Actuarial, Legal, Reporting and Disclosure

Judgment errors, secular trends, and random or statistical fluctuations

The course states that the actuary's role is to present facts, and those facts are that self-funding financial outcomes vary due to (1) judgment errors, (2) secular trends, and (3) random or statistical fluctuations.

The enrolled pension actuary designation, administered by the Joint Board of the Enrollment of Enrolled Actuaries

The course suggests a qualified health actuary designation comparable to the enrolled pension actuary. The Joint Board of the Enrollment of Enrolled Actuaries features a testing and qualifying process that has been useful in minimizing abuses in pensions, and similar results may be expected with health actuaries.

Claim reserves are now actuarially determined at the accountant's request and shown as a liability on the balance sheet for a large percentage of general asset plans

The course states that the original AICPA position was that a GAAP general asset self-funder did not have a FAS 5 contingent liability for claim reserves on its balance sheet. This position was reversed, and now such claim reserves are actuarially determined at the accountant's request for a large percentage of general asset plans.

Through the state insurance department as a regulatory requirement of plan licensing

The course lists four ways actuarial services are arranged: (1) directly to employer and plan, (2) indirectly through the plan supervisor/risk manager/consultant, (3) indirectly through the managing underwriter (intermediary or MGA), and (4) directly to MEWA, trusteed, or VEBA plans. State insurance departments are not listed as an arrangement channel.

To have a device to obtain credible and honest work products for health practitioners

The course states the goal of the enrolled actuary designation is 'to not only have good mathematicians do accurate work, but also to have a device to obtain credible and honest work products for the health practitioners.' The emphasis is on credibility and honesty, not just technical skill.

The insurer's actuary

The course states that where the self-funded plan is ASO-administered, the insurer's actuary will normally provide the needed actuarial services.

Only as a presenter of the facts, neither promotional nor adversarial

The course explicitly states that the role of the actuary should not be promotional or adversarial; rather, it should be only as a presenter of the facts.

The assumptions used to make the projection must be clearly disclosed

The course states that any actuarial determination must be experiential. Where no experience is available, the assumptions used to make the projection must be clearly disclosed. The actuary must project some type of plan cost, disclosing with specificity the basis of such projection.

Paid benefits by month

The course lists four essential statistics: paid benefits by month, annual benefits paid to providers in excess of $1,000, monthly and annual plan account reconciliation, and quarterly disability payments with FICA withhold. Monthly breakdown by age group is 'needed to reasonably monitor,' while claims by in-hospital service type and payment profiles are 'desirable but not essential.'

The maintenance and input of data is expensive and slows down processing time, and many employers neither need nor want the extensive data available

The course states that with large computer analyses, the unattractive features are that the maintenance and input of data to obtain the statistical output is expensive and slows down processing time; also, many employers neither need nor want the extensive data available to them.

It is not deemed to be statistical

The course explicitly states that information needed to complete IRS Form 990, DOL/IRS Form 5500, or IRS Form 1041 (needed for quarterly FICA reports or disability income payments) and the annual IRS Form 1099 statements to providers is not deemed to be statistical.

America's Health Insurance Plans (AHIP)

The course lists several sources of statistics: Society of Actuaries, Conference of Consulting Actuaries, CMS, International Foundation of Employee Benefit Plans, Social Security Administration, U.S. Chamber of Commerce, AHIP, Employee Benefit Research Institute, and Risk and Insurance Management Society.

Needed to reasonably monitor the plan

The course classifies savings due to certain plan provisions such as coordination of benefits or subrogation under 'needed to reasonably monitor the plan' — statistics that are needed but without which the plan could function in a legal way.

Common law neglect, fraud, and breach of fiduciary duties by not discovering the error

In the Equity Funding case, the actuary was party with others of insurer's management in perpetrating a massive fraud under SEC rules. The consulting actuarial firm was charged with (1) common law neglect, (2) fraud, and (3) breach of fiduciary duties by not discovering the error. The basic error was making up bogus insurance policies.

The actuary relied on industry-standard assumptions published by an actuarial organization

The course lists three usual defenses for the actuary: (1) there was no negligence, (2) any damages were not a result of negligence, and (3) others caused or contributed to the negligence. Reliance on industry-standard assumptions is not listed as a defense.

When plan assets were unaffected and no fraud or egregious act had been perpetrated by the actuary

The course states that courts have held the actuary did not commit an ERISA-contemplated professional breach so long as (a) plan assets were unaffected and (b) no fraud or egregious act had been perpetrated by the actuary. DOL regulations also provide that actuaries performing typical professional functions will generally not be considered ERISA fiduciaries.

Failure to discover fraud

The course identifies four causes of action: (1) failure to disclose pertinent facts, (2) failure to discover fraud, (3) negligent omission, and (4) unwarranted delays. The actuary will be in trouble if a showing of breach or negligence results in damages.

