What you should know about Hawaii’s Prepaid Health Care Act

While employers in most states only need to consider the Affordable Care Act's (ACA) employer mandate when it comes to determining if they need to provide health benefits, this isn't always the case. Employers with employees in Hawaii have the Prepaid Health Care Act (PHCA) to consider. This health coverage law supersedes the ACA's federal minimum requirements for care. As an employer, you need to know the laws this unique healthcare coverage act contains if you have or plan to hire employees in Hawaii.

In this article, we'll cover the Hawaii Prepaid Health Care Act, how it works, and which health benefits are compatible with the law.

Looking for a flexible way to offer medical benefits to your employees? Learn more about health reimbursement arrangements (HRAs) in our guide

What is the Hawaii Prepaid Health Care Act?

Initially passed in 1974 and reenacted in 1981, PHCA, also known as the Hawaii employer mandate, contains essential requirements regarding employer-sponsored health plans. Hawaii was the first state to set minimum standards for health care benefits provided by employers.

These rules affect all employers in Hawaii with at least one employee working an average of 20 hours per week for four consecutive weeks. Under the act, these employees must be able to access employer-sponsored health insurance without having to pay more than a minimal share of premium costs.

While there are exceptions for those employed by family members, agricultural workers, insurance and real estate agents who work commission-only, and seasonal workers, most employees who work 20 hours or more each week are guaranteed employer health coverage under the law.

However, employees can seek an exemption from these requirements if they are already covered.

You need to be aware of the PHCA regulations as they impose stricter rules for employers in Hawaii than the ACA, which was passed federally in 2010 and only applies to organizations with 50 or more FTEs.

While there are numerous pieces to the law, we've summarized the main points in the sections below.

PHCA is exempt from ERISA

Congress amended the Employee Retirement Income Security Act (ERISA) in 1983¹ to exclude the PHCA from ERISA preemption.

The PHCA is the only state plan exempt from ERISA's preemption.

This means that the PHCA in Hawaii can skirt ERISA rules and act as the state's main authority regarding employer healthcare.

Healthcare plans must be “Hawaii-approved” or otherwise eligible

Employers can provide acceptable coverage by selecting compliant health plans² from a licensed insurance carrier, utilizing a self-insured health plan (Form HC-4³, Form HC-61⁴), or by purchasing a plan of their choice.

With the last option, the employer selects the healthcare contractor and the plan type.

Under the law, employer-sponsored health insurance must be equal to the plan with the most subscribers in Hawaii. Currently, the most popular plans are offered by the Hawaii Medical Service Association and Kaiser Permanente. This is known as a 7(a) plan.

Employers can also offer 7(b) plans that are more limited in their benefits or that have fewer benefits than a 7(a) plan. However, these plans will require more significant employer contributions to healthcare.

Employees working 20 or more hours per week must be offered coverage

The PHCA requires employers to provide comprehensive health insurance coverage to employees who work an average of 20 hours or more per week in a four-week period and earn a monthly wage of at least 86.67 times the state’s minimum hourly wage⁵. This includes some temporary or seasonal employees.

Under the ACA, you only need to provide health coverage to full-time employees who work 30 or more hours each week, meaning you'll need to provide coverage to more employees in Hawaii than you might in other states.

Failure to provide coverage to workers can result in $1 per worker per day fines in addition to any medical costs those workers incur.

Employees can't pay more than 1.5% of their income

Under the PHCA, employers can't require an employee to pay more than 1.5% of their gross monthly wages for the cost of self-only coverage. Due to this rule, many employers cover the total cost of employee premiums.

For example, suppose your employee earns $5,000 per month and has a monthly insurance premium of $300. In that case, your employee can't be required to contribute more than $75 per month since anything above $75 would exceed 1.5% of their monthly income.

Employers are required to cover half of premiums

Employers are required to either pay the entire monthly premium for their employees or to share the cost by covering at least half of the premium for employee-only coverage. In other words, an employee will never be responsible for more than half of their total health insurance premium for self-only coverage.

Premiums for dependent coverage

Employers generally require employees to cover 100% of the premium cost for dependents with a 7(a) plan. In some instances, the employer is required to cover up to half of one dependent's coverage. This is a requirement when the dependent's coverage falls in the 7(b) category under the law⁷.

Employees are required to enroll in coverage

The PHCA requires employees to enroll in their employer's plan unless an exemption applies. The most used exemption is for employees covered under their spouse's employer-sponsored plan. Employees with exemptions must provide Form HC-5 to the employer documenting the exemption. Employees must renew their exemption each year.

