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2011 was the year in which employers began to amend their plans to comply with the health care reform law.
The initial changes were modest and relatively simple to put into place. For example, few employers had difficulty amending their plans to extend coverage—as the law requires—to employees' adult children up to age 26; previously, employers typically ended coverage at age 18 or 19, or 23 or 24 in the case of full-time college students.
The cost impact of the coverage expansion was modest, typically ranging from 0.5% to 1.5%. But the change also meant that about 1 million young adults gained coverage in the first quarter of 2011, the Department of Health and Human Services found.
Other design changes employers had to make this year included eliminating lifetime dollar limits and requiring employees to get a prescription to obtain reimbursement from their flexible spending accounts for over-the-counter medications.
At the same time, employers had to deal with a law whose requirements—thanks to congressional actions this year—continued to change.
For example, Congress, with Obama administration support, repealed a reform law provision that would have required employers to furnish 1099 statements when they did more than $600 in business with a corporate vendor starting in 2012. Small employers, in particular, complained of the administrative burden of complying with the requirement.
But the biggest health care reform law development of the year—the decision of the U.S. Supreme Court to review the constitutionality of the law's individual mandate—will not be decided until 2012 at the earliest.
The second round of the health care reform law—developing guidance and regulations to implement the Patient Protection and Affordable Care Act—provided a steady stream of rules and guidance this year.
Some information was straightforward and welcomed by employers. One example: April Internal Revenue Service guidance clarified that certain health care costs, such as dental and vision care, do not have to be included when employers comply with a requirement to report the cost of health care coverage on employees' W-2 wage and income statements.
Other rules dealt with narrow issues, such as a class exemption issued in August by the Department of Health and Human Services waiving through 2013 the requirement that sponsors of health reimbursement arrangements would have to seek exemptions from health care reform rules that restrict annual dollar limits on coverage of essential benefits.
In some cases, federal agencies signaled that rules being developed would ease employer concerns. For example, the IRS sought comment on a provision that suggests employers could be liable for a financial penalty if just one full-time employee were not offered coverage and the employee used a federal premium subsidy to get coverage through a state insurance exchange. The IRS said it wanted to know of “situations where application of the…assessable payment may not be appropriate.”
In the face of widespread criticism, agencies did an about-face in other situations. For example, three months after proposing that employers comply with health care plan benefit communication rules by March 23, 2012, regulators put off compliance indefinitely.
When 2011 began, employers had good reason to be optimistic about their pension plans' funding levels.
At the end of 2010, pension plans sponsored by employers in the S&P 1500 were on average 81% funded, thanks to a rally in the equities market, according to a Mercer L.L.C. analysis.
Pension funding continued to improve in 2011, hitting its high point in April, when plans on average were 88% funded.
But then the stock market slumped and interest rates declined. At the end of September, the average pension plan funding level had dropped to 72%, while the average funding level was 78% as of Nov. 30.
The result is that employers will have to put a lot more money into their pension plans next year. “We are talking about record contributions,” said John Ehrhardt, a principal with Milliman Inc. in New York.
In turn, that could lead more employers to freeze their defined benefit plans, a trend that began to pick up steam in 2003 and has accelerated sharply during the past several years.
On the health care cost front, 2011 was a year of bad news and good news.
The bad news was that health plan costs continued to rise, increasing 6.1% this year as average costs surpassed the $10,000-per-employee mark, according to a Mercer L.L.C. survey.
But there was good news, too. More employers added consumer-driven health care plans, which, many experts say, have much greater potential to hold down cost increases than other plan designs. Nearly one-third of large employers now offer CDHPs vs. virtually none a decade ago, Mercer found.
And nearly 90% of large employers, according to the Mercer survey, say they will add or strengthen programs to encourage employees to engage in more cost-conscious behavior, which, if successful, could mean smaller cost increases in the future.
For The Coca-Cola Co., innovation and captive employee benefit plan funding go hand in hand.
In March, the Atlanta-based nonalcoholic beverage giant unveiled a program in which it is using a Dublin-based captive insurer to fund benefits earned by pension plan participants in the United Kingdom, Ireland and Germany. Coca-Cola is using Coca-Cola Reinsurance Services Ltd. to reinsure group annuity products written by a top-rated European-based insurer—and purchased by its pension plans in the United Kingdom, Ireland and Germany.
Coca-Cola executives said the program, which has been in the planning stage for nearly two years, will generate significant operational efficiencies and potential financial advantages. Instead of dealing with a diverse group of pension plan trustees and investment managers for each plan in different countries, Coca-Cola can consolidate asset management through the captive.
In addition, if investment results are strong, the surplus generated would accrue to the captive and could be used by Coca-Cola rather than having to remain in the plan.
That approach follows a trailblazing arrangement—given Labor Department approval last year—for Coca-Cola to use its South Carolina-domiciled captive, Red Re Inc., and a special trust to fund health care obligations of retired U.S. employees and their dependents.
Coca-Cola is waiting for an Internal Revenue Service private letter ruling, which company executives expect in 2012, before proceeding.