The court found the actuaries guilty of malpractice, fraud, and breach of fiduciary duties, and the insurer was required to pay benefits originally calculated

In Saffo v. Occidental, pension actuaries erred in understating plan costs. The employer reduced benefits below what had been promised. Participants sued the employer. The court found that the actuaries were guilty of malpractice, fraud, and breach of fiduciary duties. The insurer was required to pay benefits originally calculated.

A finding of fraud

The course states that for there to be a liability due to third-party reliance, normally there must be a finding of fraud. The actuary would be excused unless the certification involved lack of knowledge, reckless misstatement, or an opinion based on flimsy grounds.

It is one of seven categories of damages the actuary may be expected to pay

The course lists seven categories of damages: (1) money embezzled after discovery should have been made, (2) avoidable damages, (3) added taxes/penalties/fees, (4) punitive damages for reckless disregard or fraud, (5) unwarranted dividends, (6) losses in stock values, and (7) lost or refunded fees. Stock value losses are a separate category from punitive damages.

Whether the admitted errors resulted in the alleged damages — specifically, whether the client would have adopted the pension plan amendment had correct figures been presented

In the British Columbia Automobile Association case, the insurer and actuary were sued for breach of contract, fiduciary duties, and negligence. The errors were admitted; the issue was whether they resulted in alleged damages — specifically, would the client have adopted the pension plan amendment had the correct figures been presented? The errors were minor in nature.

The Deficit Reduction Act of 1984

The course states that the MEWA came into existence when ERISA was amended by the Deficit Reduction Act of 1984. The thrust of the federal legislation was that self-funded MEWAs should be permitted but subject to state regulation.

They are non-ERISA and noninsurance, so states like Iowa, Florida, California, and Ohio have enacted special statutes to regulate them

The course explains that self-funded government entity plans are basically unregulated because they are non-ERISA and also noninsurance. Several states, including Iowa, Florida, California (public schools), and Ohio, have enacted special statutes regulating such plans.

Compliance with federal ERISA fiduciary standards

The course lists four actuarial certifications required for governmental entity plans: (1) overall actuarial soundness, (2) presence of appropriate stop-loss coverage, (3) adequate claim reserve, and (4) appropriate level of plan contributions. Since governmental plans are non-ERISA, ERISA fiduciary compliance is not applicable.

ERISA Section 3(40)(A) provides states with this authority

The course states that many states have their own MEWA legislation demanding actuarially certified reserves in audited financial statements, and that states are provided with the authority to make this demand by ERISA Section 3(40)(A).

102% of the cost to the plan for similarly situated individuals who have not experienced a qualifying event

The COBRA statute provides that the maximum premium is 102% of the cost to the plan for similarly situated individuals who have not experienced a qualifying event. This 102% includes the full cost of coverage plus a 2% administrative fee.

The fully insured equivalent method, which may result in significantly overstated COBRA premiums because stop-loss often represents the worst-case scenario

The fully insured equivalent method bases COBRA premiums on stop-loss terms and is not recognized by COBRA law. The course warns that COBRA premiums under this method often represent the worst-case scenario and may be significantly overstated.

150% of the cost of coverage for the 11-month extension period

For individuals eligible for the disability extension, the plan can charge up to 150% of the cost of coverage for the 11-month extension period (months 19 through 29).

COBRA premiums for both divisions must be the same regardless of each division's different claims experience

The course states that where two divisions share a common plan (defined as one plan name, one plan sponsor, and one plan number) COBRA premiums for both divisions must be the same regardless of each division's different claims experience.

A benefit content analysis to measure the economic value between the high and low options and develop cost indices

The course states that when experience is composite but the plan has a high-low benefit structure, a benefit content analysis is needed. The example shows Plan Option A with a cost index of 100 and Plan Option B with a cost index of .88.

The participant and spouse may each elect COBRA as individual beneficiaries, making the 2.2 combined premium pointless or ineffectual

The course notes that a tier such as 1P; 2.2 P/S is illogical because the participant and spouse may each elect COBRA as individual beneficiaries, making the 2.2 combined premium pointless or ineffectual.

A COBRA participant can select against the plan by electing COBRA for only sick children while excluding healthy family members

The course states that having the participant premium high relative to the family is logical from a risk management standpoint when considering the ability of the COBRA participant to select against the plan by electing COBRA for two sick children only but not on the other family members in good health.

Such practice must be formalized in the plan document, and under the similarly situated rules, the variations must apply to COBRA premiums

The course states that nothing prevents a plan from considering age and geography as a factor in funding policy, so long as such practice is formalized in the plan document. Once established, such variations must apply to COBRA premiums under the similarly situated rules.

The method produces premiums that are consistently lower than the actuarially determined method

The course lists multiple reasons against the fully insured equivalent method but does NOT say it produces lower premiums. In fact, the course warns that it often overstates premiums. The method has been challenged legally, stop-loss is not part of the plan, and guaranty association coverage may not protect the employer.

