On September 20, 2011, Governor Rick Snyder signed into law the Health Insurance Claims Assessment Act (Public Act 142 of 2011 – MCL § 550.1731, et seq.)  The Act, which became effective January 1, 2012, will increase the cost for employers providing health benefits to their employees for the next two years and mandates a 1% assessment on eligible paid health claims incurred in Michigan by Michigan residents. 

The Act broadly defines the “paid claims” that are assessed the 1% surcharge.  Eligible “paid claims” include actual payments made to a health and medical services provider or reimbursed to an individual by a third party administrator, excess loss or stop loss carrier, a property or casualty carrier, or any other type of carrier, including an insurer, health care corporation, or group plan sponsor.  Under the Act, paid claims include payments:

  • made under a service contract for administrative services;
  • cost-plus or noninsured benefit plan arrangements; 
  • for health and medical services provided under group health plans; and
  • for individuals, nongroup, and group insurance coverage to residents of Michigan that affect the rights of an insured person in Michigan and bear a reasonable relation to Michigan, even if the coverage is not delivered, renewed, or issued for delivery in Michigan.

Several categories of payments are exempted from the definition of paid claims including:

  • claims-related expenses;
  • certain payments under an incentive compensation arrangement;
  • claims for specified payments under forms of insurance other than health insurance (e.g. homeowners or automotive insurance);
  • claims for services provided to a nonresident of Michigan or for services provided outside the state to a Michigan resident;
  • claims for federal employees or payments made by Medicare, Medicaid, and the Veterans Administration;
  • FSA reimbursements; and
  • Co-pays, deductibles, and other healthcare costs paid by an individual.  

Under the Act, an individual can be charged a maximum of $10,000.00 per year.  The tax must be applied uniformly and without regard to health status or claim experience.

Insurance carriers are permitted to pass the tax on to employers.  While employers are also permitted to pass the tax on to employees, many employers will not be able to immediately do so.  If an employer is party to a collective bargaining agreement, the subject of passing the cost to employees must be bargained with the union since it involves altering a mandatory subject of bargaining.  To fulfill its duty to bargain, a unionized employer must advise the union that it intends to pass this cost on to its employees.  If the union agrees to the change or waives its right to negotiate over the matter, the employer may institute the increased cost.  On the other hand, should the union demand to bargain over the increase, the employer may not impose the cost on employees until reaching a negotiated agreement or reaching impasse in negotiations.

Additionally, due to non-discrimination rules and COBRA regulations, employers with 20 or more employees (part-time employees count as a fraction of an employee) are left with the choice of passing the tax on to all its employees and individuals utilizing COBRA benefits or to no one at all.  Even then, COBRA regulations prohibit increasing premiums for COBRA beneficiaries more than once a year.  Specifically, under the regulations, premium rates must be computed and fixed before the determination period begins.  If an employer’s open enrollment period has already ended and the COBRA rate has already been set, the employer may not pass this tax on to its employees until next year’s chance to change rates.  

Because COBRA regulated employers must evenhandedly impose this tax on all affected individuals, unionized employers subject to COBRA should immediately begin negotiations to reach agreement on the matter before their next open enrollment period ends.  If employers are unable to impose the tax on unionized employees by the next open enrollment period, they could violate COBRA by only imposing the tax on the remainder of their employees and COBRA beneficiaries. 

Essentially, only non-unionized employers, employing fewer than 20 employees, can immediately pass costs associated with this tax on to their employees.  Unfortunately, given the regulatory field in this area, many employers will find themselves unable to avoid shouldering this increased burden for the next two years. 

If you have questions regarding the impact of this recent decision on your business or other labor and employment law matters please contact Masud Labor Law Group.