISA’s application to these policies could be a nightmare—plan documents and SPDs would become unwieldy, annual reporting would become complex, and COBRA and HIPAA compliance would be a severe headache.

For that reason, the new regulations create a safe harbor for employers that establish individual coverage HRAs. The safe harbor generally tracks criteria recognized under similar safe harbor rules for voluntary employee benefit plans—i.e., common employee-paid voluntary insurance for things such as critical illness or accidents. To qualify for the safe harbor so that ERISA does not apply to the individual market insurance, all of the following conditions must be satisfied:

  • The purchase of any individual health insurance coverage must be voluntary. This essentially means that an employee must be able to opt out of the individual coverage HRA. To enroll in an individual coverage HRA, employees must purchase individual market coverage. However, the regulations provide that this requirement does not make the purchase “involuntary” for the purpose of the safe harbor.
  • The employer may not endorse an issuer or type of coverage. Employers may generally help employees navigate the marketplace but should take care not to steer them toward a particular health insurer or type of coverage. If access is provided to insurance brokers, the brokers must be made available on a uniform basis and without preference for any particular ones. Additionally, employers may not apply reimbursement procedures in a way that limits or endorses one insurer over another.
  • Reimbursement is limited solely to individual health insurance coverage. To comply with the safe harbor, only individual health coverage premiums may be reimbursed; coverage that consists solely of excepted benefits does not satisfy the safe harbor. That said, the HRA may reimburse Medicare premiums for Medicare beneficiaries without falling outside the safe harbor.
  • Employers may not get kickbacks. The preamble to the final regulations emphasizes that employers may not receive consideration or kickbacks from any insurance issuer or affiliated person in connection with an employee’s purchase or renewal of individual insurance coverage that is reimbursed by the HRA. Accordingly, compensation from third parties, such as individual insurers or brokers, to cover the cost of operating the HRA would not be permissible under the safe harbor. Plan assets would be available to pay plan expenses as in the normal case, provided that ERISA requirements are satisfied.
  • Each participant must be notified annually that the individual health insurance coverage is not subject to ERISA. This information is contained in the model notices provided along with the regulations.

Individual coverage HRAs may be an attractive benefit option for employees, but employers must be cognizant of legal requirements. Employers might want to limited the scope of insurance coverage available for purchase—e.g., through a private exchange—but such a limitation could expose the individual insurance to ERISA. When designing the scope of individual coverage HRAs and any private insurance exchange, employers should consult with counsel.

Damian Meyers is a senior counsel in the employee benefits and executive compensation group at Proskauer Rose LLP.

 

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services Inc. (ISS) or its affiliates.

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