Can North Carolina's NC Flex flexible-benefits program offer state employees a voluntary indemnity health plan that pays fixed-dollar amounts for hospitalization, heart attack, and similar events, and can it offer alternative dependent health coverage?
Plain-English summary
Carl Goodwin asked the AG whether NC Flex, the state's flexible benefits program for UNC and state employees, could offer two new plans: (1) a voluntary indemnity plan that pays set dollar amounts for hospital confinement, short-stay, rehabilitation, surgery, heart attack, stroke, coma, paralysis, ambulance, and wellness benefits; and (2) a voluntary indemnity health plan offering alternative dependent health coverage.
Senior Deputy AG Ann Reed and Special Deputy AG Alexander Peters answered. Yes on plan 1. As to plan 2, the answer depended on specific provisions, but they flagged a significant problem.
N.C.G.S. §§ 116-17.2 and 143-34.1(d), which authorize NC Flex, expressly state that the program "shall not include those benefits provided to employees under" the Legislative Retirement System, Teachers' and State Employees' Retirement System, State Health Plan, and Disability Income Plan. A November 3, 1995 AG advisory opinion (to former State Personnel Director Ronald Penny) interpreted that language as preventing NC Flex from duplicating these state-sponsored plans. The 2002 opinion reaffirmed that interpretation.
The reasoning matters. The state-sponsored plans are designed to provide basic benefits of uniform design to all covered employees. Letting NC Flex duplicate them would create competition that undermines the basic-benefits structure. The AG noted both that it serves the State's interest not to have duplicative optional plans and that it serves employees' interests not to pay for duplicative benefits.
Applying the non-duplication principle to plan 1. The proposed indemnity plan would pay fixed dollar amounts on certain occurrences (hospitalization, heart attack, etc.) rather than indemnifying the participant's actual deductible, coinsurance, or copayment expenses. That structure does not duplicate the State Health Plan's coverage of actual medical expenses. It is analogous to accidental death and dismemberment coverage, which NC Flex already offered. So plan 1 is permissible.
Applying the non-duplication principle to plan 2. The opinion noted no specific dependent-coverage plan was yet under consideration, so a definitive answer was not possible. But the AG raised a structural concern. Even though the State Health Plan's dependent coverage is optional and is paid for entirely by employee premiums without state contribution, dependent coverage is still a "benefit provided to employees" within the meaning of the statute. Letting NC Flex offer competing dependent coverage would reduce the State Health Plan's dependent pool and likely drive up dependent premiums for those who stayed. The healthier dependents (those most attractive to a competing plan) would be most likely to leave. The smaller, less-healthy remaining pool would face premium increases.
The AG concluded that this kind of competition is precisely what §§ 116-17.2 and 143-34.1(d) intended to prevent. So any specific dependent-coverage plan would face the same statutory analysis as a competing health plan generally and would likely violate the non-duplication rule.
Currency note
This opinion was issued in 2002. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. NC Flex and the State Health Plan have been amended many times since 2002. Anyone evaluating a current NC Flex offering should consult current statutes and current State Health Plan policies before relying on this analysis.
Background and statutory framework
NC Flex. The state's "cafeteria plan" allowing employees to make pre-tax elections for health insurance, dependent care, flexible spending accounts, and other benefits. Authorized by N.C.G.S. § 143-34.1(d) for state employees and § 116-17.2 for UNC employees. Modeled after IRS Section 125 cafeteria plan tax framework.
The non-duplication rule. Both authorizing statutes contain the same critical clause: "This plan shall not include those benefits provided to employees [and officers] under [Article 1A of Chapter 120 of the General Statutes and] Articles 1, 3, 4, and 6 of Chapter 135 of the General Statutes." The bracketed language appears in § 143-34.1(d) only because it cross-references the Legislative Retirement System. The combined effect bars NC Flex from offering anything that duplicates the State Health Plan, the Teachers' and State Employees' Retirement System, the Disability Income Plan, or specified Chapter 120 legislative retirement benefits.
The 1995 Penny advisory opinion. The AG's November 3, 1995 advisory opinion to State Personnel Director Penny established the duplication-prohibition reading. The 2002 opinion expressly relies on and reaffirms that earlier opinion. The rationale: the State's basic-benefits plans are designed for uniform coverage of covered employees, and competing optional plans would fragment the pool and undermine the design.