Assume the COBRA beneficiary has a network option, regardless of whether the beneficiary is in the plan's geographic area

The course states that the preferred way is to have the COBRA premium calculation assume that the COBRA beneficiary has a network option, regardless of whether the beneficiary is in the plan's geographic area.

When there are significant changes in benefits, eligibility, census, etc., between the current and upcoming plan year

The course states that the past cost method projects past claims forward and spreads them among participants. It must be modified where there are significant changes in benefits, eligibility, census, etc., between the current and the upcoming plan year.

The claims-only portion of the COBRA premium

The course states that the claims-only portion of the COBRA premium should be used when establishing funding levels. COBRA premiums are also useful in setting participant contributions and for IRS Form 1099 purposes.

Determining the employer's annual tax deduction for plan contributions under IRC Section 419A

The course lists several beyond-COBRA uses: setting contributions, IRS Form 1099 for HCEs, determining participant contributions, funding purposes, and intercorporate expense transfers. It does not list determining the IRC Section 419A tax deduction as a use of COBRA premiums.

To determine the employer's annual stop-loss premium deduction

The three primary reasons are: (1) Tax-Related — trust filings require IBNR and in-course-of-settlement reserves, (2) Employer-Related — contingency reserve for GAAP filers under FAS 5, and (3) Compliance-Related — accountant's statement with DOL/IRS Form 5500 under SOP 92-6. Stop-loss premium deductions are not listed.

$30,000, because only reported claims (in-process $10,000 plus approved $20,000) are deductible and IBNR is not

Per Rev. Rul. 79-338 and U.S. v. General Dynamics, the employer may deduct only up to $30,000 (the $10,000 in-process claims plus $20,000 approved). The in-process claims are allowed because they are reported, even though not formally approved. The IBNR of $90,000 ($120,000 less $30,000) is not deductible for a general asset plan.

$120,000, because SOP 92-6 reserves are uncertain both as to nature and amount, and the smaller service-date reserve should be used for employer financials

The course states that the contingent liability of $120,000 might be recognized under FAS 5. The SOP 92-6 reserve of $200,000 should not be used because it is uncertain both as to nature and amount, so the smaller reserve of $120,000 should be used for employer financials.

$120,000 — the reserve for claims incurred but unpaid, which should be actuarially certified as claimable as a deduction

For a trusteed plan, the reserve of $120,000 for claims incurred but unpaid is required by IRC Section 419A(c)(1)(A). This reserve should be actuarially certified as claimable as a deduction, regardless of whether the employer follows GAAP rules.

$320,000 ($120,000 plus $200,000), offset by an asset titled 'Present Value of Future Plan Contributions' or similar

In accordance with SOP 92-6, the accountant would put the total plan liabilities at $320,000 ($120,000 plus $200,000). Such liability may be offset by an asset titled 'Present Value of Future Plan Contributions' or similar.

They are not subject to limitations for federal income purposes under IRC Sections 419A(f)(5) and (6)

The course states that reserves for non-employer plans (union, Taft-Hartley, employee-pay-all, or VEBA) are not subject to limitations for federal income purposes per IRC Sections 419A(f)(5) and (6).

One uses the date the service was provided as the incurred date, while the other uses the date of onset of the accident or illness (the SOP 92-6 liability)

The course states that two lag study formats should be provided: one with (a) an incurred date the service was provided and another with (b) an incurred date of the onset of the accident or illness. The (b) portion is the liability created by AICPA SOP 92-6.

Due to rapid maturation of the claims runout, which provides more accurate data

The course states that the computation should be delayed as long as possible, due to rapid maturation of the claims runout. As more claims are processed and paid, the lag study data becomes more complete and the reserve estimate more accurate.

The existing plan supervisor's actuary, because that actuary is familiar with the data, workflow will be smoother, and greater employer input is possible

The course states that if the fee of the plan supervisor's actuary is shopped for cost, the existing actuary's fee will usually be lowest because the actuary is familiar with the data, the workflow will be smoother, and greater employer input is possible.

Directly to the accountant, so as to achieve independence

The course states that once the reserve has been computed and the certification signed by the actuary, the document is usually transmitted to the accountant directly so as to achieve independence. Copies will normally be provided to the employer and plan supervisor.

Deductibility tracks the employer-sponsor, and the trust is merely the depository of claim reserves that determines the employer's tax liability

The course states that since the IRC Section 501(c)(9) trust is qualified and therefore nontaxable, the deductibility of contributions tracks the employer-sponsor and not the trust. The trust is merely the depository of the claim reserves that determines the employer's tax liability. This does not rule out taxes on unrelated trust income.

Qualified trust files IRS Form 990; nonqualified trust files IRS Form 1041

The course states that where the trust is qualified, a tax return, IRS Form 990, must be filed. Where the trust is nonqualified, IRS Form 1041 must be filed.