Employees can waive employer healthcare coverage when:

• They have coverage through another plan as a dependent or through their principal employer.
• They are covered by a federally established health insurance or prepaid healthcare plan. This includes Medicare, Medicaid, or military medical care benefits.
• They rely on prayer or other spiritual means for healing.
• They receive public assistance or coverage from a state healthcare plan.

What are the required benefits under PHCA?

While the ACA requires employers with 50 or more FTEs to provide plans that meet minimum essential coverage (MEC) and affordability, the PHCA has its own requirements

The 10 essential health benefits of the ACA include:

1. Ambulatory patient services
2. Emergency services
3. Hospitalization
4. Pregnancy
5. Mental health and substance abuse
6. Prescription drugs
7. Rehabilitation
8. Laboratory services
9. Preventive care
10. Pediatric services, including oral and vision care

However, all plans in Hawaii must include coverage for the following:

• Hospital costs
• Surgical expenses
• Medical expenses
• Diagnostic expenses
• Maternity coverage
• Substance abuse treatment

Plans aren't required to cover dental or vision expenses.

How do HRAs work with PHCA?

While the regulations can put organizations in a difficult position regarding cost and administrative responsibility, there are still alternative health benefits options available in Hawaii.

Health reimbursement arrangements (HRAs) allow you to reimburse your employees for their qualifying medical expenses, including health insurance premiums, tax-free.

Three of the most popular types of HRAs available include:

• Qualified small employer HRA (QSEHRA)
• Individual coverage HRA (ICHRA)
• Group coverage HRA (GCHRA), also known as an integrated HRA.

Due to Hawaii's complex healthcare policies, employers may have difficulties providing their employees with a QSEHRA. This is because a QSEHRA has annual allowance caps that may not allow employers to cover 50% or more of certain insurance premiums.

That leaves integrated HRAs and ICHRAs as good options for employers in Hawaii.

An integrated HRA is used to supplement your existing group health plan, such as a high deductible health plan (HDHP). This allows you to reimburse employees for out-of-pocket expenses like coinsurance, copayments, and deductibles.

While a GCHRA can be paired with any qualifying group plan, there are some limitations on the types of plans available in Hawaii.

The Hawaii Department of Labor and Industrial Relations limits cost-sharing for health plans, resulting in lower deductibles than plans in other states. This means that an HDHP is less likely to get approval from the state, leaving only state-approved group plans as options you can use with a GCHRA.

An ICHRA is likely the best option for employers in Hawaii, as there are no limits on what allowances can be set, helping to ensure you have a significant monthly contribution to remain compliant with the law no matter which individual plan your employees choose from the health insurance marketplace.

Organizations offering an ICHRA must ensure the health plans employees purchase are "Hawaii-approved," per Form HC-4⁴ and Form HC-61⁵.

Conclusion

The Hawaii Prepaid Health Care Act was implemented to set minimum standards of healthcare benefits for workers in Hawaii. It includes coverage for hospital stays, surgeries, medical expenses, diagnostic services, maternity care, and substance abuse treatment.

Proving a health benefit with this level of care can come with challenges for employers. While the PHCA can make offering employee benefits more difficult and pricey, there are still plenty of options available to help you provide coverage. Whether you choose a healthcare contractor or a self-funded benefit like an HRA, you can avoid fines as long as your plan meets the minimum basic requirements of the PHCA.

If you're ready to offer flexible health benefits to your employees, such as an ICHRA, PeopleKeep can help! Our HRA and employee stipend benefits administration software makes it easy to set up and manage your benefits in minutes per month.

Schedule a call with a personalized benefits advisor today to see how an HRA can help your organization stay compliant in Hawaii!

This blog article was originally published on April 28, 2020. It was last updated on May 9, 2023.

1. https://cga.ct.gov/PS94/rpt%5Colr%5Chtm/94-R-1069.htm#:~:text=Hawaii's%20Prepaid%20Health%20Care%20Act,exempt%20from%20ERISA's%20preemption%20clause.&text=Congress%20enacted%20ERISA%20in%201974,to%20regulate%20employee%20pension%20requirements.
2. Hawaii Approved Health Care Plans, 2013
3. http://labor.hawaii.gov/dcd/files/2012/11/HC-4.pdf
4. http://labor.hawaii.gov/dcd/files/2012/11/HC-61.pdf
5. https://labor.hawaii.gov/wsd/minimum-wage/
6. http://labor.hawaii.gov/dcd/phc-links/