Eye on Washington: Health Care Reform
Updated: April 15, 2010
Health Care Reform: Benefit Plan Considerations for Employers
The Patient Protection and Affordable Care Act (“PPAC”) was signed into law on March
23, 2010, and the related Health Care and Education Reconciliation Act of 2010 (“HCER”),
which modifies certain provisions of PPAC, was signed into law on March 30, 2010.
These two statutes (together, the PPAC and HCER are referred to in this update as
the “Health Care Reform Law”) make sweeping changes to existing law governing employer-sponsored
group health plans, individual health coverage, and governmental health programs.
The new provisions affect insured and self-insured employer health plans.
The Health Care Reform Law provisions generally are added to the Public Health Service
Act (“PHSA”) and are incorporated by reference into the Employee Retirement Income
Security Act of 1974, as amended (“ERISA”). Certain changes are also made to the
Internal Revenue Code of 1986, as amended (“Code”), and the Fair Labor Standards
Act (“FLSA”). Since the Health Care Reform Law implicates a number of different
statutes, various governmental agencies will have authority to issue guidance.
The Health Care Reform Law clearly is not the final word in this area—there are
many significant, as yet unanswered, questions regarding various provisions of the
Health Care Reform Law (including effective dates, definitions, etc.). Moreover,
there will be many related technical and substantive changes, regulations, and judicial
interpretations, as well as official guidance, regarding its wide-ranging implications.
Nevertheless, certain provisions of the Health Care Reform Law take effect in the
near future, and employers need to understand now what changes may impact their
benefit plans and when these changes take effect.
The following topics are addressed in detail and describe some of the more significant
changes made by the Health Care Reform Law that affect employers. The topics are
followed by some suggested next steps for employers to consider.
This communication is intended only for informational purposes. It should not be
relied upon as to any legal rights, obligations, or liability that any particular
employer may have under the Health Care Reform Law. In addition, and consistent
with Treasury Department Circular 230, this communication was not prepared with
the intent of being used, and cannot be used, by any employer for the purpose of
(i) avoiding any tax penalties, or (ii) promoting, marketing, or recommending to
another party any matter it addresses.
Grandfathered and Nongrandfathered Plans Certain
provisions of the Health Care Reform Law do not apply to grandfathered plans, and
special rules and effective dates, as noted below, will apply to grandfathered plans
and to existing health insurance coverage maintained pursuant to one or more collective
bargaining agreements (“CBAs”) ratified before 3/23/2010. It is unclear how the
special rules applicable to grandfathered plans and CBA coverage will interrelate.
Grandfathered Plans. Grandfathered plans (generally, any group
or individual health plans that existed on 3/23/2010) are exempt from many of the
employer mandates. (Note: It is unclear the extent to which a plan will be considered
“grandfathered” if it is amended significantly, including potentially new plan designs
or features, or offered to new categories of employees who previously were ineligible
for the plan; until further official guidance is issued, employers should proceed
cautiously before modifying their existing health plans.) • Family members may be
added to coverage, without loss of grandfathered status, if permitted under plan
terms as in effect on 3/23/2010. • New employees and their eligible family members
may enroll after 3/23/2010 without loss of grandfathered status if permitted under
plan terms as in effect on 3/23/2010.
CBA Coverage. Health insurance coverage maintained pursuant to
one or more CBAs ratified before 3/23/2010 is not subject to many of the employer
mandates until the date on which the last of the CBAs relating to the coverage terminates.
(Note: It is not entirely clear whether this exception also applies to self-insured
plans, or how it applies to plans that cover both collectively and noncollectively
bargained employees.)
Employer Health Plan Design Changes
Automatic Enrollment in Health Plans. Employers covered by the
FLSA with more than 200 full-time employees and that offer employees enrollment
in one or more health plans must automatically enroll all new full-time employees
in an employer group health plan (if any) for which they are eligible, and continue
the enrollment of current employees. (This provision is applicable to grandfathered
and nongrandfathered plans and appears to be effective the later of 3/23/2010 or
when specified in regulations to be issued by the U.S. Department of Labor (“DOL”)
although this is not entirely clear since the Health Reform Law does not specify
an effective date for this requirement.) The automatic enrollment feature is to
include the following requirements:
- Automatic enrollment applies only to new hires.
- Currently enrolled employees would remain enrolled unless and until they opt out.
- Automatically enrolled employees can elect to opt out of the plan.
- Employers need to provide advance notice of opt-out rights.
Waiting Periods. Waiting periods cannot exceed 90 days (applies
to grandfathered and nongrandfathered plans effective for plan years beginning on
or after 1/1/2014; or, if later, when the last of the CBAs relating to CBA coverage
terminates, as applicable).
