SIIA Files Comment Letter with IRS Regarding Stop-Loss
MyHealthGuide Source: Self-Insurance Institute of America, Inc. (SIIA), 3/24/2011, www.SIIA.org
The Self-Insurance Institute of America, Inc. filed comments in a letter with the Internal Revenue Service (IRS) in response to the agency’s request for comments regarding the distinction between health insurance and stop-loss insurance.
As part of the new healthcare law, the IRS is tasked with setting new limits on the tax deduction for executive compensation. The new law also now extends the compensation deductibility limits to employers who sell “health insurance”.The stop-loss insurance connection is specified in the following excerpt from the IRS notice seeking comments from the public on:
• “The application of the deduction limitation for services performed for insurers who are captive or who provide reinsurance or stop loss insurance, and specifically with respect to stop loss insurance arrangements that effectively constitute a direct health insurance arrangement because the attachment point is so low.” (See IRS Notice 2011-2)
So, not only is the IRS asking insurance practitioners how they should treat, for example, stop-loss policies, the Agency is explicitly asking for comments on how they should treat these policies, especially policies with a low attachment point.
SIIA lobbyists expect to meet with IRS officials in person in the coming weeks to reinforce the submitted written comments. This is a developing story so watch for additional updates to follow.
SIIA’s comments letter (below) forcefully argues that stop-loss insurance should not be considered health insurance regardless of attachment point levels.
March 23, 2011 Internal Revenue Service CC:PA:LPD:RU (Notice 2011-02) Room 5203, PO Box 7604, Ben Franklin Station, Washington DC 20044Notice 2011-02 — Submitted Comments, Self-Insurance Institute of America
The comments below pertain to the question posed in IRS Notice 2011-02 (hereinto referred to as “notice”) whether IRS Code Section 162(m)(6) (as added to the Code by P.L. 111-148) applies to stop-loss policies used to reinsure employer-sponsors of self-insured health plans. Specifically, the points presented substantiate the clear notion that stop-loss, regardless of its contractually agreed upon attachment points, is to be regulated as liability insurance, not health insurance and as such, should not be an applicable entity of the discussed Code Section.
How Stop-Loss Works & How it is Used:
Unlike traditional group health insurance, stop-loss insurance does not cover individuals regardless of the attachment point. Rather, stop-loss insurance is a form of contractual liability coverage provided to the employer/plan sponsor for catastrophic claims. Stop-loss insurance is simply a risk transfer option of the employer used to protect the employer from what the employer determines to be a calamitous loss. There is no remedy right of any beneficiary against the stop-loss carrier and that carrier does not have any liability to any beneficiary, merely to the plan.
Definition of “Health Insurance Issuer” not Applicable to Stop-Loss:
The notice cites Section 9832(b)(2) to define employer “health insurance issuers” whom IRS Code Section 162(m)(6) applies.
• The term “health insurance issuer” means an insurance company, insurance service, or insurance organization (including a health maintenance organization, as defined in paragraph (3)) which is licensed to engage in the business of insurance in a State and which is subject to State law which regulates insurance (within the meaning of section 514(b)(2) of the Employee Retirement Income Security Act of 1974, as in effect on the date of the enactment of this section). Such term does not include a group health plan.
It has been long-standing practice that State Insurance Departments, in direct deference to the cited definition that the Department will reference to determine applicability, regulates stop-loss insurance policies not as health insurance, but as liability insurance. Stop-Loss insurance is not required under State law to comply with benefit mandates or administrative and solvency requirements levied on traditional health insurance carriers.
Stop-Loss not to be Regulated as Health Insurance — Regulatory Precedents:
A number of PPACA regulations should serve as a precedent for interpretation that stop-loss is not to be regulated as health insurance. When crafting the rules on plan changes and their affects on grandfathering status the regulators stated that while a change in health insurance carriers would jeopardize the plan’s grandfather status, changing stop-loss carriers would not. This is significant for two reasons. First, regulators distinguished that stop-loss is not a health insurance related product as changes to it do not affect the underlying plan. Secondly, in describing allowable plan changes, regulators specifically included stop-loss as a service provider — not as a component of the plan itself.
Additionally, upon releasing the rule that dealt with PPACA’s Medical Loss Ratio requirements, regulators again exempted stop-loss insurance as a compliant entity. This further shows that Federal regulators are on record distinguishing between, and recognizing, that traditional health insurance and stop-loss reinsurance are separate and unrelated products.
Stop-Loss not to be regulated as Health Insurance — Legal Precedents:
There are significant legal precedents establishing that stop-loss reinsurance is separate than health insurance and should not be regulated as such. The following are just a sample of existing legal precedents articulating that stop-loss is a separate and different product than commercial health insurance:
• Travelers Ins. Co. v. Cuomo, 14 F.3d 708,723 (2nd Cir. 1993) – (“Unlike traditional group health insurance, stop-loss insurance is akin to reinsurance in that it does not provide coverage directly to plan members or beneficiaries. Rather, most stop-loss policies provide coverage to the plan itself if the total amount of claims paid by the plan itself exceeds the amount of anticipated claims by a specific sum.”)
• Thompson v. Talquin Building Pools Co. 928 F.2d 649, 653 (4th Cir. 1991) – (“The purpose of the stop-loss is to protect [the employer] from catastrophic losses, it is not accident and health insurance for employees. Instead of covering employees directly, the stop-loss insurance covers the Plan itself.”)
• American Medical Security Inc. v. Bartlett, 111 F.3d 358, 360 (4th Cir. 1996) — (“Stop-loss insurance provides coverage to self-funded plans above a certain level of risk absorbed by the plan. It provides protection to the plan, not to the plan’s participants and beneficiaries, against benefit payments over the specified level, called the attachment point.”
• Brown v. Granatelli 897 F. 2d 1351, 1353 (5th Cir. 1990) — (“Holding that stop loss insurance is not “accident or sickness insurance” as defined in Texas statute. (Read literally, the stop-loss insurance policy purchased by the Plan is not an individual or group policy since it does not benefit individuals.”)
In conclusion, stop-loss insurance serves solely as an indemnity product used by employer-sponsors of health plans to reinsurance against catastrophic losses. Stop-loss carriers have no part in plan formation, plan modifications, plan administration or claims payment. Stop-loss policies only enter the plan equation at the time the employer-sponsor seeks reimbursement for claims they have paid above the contractually agreed upon levels.
Based upon the points raised throughout these comments along with existing legal and regulatory precedent, the Department should ultimately conclude that stop-loss insurance is an entirely separate and different product than health insurance and as such, Section 162(m)(6), nor any other requirement levied directly and solely to “health insurance issuers”, should not apply to stop-loss policies.
About SIIA
The Self-Insurance Institute of America is the nation’s only national association dedicated exclusively to protecting and promoting the self-insurance and alternative risk transfer industry. Visit www.SIIA.org.
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