Why a fixed-dollar indemnity plan is different from health insurance. Health insurance pays based on actual expenses incurred (subject to deductibles, coinsurance, copayments). Fixed-dollar indemnity coverage pays a set amount per defined event regardless of expense. The two products serve different financial-protection functions: health insurance reimburses cost; indemnity provides cash on a triggering event. The AG saw this distinction as meaningful and put fixed-dollar indemnity in the same category as AD&D, which NC Flex was already permitted to offer.
Why dependent coverage is a 'benefit provided to employees.' Even though employees pay 100% of dependent premiums and the state does not contribute, the availability of dependent coverage in the State Health Plan is itself an employee benefit. It is administratively convenient (one plan covers the family), economically advantageous (group pricing), and integrated with the employee's own coverage. The statute does not require the state to fund a benefit for the non-duplication rule to apply.
The adverse selection concern. A voluntary dependent coverage option offered through NC Flex would attract employees whose dependents were healthy enough to take advantage of preexisting condition restrictions or healthier-pool pricing. The State Health Plan would lose those dependents, leaving a less-healthy pool subject to higher premiums. This is the standard adverse-selection problem that justifies non-duplication rules in benefits-plan design.
Common questions
Q: Could NC Flex offer a dental or vision plan that the State Health Plan does not cover?
A: The opinion did not address those specific plans, but the analysis suggests yes. NC Flex has historically offered dental, vision, and other supplemental coverages because the State Health Plan does not provide them. Non-duplication only bars overlap with the listed plans.
Q: Could NC Flex offer a fixed-dollar indemnity plan that paid for dental procedures?
A: Possibly. The opinion's logic is that fixed-dollar indemnity is structurally different from regular health insurance. If a dental indemnity plan paid fixed amounts on specific dental events rather than reimbursing actual expenses, it might fit the same analytical category as the approved plan 1.
Q: What if the State Health Plan offered an option that NC Flex sought to duplicate but at a lower price?
A: The non-duplication rule does not depend on whether NC Flex's pricing would be better. Any duplicating benefit would violate §§ 116-17.2 and 143-34.1(d) regardless of cost.
Q: Could the General Assembly amend the statutes to allow competing dependent coverage?
A: Yes. The non-duplication rule is statutory, not constitutional. The General Assembly could narrow or eliminate the rule by amendment. Without such an amendment, NC Flex was constrained.
Citations
Statutes:
- N.C.G.S. § 116-17.2 (UNC employee flexible benefits)
- N.C.G.S. § 143-34.1(d) (State employee flexible benefits)
- N.C.G.S. Article 1A of Chapter 120 (Legislative Retirement System)
- N.C.G.S. Article 1 of Chapter 135 (Teachers' and State Employees' Retirement System)
- N.C.G.S. Article 3 of Chapter 135 (State Health Plan)
- N.C.G.S. Article 4 of Chapter 135 (Disability Income Plan)
- N.C.G.S. Article 6 of Chapter 135
Prior AG opinion:
- November 3, 1995 advisory opinion to State Personnel Director Ronald G. Penny (interpreting non-duplication rule)
Source
Original opinion text
Mr. Carl Goodwin asked whether NC Flex may offer:
(1) A voluntary indemnity plan that provides hospital confinement, short-stay, rehabilitation unit, surgical, heart attack, stroke, coma, paralysis, ambulance, and wellness benefits; and
(2) A voluntary indemnity health plan that provides health benefit alternatives to employees for dependent health care coverage.
For reasons set out below, it is our opinion that NC Flex may offer the voluntary indemnity plan described in (1) above. Whether NC Flex could offer a voluntary indemnity health plan that provides health benefit alternatives to employees for dependent health care coverage would depend on the specific provisions of the plan in question.
N.C. GEN. STAT. §§ 116-17.2 and 143-34.1(d), which authorize the creation of a flexible benefits program for employees of the University of North Carolina and for State employees, expressly provides:
This plan shall not include those benefits provided to employees [and officers] under [Article 1A of Chapter 120 of the General Statutes and] Articles 1, 3, 4, and 6 of Chapter 135 of the General Statutes.