Lifetime Maximums. Health plans may not impose any lifetime maximums
on the dollar value of benefits for any participant or beneficiary (applies to grandfathered
and nongrandfathered plans effective for plan years beginning on or after 9/23/2010;
or, if later, when the last of the CBAs relating to CBA coverage terminates, as
applicable).
Lifetime limits generally may be imposed on specific covered benefits that are not
essential health benefits, if otherwise permitted under federal or state law.
Annual Limits. Health plans may not impose any annual limits on
the dollar value of benefits for any participant or beneficiary (applies to grandfathered
and nongrandfathered plans effective for plan years beginning on or after 9/23/2010;
or, if later, when the last of the CBAs relating to CBA coverage terminates, as
applicable).
Restricted annual limits on essential health benefits may be permitted, as determined
by the Department of Health and Human Services (“HHS”), for plan years beginning
before 1/1/2014.
Annual limits generally may be imposed on specific covered benefits that are not
essential health benefits, if otherwise permitted under federal or state law.
Cost-Sharing Limits. Certain cost-sharing limits will apply under
a health plan (except stand-alone dental plans):
- Annual out-of-pocket limits (indexed for inflation) may not exceed the limits that
apply to Health Savings Accounts (“HSAs”) (applies to nongrandfathered plans effective
for plan years beginning on or after 1/1/2014).
- Deductibles cannot exceed $2,000 for single coverage and $4,000 for family coverage
(both indexed for inflation) (this limit appears to apply to nongrandfathered group
health plans effective for plan years beginning on or after 1/1/2014).
Preventive Care. Plans must provide certain preventive care (including
child and women’s preventive care and screenings) without participant cost-sharing
requirements (applies to nongrandfathered plans effective for plan years beginning
on or after 9/23/2010; or, if later, when the last of the CBAs relating to CBA coverage
terminates, as applicable).
Preexisting Conditions. Health plans may not impose any preexisting
condition exclusions (applies to grandfathered group health plans and nongrandfathered
plans effective for plan years beginning on or after 1/1/2014, except that limitations
on preexisting condition exclusions under grandfathered plans for children under
age 19 are effective for plan years beginning on or after 9/23/2010; or, if later,
when the last of the CBAs relating to CBA coverage terminates, as applicable).
Primary Care Provider Selection. Group health plans must permit
participants to select their primary care provider or pediatrician from any available
participating primary care provider, under plans that require such a designation
(applies to nongrandfathered and, apparently, grandfathered plans effective for
plan years beginning on or after 9/23/2010, but this will need to be clarified in
future guidance).
Pre-Authorizations. Participants cannot be required to obtain prior
authorization or pay increased cost-sharing for in-network or out-of-network emergency
services, or obtain prior authorization or referrals for obstetrical and gynecological
care (apparently applies to grandfathered and nongrandfathered plans effective for
plan years beginning on or after 9/23/2010, or, if later, when the last of the CBAs
relating to CBA coverage terminates, as applicable, but this is not entirely clear).
Extension of Child Coverage. Health plans that provide for coverage
of dependent children must permit continued coverage until attainment of age 26
(generally applies to grandfathered and nongrandfathered plans effective for plan
years beginning on or after 9/23/2010, except that for plan years beginning before
1/1/2014, grandfathered plans must cover adult children only if they are ineligible
for other employer-sponsored coverage; or, if later, when the last of the CBAs relating
to CBA coverage terminates, as applicable). To the extent that presently uncovered
dependent children are to be extended coverage, a process will have to be established
to add them to the employer’s plan. In addition:
- Full-time student requirements would not apply, and the child can be married.
- Medical Expense reimbursements under properly amended employer-provided health plans,
and apparently any related employer-subsidized coverage, of a child who has not
reached age 27 by the last day of the calendar year are not subject to federal income
tax (effective 3/23/2010).
- Employers that currently permit employees to cover children who are over the prior
federal age limit for dependents should evaluate the effect of this change on how
they currently impute income for such coverage (if the child is under age 27 by
12/31/2010, no imputed income for 2010 federal income tax purposes may be required).
- It is unclear whether employers may charge employees for the full cost of this extended
coverage.
