North Carolina Department of Justice
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REPLY TO ANN REED STATE AGENCIES TEL: (919) 716-6800 FAX: (919) 716-6755 TTY: (919) 716-6430

March 26, 2002

Leslie Winner Vice President and General Counsel University of North Carolina Post Office Box 2688 Chapel Hill, North Carolina 27515

Re: Advisory Opinion; N.C. Gen. Stat. § 116-17.2 and

§ 143-34.1(d); ability of the University System to offer

dependant health coverage

Dear Leslie:

This letter is in response to your inquiry in which you ask whether the University, or some of its campuses, may offer a cafeteria plan which allows pre-tax premiums for dependent health coverage. You ask that we review this issue in light of our opinion to Carl Goodwin of the Office of State Personnel dated October 3, 2001, which discusses whether a pre-tax dependent health coverage plan violates the non-compete mandate of N.C. Gen. Stat. § 116-17.2 and § 143-34.1(d). You also asked that we research the legislative rationale for this noncompete restriction.

As you are aware, in our opinion to Mr. Goodwin we opined that a flexible benefit plan "cannot offer a plan that duplicates benefits offered to employees by the State Health Plan." We went on to indicate that Mr. Goodwin's inquiry raised the issue of whether dependent health care benefits are subject to the non-compete restrictions set out in N.C. Gen. Stat. § 116-17.2 and § 143-34.1(d). We indicated that in our opinion they are.

In interpreting the non-compete restrictions contained in N.C. Gen. Stat. § 116-17.2 and § 143-34.1(d), we focused on the prohibition against a cafeteria plan including those benefits provided to employees under various Articles of Chapter 135, including Article 3 of that chapter, which covers providing employee and family healthcare coverage. It has been suggested that the word "provided" limits the non-compete restrictions to those benefits which the State pays for. We disagree. We believe it is clear from the language of the statutes that the word "provide" Leslie Winner Page 2 - Letter March 26, 2002

means making the benefit available to the employee. The benefit is provided under the Comprehensive Major Medical Plan even when the employee fully funds the cost of the benefit. G.S. § 135-40(b), the undertaking section for the Major Medical Plan, also refers to "providing" benefits for the State's employees and certain of their dependants, and it is clear the State does not pay for all of the benefits. For example, long-term care benefits are authorized as an optional program for qualified employees, retired employees and their dependants. The State pays nothing towards these costs. Nonetheless, G.S. § 135-41(b) refers to benefits provided and made available through the Plan. Established case law counsels us not to interpolate or superimpose restrictions not contained in a statute on the statute. State ex. rel Utilities Com. v. Edmisten, 291 N.C. 451, 232 S.E.2d 184 (1977). Interpreting "provide" to mean "make available on a fully funded basis" is a restriction not contained in the statute. Additionally, a construction of a statute which operates to defeat or impair the object of the statute must be avoided if that can reasonably be done. State v. Hart, 287 N.C. 76, 213 S.E.2d 291 (1975). Our review of the legislative interactions surrounding the non-compete provisions of G.S. § 143-34.1(d) supports the conclusion that a cafeteria plan for the University or some of its constituent campuses that allows pre-tax premiums for dependant health coverage impairs the object of the statute.

In the course of researching the origins and legislative history of these statutes, we did not locate any legislative minutes directly discussing the non-compete restrictions. However, in reviewing the events surrounding the establishment of the State's flexible benefits plan we did discover documents which we believe are relevant. As you are aware, the initial responsibility for studying the feasibility of establishing and maintaining a flexible benefits plan for State employees was assigned to the Office of State Budget and Management. The Office of State Budget contracted with the accounting firm of Coopers and Lybrand to provide recommendations concerning structure and plan design. Coopers and Lybrand's final report, issued August 20, 1993, recommended a single statewide plan encompassing all employees and utilizing a central administration. The Office of State Budget moved forward with this design concept, and the Governor formalized the statewide, centrally-administered coordination effort with Executive Order #66, issued December 5, 1994.

During the debate over removing the sunset provision from the NC Flex bill, the Director of the State Health Plan and the lead fiscal analyst staffing the legislative committee to which the bill was assigned emphasized the need for the non-compete provision. Additionally, they produced figures which showed that the dependent coverage cost is indirectly subsidized by the amount saved on the employee - only claims. Since the employee-only claims paid are less than the premiums paid by the State, the rate for dependent coverage is reduced by the surplus. Furthermore, siphoning off younger, healthier dependents from the pool that includes retirees and their dependents would almost certainly drive up the cost of dependent coverage. As we previously stated, and as the legislative interactions confirm, this is precisely the type of competition the General Assembly intended to prohibit. Accordingly, based on the clear Leslie Winner Page 3 - Letter March 26, 2002 language of N.C. Gen. Stat. § 116-17.2 and § 143-34.1(d) and our research into their history, we conclude that the University, or some of its constituent campuses, cannot offer a cafeteria plan that allows pre-tax premiums for dependent health coverage. This competition would impair the object of the statute, which was to establish a single statewide plan that did not compete with existing benefits.

We trust this information has been helpful and answers your inquiry. Do not hesitate to contact us if you have any additional questions.

Very truly yours,

Ann Reed Senior Deputy Attorney General

Alexander McC. Peters Special Deputy Attorney General