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Old Deficit Law Triggers Modern Stop-Loss Misunderstanding

Historical perspective from SPBA Past President Fred Hunt

This is a sample of "big picture" perspective pieces constantly prepared for SPBA members.  There are alo detailed technical analysis of issues with insider insights for compliance.

(Those who do not know history are doomed to repeat it.  Or, in this case, to create more problems.)

Laws have a tendency to trigger unintended consequences.  A very modern misunderstanding was triggered 30 years ago by the Deficit Reduction Act (DEFRA) of 1984.  It was the government’s first specific deficit-reduction law.  One provision limited allowable reserves for funded health & welfare plans.  IRS requested it, because of the “revenue loss” (untaxable money) being held as reserves for self-funded health plans.

During the legislative process, there was lots of double-talk about safe-harbors and such.  Once signed into law, the IRS made it clear that they essentially wanted self-funded health plans to have zero reserves.  If a plan had a good year, and some money was left over (more plans pre-paid for the year in those days), that was OK, but that money could not be set aside for a rainy day, and the contributions for the next year should be adjusted to aim for a zero balance at the end.  This also caused plans to henceforth target contribution amounts to the zero leftover mark.

Irony #1:  This same DEFRA law added some new mandates that made predicting yearly health costs far less predictable, such as Medicare Secondary Payor & Veterans Secondary Payor, which can have surprise costs emerging years later.  The ensuing 30 years have seen a steady stream of mandates & requirements that impact plan cost predictability, such as COBRA etc. etc.

Irony #2:  During this same period 30 years ago, Congress was very worried that employers were not setting aside adequate reserves for their pension employee benefits, and there is even a government agency as a back-up to those reserves.

While Congress & IRS were saying that employers should keep no reserves to pay surprise or extra-high medical costs, the Department of Labor was reiterating the ERISA fiduciary duty of employers to be sure to be able to pay any and every promised benefit.  It is an odd Catch 22 that continues today.

DEFRA marked the burst of growth of Stop-Loss.  Prohibited from having reserves, employers sought other ways to ensure money to pay for unexpected costs.  Stop-Loss filled that IRS-induced need.  Stop-Loss also adapted as employers sought plan designs very personalized to the wants & needs of each workforce and workforces that tend to have unpredictable ups and downs of health costs.

Today’s misunderstanding is that some state and other officials (unaware of the DEFRA history) think Stop-Loss is a “sham”, and should be allowed to have only very high attachment trigger points.  This is both illogical and counter-productive.  Illogical, because, if not for DEFRA, employers would have built up appropriate reserves for emergencies, and Stop-Loss would be only for catastrophically large losses.  However, stripped of the right to have any reserves, even $20,000 attachment points can quickly add up and hurt the ability to carry on business.  

Critics tend to focus on small employers, but think of the number of America’s largest employers who are under financial strain.  Also, stock markets are now extremely attentive to any down-tick of profit in a quarter, so one or a few big health losses can make the firm look like its overall value is falling and stock value declines, so the ramifications for jobs & continuity of businesses is far beyond the health plan.

Also, if there had been no DEFRA, and if employers & plans were holding reserves, those moneys (now the role played by Stop-Loss) would be available first-dollar for any surprise situations.  So, the attachment point trigger would be irrelevant, just as some people of all income levels pick $100 deductible and some people pick $1,000 deductible on their car insurance.

So, the moral of this story is that a nearly-forgotten federal deficit-reduction law 30 years ago still rules us.  A working solution, Stop-Loss, was found to protect workers and the stability of employers.  Understanding that context, obviously, applying minimum attachment points or any discouragements to the work of Stop-Loss is counter-productive.