Premiums. Premiums may vary under insured plans offered in the
individual or small group market (employers with no more than 100 employees in the
prior calendar year), or in the large group market (employers with more than 100
employees in the prior calendar year) with respect to states that permit insurers
in that market to offer coverage through an Exchange. The Health Care Reform Law
identifies the following factors to be considered with respect to determining the
applicable premium rate: family status, geography, rating area, age, and tobacco
use, subject to certain limitations. The Health Care Reform Law further indicates
that such premium rates will vary with respect to a particular plan or coverage
only by these factors (applies to nongrandfathered plans effective for plan years
beginning on or after 1/1/2014 or, if later, when the last of the CBAs relating
to CBA coverage terminates, as applicable).
Health Care HSA and Archer MSA Withdrawals. The penalty on withdrawal
of HSA funds for non-medical expenses is increased from 10% to 20%, and from 15%
to 20% for nonqualified Archer Medical Savings Account (“Archer MSA”) withdrawals
(effective for distributions made on or after 1/1/2011).
Wellness Program Incentives. The maximum permissible employer wellness
program incentive to participants based on an individual’s satisfying a standard
related to a heath status factor is increased from 20%, as provided under the Health
Insurance Portability and Accountability Act of 1996 (“HIPAA”), to 30% of employer
and employee plan cost for single or family coverage, depending on who is eligible
to participate in the wellness program (applies to nongrandfathered plans effective
for plan years beginning on or after 1/1/2014).
- The maximum may be increased to 50%, subject to HHS, DOL, and Internal Revenue Service
(“IRS”) approval.
Wellness Program Disclosures. Wellness programs may not require
the disclosure or collection of any information regarding, and may not base premiums,
rewards, or penalties on, the lawful presence or ownership of firearms (effective
for plan years beginning on or after 9/23/2010).
Rescissions. Health plans cannot rescind individual or group health
coverage once an individual is covered under the plan, except for fraud or intentional
misrepresentations; the plan or coverage may be terminated only with prior notice
to the participant and only as permitted under sections 2702(c) or 2742(b) of the
PHSA (it is not entirely clear how this provision affects the right of an employer
to terminate a plan) (applies to grandfathered and nongrandfathered plans effective
for plan years beginning on or after 9/23/2010; or, if later, when the last of the
CBAs relating to CBA coverage terminates, as applicable).
Claims Appeals. Group health plans and health insurance issuers
must implement new claim and coverage appeal provisions (applies to nongrandfathered
plans effective for plan years beginning on or after 9/23/2010; or, if later, when
the last of the CBAs relating to CBA coverage terminates, as applicable). The new
claim and appeal features include:
- Implementing an internal claims appeal process.
- Furnishing notices of available internal and external appeal processes (written
in a “culturally and linguistically appropriate” manner) to participants.
- Granting access to their benefit files.
- Providing for continuation of benefits during the appeals process.
- Establishing an external review process.
OTC Drugs. Over-the-counter (“OTC”) drugs, except insulin, are
no longer eligible for reimbursement under Flexible Spending Accounts (“FSAs”),
Heath Reimbursement Accounts (“HRAs”), HSAs, or Archer MSAs, unless prescribed by
a physician (effective for amounts paid with respect to taxable years beginning
on or after 1/1/2011).
Adoption Assistance Programs. The federal income tax exclusion
for adoption assistance programs ($12,170 for 2009) is increased by $1,000 (indexed
for inflation), and the expiration of such exclusion is extended until 12/31/2011
(effective for taxable years beginning on or after 1/1/2010).
Long-Term Care Insurance. A national employee-funded voluntary
long term care (“LTC”) insurance program (CLASS Act) is established (effective 1/1/2011).
• No underwriting restrictions (other than age) on enrollment or rated policies
apply. • The individual generally must be actively employed to enroll. • Five-year
vesting is required before benefits are payable to a participant. • Lifetime benefit
payments are provided (no lifetime or aggregate limits). • Employers may offer access
through payroll deduction. • Employers may automatically enroll employees, with
employee opt-out rights.
Health Care FSA Limits. Any health care FSA under a cafeteria plan
is limited to $2,500 annually (indexed for inflation) per employee (effective for
taxable years beginning on or after 1/1/2013).
- There is no difference for single or family coverage.
Clinical Trials. Health plans must cover clinical trials for certain
life-threatening diseases (apparently applies only to nongrandfathered plans effective
for plan years beginning on or after 1/1/2014).
Nondiscrimination
Health Factor Nondiscrimination. Group health plans and health
insurance issuers may not establish eligibility (or continued eligibility) rules
based on various health-related factors, including health status, medical condition,
claims experience, receipt of health care, medical history, disability, and genetic
information (applies to nongrandfathered plans effective for plan years beginning
on or after 1/1/2014; or, if later, when the last of the CBAs relating to CBA coverage
terminates, as applicable).
- Special rules apply to wellness programs, including disease prevention or health
promotion.
