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November 16 2011

Publicly-Funded Health Insurance Contribution Act

By: Timothy J. Tornga

 

Recently the Michigan legislature adopted a law limiting the flexibility of cities, villages, townships, counties and other Michigan public employers providing medical benefit plans for their employees and elected public officials. Governor Snyder signed the legislation and it became effective September 27, 2011. This law is known as PA 152 and can also be found at MCL sections 15.561-569.

Depending on the individual circumstances, it may be advisable for a public employer to take action before January 1, 2012 to ensure that the requirements of Act 152 are applied in the most appropriate manner.

Hard Cap Rule

A Michigan public employer may not pay employee medical expenses that are more than the aggregate of $5,500 times the number of employees with single coverage, $11,000 times the number of employees with individual and spouse coverage and $15,000 times the number of employees with family coverage for any medical benefit plan coverage year beginning on or after January 1, 2012. These limits apply to public employer payments for health insurance premiums, the illustrated rate for a self-insured plan, payment or reimbursement of co-pays and deductibles and payments into a health savings account, a flexible spending account or similar accounts used for health care costs. The term “medical benefit plan” does not include benefits provided to retirees.

These costs may be allocated by a public employer among its employees and elected public officials as the public employer “sees fit,” but the aggregate amount cannot exceed the amount produced by application of the above-described formula-based approach. This formula approach is the general rule (the “Hard Cap Rule”) applicable to each public employer in the state, including the state itself. This Hard Cap Rule applies whether or not the public employer adopts a resolution to comply with this requirement. The monetary levels for the single person, couple and family coverage categories are subject to annual indexing according to the medical care component of the US Consumer Price Index.

In the case of collectively bargained employees, the employer may continue payments that are inconsistent with Act 152 until the contract expires and these payments will be excluded from the Hard Cap Rule if the contract was signed before September 15, 2011. A contract or extension signed on or after September 15, 2011 must be consistent with the provisions of Act 152.

80/20 Option

An exception to the Hard Cap Rule is provided by Section 4 of Act 152, which provides that a public employer may elect, by majority vote, to pay not more than 80% of the total annual costs of all of the medical benefit plans it offers or contributes to for its employees and elected public officials “for a medical benefit plan coverage year.” As with the Hard Cap Rule, these limits apply to public employer payments for health insurance premiums, the illustrated rate for a self-insured plan, payment or reimbursement of co-pays and deductibles and payments into a health savings account, a flexible spending account or similar accounts used for health care costs. Employee payments for deductibles, co-payments, contributions to a health savings account or flexible spending account and similar employee expenses are not considered in determining and applying the 20% limit.
This means that the employees and elected public officials of the public employer covered for the medical benefit plan must collectively pay 20% or more of the annual costs of the medical benefit plan. A special rule requires elected public officials to pay 20% or more of the total annual costs of the medical benefits, thus preventing any employee subsidy or other preference in favor of elected public officials. This exception to the Hard Cap Rule is known as the “80/20 Option.”

Whether or not a public agency is subject to the provisions of Act 152 depends on whether the public agency is a “public employer” or a “local unit of government” or both, as defined in Act 152.

Two Alternative Courses of Action for a Public Employer

A “public employer” is defined in Section 2(f) of Act 152 as:

“this state; a local unit of government or other political subdivision of this state; any intergovernmental, metropolitan, or local department, agency, or authority, or other local political subdivision; a school district, a public school academy, or an intermediate school district, as those terms are defined in sections 4 to 6 of the revised school code, 1976 PA 451, MCL 380.4 to 380.6; a community college or junior college described in section 7 of article VIII of the state constitution of 1963; or an institution of higher education described in section 4 of article VIII of the state constitution of 1963.”

Act 152 provides two alternative courses of action for public employers with respect to the payment of the cost of medical benefit plans. A public employer may decide to remain subject to the $5,000/$11,000/$15,000 Hard Cap Rule. Alternatively, if it makes sense from an economic and human resources standpoint, the public employer may elect to invoke the 80/20 Option instead of the Hard Cap Rule, but only by a majority vote. If a public employer takes no action, it will be subject to the Hard Cap Rule, except to the extent that any collective bargaining agreement signed before September 15, 2011 provides for a greater employer contribution.

Three Alternative Courses of Action Available to a Local Unit of Government

As defined in Section 2(d) of Act 152, a “local unit of government” is a “subset” of the broader term “public employer.” A local unit of government is:

“a city, village, township, or county, a municipal electric utility system as defined in section 4 of the Michigan energy employment act of 1976, 1976 PA 448, MCL 460.804, an authority created under chapter VI A of the aeronautics code of the state of Michigan, 1945 PA 327, MCL 259.108 to 259.125c, or [the Huron-Clinton Metropolitan Authority]”

Since a “local unit of government” is also a “public employer,” a local unit of government may choose to operate under the Hard Cap Rule or may elect the 80/20 Option discussed above with regard to a “public employer.” In addition, a local unit of government, in accordance with Section 8 of Act 152, by a two-thirds vote of its governing body each year, may exempt itself altogether from the requirements of Act 152 for the next succeeding year. Thus, for a medical benefit plan coverage year that begins January 1, 2012, this two-thirds vote must be secured at a meeting of the governing board of the local unit of government held no later than December 31, 2011. Further, a two-thirds vote of the governing body of the local unit of government is required to extend the exemption for each subsequent year.

This exemption or opt-out alternative is only available to a local unit of government and is not available to other public employers that do not also qualify as a local unit of government. As a result, schools at all levels and most public authorities do not have the additional flexibility to opt out.

Penalties

Public employers that fail to comply with PA 152 are subject to penalties. The state treasurer is authorized to reduce economic vitality incentive program payments by 10% or assess a penalty of 10% of any funds due under the school aid act of 1979.

Unanswered Questions

Like many new statutes there are questions that arise under, but are not expressly addressed by Act 152:

  1. Are there any public entities that are exempt (not public employers)?
  2. Does this diminish the pay of an elected official while in office?
  3. Must the vote to adopt the 80/20 rule occur each year or may the initial vote apply to the coverage year and each succeeding year until revoked?
  4. Must the vote to adopt the 80/20 rule occur before the first day of the year? Prudence and practical reasons suggest that the vote occur before the beginning of the year. And if required before the year, does this refer to the calendar year or, if different from the calendar year, the coverage year?
  5. For benefit plan coverage years beginning after January 1, 2012, what is the date by which action must be taken? We believe that action must occur before the first day of the benefit plan coverage year. Those wishing to be extra cautious may wish to take action before January 1, 2012.
  6. In the case of the opt-out vote, does “for the next succeeding year” require the vote before the calendar year or before the coverage year? Again, we believe that action must be taken before the coverage year.

Assistance

If you would like guidance on the relevant requirements of Act 152 or if you would like us to prepare appropriate resolutions to implement courses of action available under Act 152, please contact Tim Tornga or another member of the Local Government Practice Group of Mika Meyers.

Related Newsletters
"Publicly-Funded Health Insurance Contribution Act," 11/16/2011