Has a vendor ever approached you about offering a medical or pharmacy benefit separate from your medical plan? When you offer a program to employees other than those who participate in your medical plan, we refer to it as a ‘stand-alone’ plan. These types of programs can be an inexpensive way to provide at least some health-related benefit to all employees. But the buyer must always beware of the potential compliance risks inherent in a stand-alone plan structure. Often when something sounds too good to be true…it is!
It depends on the details of the program. This is one area where how the program is structured can make a big difference in terms of what laws and regulations apply. The kind(s) of benefits you offer as well as the depth and duration of coverage are important considerations.
In particular, if the program provides or pays the cost of medical care, then significant compliance obstacles may exist for providing the program on a stand-alone basis. That’s because a program that provides or pays the cost of medical care will likely be considered a group health plan and therefore subject to the full complement of laws that regulate them (unless an exception applies). Typically, that would include laws such as the Employee Retirement Income Security Act (ERISA), the Consolidated Omnibus Budget Reconciliation Act (COBRA), the Affordable Care Act (ACA), and the Health Insurance Portability and Accountability Act (HIPAA).
Let’s take a closer look at some of the key compliance considerations for a stand-alone program that meets the definition of a group health plan, as well as some potential exceptions.
ERISA – If ERISA applies, then the program will need its own written plan document and summary plan description. Depending on the size of the program, you may need to file a Form 5500. Other rules can present unique challenges, such as complying with ERISA-required claims procedures. And don’t forget about the additional responsibilities (and potential liability) that apply with ERISA fiduciary duties.
COBRA – If COBRA applies, participants who experience a qualifying event must be offered continuation coverage when they lose eligibility for the program, which means, among other things, that you must determine the applicable COBRA premium for the program. The program must also comply with all other notice, timing and other requirements under COBRA and that can become complicated without the assistance of a third party. Your current COBRA third-party administrator may or may not agree to take on these responsibilities for another program and if it does, you can expect to pay some additional cost.
ACA – Group health plans generally must comply with market reforms under the ACA. This would require, for example, that a program not contain any annual or lifetime limits on benefits and cover preventive benefits with no cost sharing. As you can imagine, this can be a substantial if not insurmountable burden for most stand-alone plans and failure to comply means stiff penalties of $100/day or $36,500/year/participant. Fortunately, some programs can satisfy an exemption, such as the one for excepted benefits, which would include on-site clinics and certain employee assistance programs (EAPs) that don’t provide significant benefits in the nature of medical care. For example, it is common to seek to structure stand-alone telemedicine to fall under the EAP exception.
HIPAA – Depending on program specifics, it may need to comply with HIPAA portability, nondiscrimination, special enrollment, and privacy and security rules. These rules require careful consideration of plan design and may include a significant documentary burden that can add to program cost. Certain exceptions can prove quite useful. For example, an on-site clinic that qualifies as an excepted benefit would avoid most of these requirements as well as the ACA market reforms mentioned above.
HSA Eligibility – If you also offer a medical plan that qualifies as a high-deductible health plan (HDHP), then another trap for the unwary may appear. A stand-alone group health plan would have to ensure it does not provide zero or low-cost benefits below the IRS minimum deductible to preserve HDHP participants' ability to fund a health savings account (HSA). We do have some limited relief from this rule, most notably for certain telemedicine programs and other remote care services that became permanent under the One Big Beautiful Bill Act (OBBBA). OBBBA builds on prior limited time relief that applied to plan years beginning before Jan. 1, 2025. It provides relief retroactive to plan years beginning after Dec. 31, 2024, allowing telehealth and other remote care programs to provide services before the IRS minimum deductible is met without impacting the HSA eligibility of program participants who participate in a HDHP. However, keep in mind that relief only impacts HSA eligibility…it does not exempt the program from the acronym soup of other laws that can affect group health plans!
The easiest way to satisfy the compliance obligations that apply to supplemental programs that are considered group health plans is to bundle the program with your major medical plan. That means that you can only offer the program to medical plan enrollees and would need to take certain steps to include the program as part of your medical plan (e.g., add language indicating it is part of the medical plan, etc.). While not all the above key compliance obligations are non-starters, the ACA market reforms are difficult if not impossible for most programs to meet on a stand-alone basis.
Here are some practical tips you can follow to make sure the supplemental plan you are considering will not get you into trouble. Ask questions! Inquire about what laws apply to the program, how it complies with applicable laws and whether they have obtained a legal opinion along those lines. On the subject of legal opinions, keep in mind that a legal opinion is only as good as the source that provides it. If it comes from an attorney who does not practice in the area of employee benefits, it may not be trustworthy. Remember, if a vendor offering a stand-alone plan tells you that none of their clients have gotten in trouble, that’s not the same thing as their program being compliant. There may still be significant risks. If possible, ensure your company’s employee benefits attorneys have reviewed the program and are comfortable with it.
In the end, don’t despair! It may be that bundling the program with your major medical program or making a few tweaks to the program’s parameters is all that’s needed to create a great new benefit that does not add potentially bank-breaking liability to your bottom line.
This document is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Marsh & McLennan Agency LLC shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any statements concerning actuarial, tax, accounting or legal matters are based solely on our experience as consultants and are not to be relied upon as actuarial, accounting, tax or legal advice, for which you should consult your own professional advisors. Any modeling analytics or projections are subject to inherent uncertainty and the analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change.
Stacey Stewart, JD, LLM in Taxation
Employee Benefits Compliance Team