(The provisions in brackets are contained in N.C. GEN. STAT. § 143-34.1(d) only.) As we noted in our November 3, 1995, advisory opinion to Ronald G. Penny, former State Personnel Director, these provisions prohibit NC Flex from duplicating the benefits offered by the Legislative Retirement System of North Carolina, the Teachers' and State Employees' Retirement System of North Carolina, the State Health Plan, and the Disability Income Plan of North Carolina. We further noted that the reasons for this are readily apparent: it is in the State's best interest not to have optional employee benefit plans that duplicate or compete with the benefits offered by these plans, each of which is designed to provide basic benefits of uniform design to the employees covered by it. Similarly, it is not in the best interests of employees to contribute to flexible compensation and benefit options that merely duplicate the benefits already received from State-sponsored plans.
The question remains, then, whether the proposed plans you have described in your letter will duplicate the benefits offered by the State Health Plan pursuant to Chapter 135, Article 3, of the North Carolina General Statutes. With regard to the first proposal you described, offering indemnity coverage, you provided information on the plan description submitted to your office in response to Request for Proposal #100908. These materials show schedules of payments that would be provided under the plan. Upon review of these materials, it appears that the benefits offered under this plan, which are provided as set dollar amounts rather than as indemnification of a participant's actual deductible, coinsurance and copayment expenses, do not duplicate the benefits offered by the State Health Plan. Rather, this plan would simply provide for payments of set amounts upon certain occurrences, such as hospitalization, heart attacks, etc. The benefit offered by this plan, then, are not unlike the benefits offered by the accidental death and dismemberment plans that NC Flex has offered. In our opinion, then, NC Flex is not prohibited by N.C. GEN. STAT. §§ 116-17.2 and 143-34.1(d) from offering the voluntary indemnity plan that provides hospital confinement, short-stay, rehabilitation unit, surgical, heart attack, stroke, coma, paralysis, ambulance, and wellness benefits described in the materials you sent with your letter.
With regard to your other question, whether NC Flex can offer a voluntary indemnity health plan that provides health benefit alternatives to employees for dependent health care coverage, we have not been provided with a specific description of any proposed plan or plans. It is my understanding that there is not, in fact, any specific plan under consideration. We are not in a position, then, to offer an opinion as to whether any possible plan might be prohibited by N.C. GEN. STAT. §§ 116-17.2 and 143-34.1(d). We can only note that NC Flex cannot offer any plan that duplicates benefits offered to employees by the State Health Plan. This, of course, raises the issue, which we understand to be a part of your question, of whether dependent health care benefits are "benefits provided to employees" within the meaning of N.C. GEN. STAT. §§ 116-17.2 and 143-34.1(d). It is our opinion that they are.
It is true that dependent coverage is optional under the State Health Plan. That is, an employee can elect to cover or not cover his or her dependents through the State Health Plan. It is also true that dependent coverage is paid for solely by the employee premiums, without any contribution from the State. Nevertheless, we believe that dependent coverage is still a benefit provided to employees within the meaning of N.C. GEN. STAT. §§ 116-17.2 and 143-34.1(d). Clearly, it is a benefit to employees to make dependent coverage available in the same plan in which the employee participates and on the same terms.
Moreover, as we have noted, N.C. GEN. STAT. §§ 116-17.2 and 143-34.1(d) prohibit competition with the State Health Plan. Without question, dependent health care coverage offered by NC Flex would compete with the State Health Plan. It would decrease the number of dependent participants in the State Health Plan. Because the benefits offered by NC Flex would be available only to active State employees and not retirees, the smaller pool of participants remaining in the State Health Plan would most likely also be a less-healthy pool. This is particularly true if preexisting condition restrictions enabled only the employees with healthier dependents to take advantage of a plan offered by NC Flex. This would almost certainly have the effect of driving up dependent care premiums for those who remain in the State Health Plan. In our opinion, this is precisely the type of competition that the General Assembly intended to prohibit in N.C. GEN. STAT. §§ 116-17.2 and 143-34.1(d). Accordingly, we believe that dependent health care benefits are "benefits provided to employees" within the meaning of N.C. GEN. STAT. §§ 116-17.2 and 143-34.1(d).
For the foregoing reasons, it is our opinion that NC Flex may offer the indemnity plan described in materials sent with your July 26, 2001, letter. Further, we cannot offer an opinion as to whether NC Flex can offer a voluntary indemnity health plan that provides health benefit alternatives to employees for dependent health care coverage without seeing the specific provisions of any such plan.
Very truly yours,
Ann Reed
Senior Deputy Attorney General
Alexander McC. Peters
Special Deputy Attorney General
AMP/hs
cc: Thomas H. Wright, Personnel Director
Pani Tademeti, NC Flex Program Manager