- Disease prevention or health promotion programs in existence prior to 3/23/2010
and in compliance with applicable regulations may continue to be offered while such
regulations remain in effect.
Provider Nondiscrimination. Group health plans and health insurance
issuers may not discriminate against providers acting within the scope of their
license or certification, but can vary reimbursement rates based on quality or performance
measures, and are not required to contract with any willing provider (applies to
nongrandfathered plans effective for plan years beginning on or after 1/1/2014;
or, if later, when the last of the CBAs relating to CBA coverage terminates, as
applicable).
Highly Compensated Individuals. Insured health plans may not discriminate
in favor of highly compensated individuals, and will be subject to similar nondiscrimination
testing rules that currently apply to self-insured medical reimbursement plans (apparently,
rules applicable to insured health plans will be administered by HHS, while rules
applicable to self-insured plans under Code section 105(h) will continue to be administered
by the IRS) (appears to apply only to nongrandfathered plans effective for plan
years beginning on or after 9/23/2010).
Small Employer Cafeteria Plan Safe Harbor Rules. Small employers (averaging no more
than 100 employees during either of the 2 prior full years) are exempt from the
nondiscrimination requirements applicable to cafeteria plans and certain component
benefit plans (including group term life insurance, self-insured medical reimbursement
plans, and dependent care assistance programs), if their cafeteria plan satisfies
certain requirements (effective for taxable years beginning on or after 1/1/2011).
• All nonexcludable employees must be eligible to participate. • Certain minimum
contribution requirements apply for nonhighly compensated and non-key employees.
Retiree Health Plans
The extent to which the changes made by the Health Care Reform Law apply to retiree
health plans is not entirely clear. In the absence of official guidance, employers
should determine whether all such changes apply to grandfathered and/or nongrandfathered
retiree plans, as applicable. In any case, the following additional provisions relate
to retiree medical plans.
Reinsurance of Certain Early Retirees. HHS will establish a temporary
reinsurance program to reimburse employers for a portion of their early retiree
health program costs (by 6/21/2010 and continuing through 12/31/2013 or, if earlier,
when the current funding limit of $5 billion is exhausted).
- The program applies only to retirees who are age 55 or older (and their spouses
and dependents) and are not eligible for Medicare.
- Self-funded and insured plans can participate, including plans sponsored by private
entities, state and local governments, nonprofit organizations, religious entities,
and unions.
- The program will reimburse the plan for 80% of costs (less negotiated price concessions)
for health benefits that are between $15,000 and $90,000 for a retiree (and his
spouse and dependents).
- Includes retiree cost-sharing (deductible, copayments, or coinsurance).
- Includes medical, surgical, hospital, and prescription drug claims, and other benefits
determined by HHS.
- Employers must apply for this program, document claims, and implement programs and
procedures to meet minimum requirements that generate cost savings for participants
with chronic and high-cost conditions.
- The reinsurance payments are not treated as taxable income to the employer.
- Amounts paid to an employment-based plan (sponsored by an employer or multiemployer
plan) must be used to lower costs for the plan, and cannot be used as general revenues
for the employer or the multiemployer plan (as applicable).
- Reimbursement payments may be used to reduce premium costs for the employer or multiemployer
plan (as applicable) or reduce retiree premium contributions, copays, deductibles,
etc. (Note: The White House has issued a Fact Sheet which states that plans must
use these proceeds to lower health costs for enrollees, e.g., premium contributions,
copayments, deductibles, etc.)
Medicare Part D Donut Hole. The Health Care Reform Law makes various
changes related to the so-called Medicare Part D “donut hole” (applies effective
3/23/2010, except as otherwise noted).
- Pharmaceutical manufacturers will provide a 50% discount on brand drugs that fall
into the donut hole beginning 1/1/2011 for applicable beneficiaries.
- Federal subsidies for generic prescriptions filled in the Medicare Part D coverage
gap are phased in beginning 1/1/2011.
- HHS will provide a $250 rebate to Medicare beneficiaries who reach the Medicare
Part D coverage gap in 2010.
- There is a reduced subsidy for high income participants (similar to Medicare Part
B).
- Reduced generic drug coinsurance will be paid by the Part D beneficiary beginning
1/1/2011.
- Reduced brand drug coinsurance will be paid by the Part D beneficiary beginning
1/1/2013.
- The donut hole is effectively eliminated by 1/1/2020, when the beneficiary coverage
amount reaches the standard 25% beneficiary coinsurance level.
Retiree Drug Subsidy Tax Exclusion. The Part D subsidy to employers
will, in effect, no longer be deductible (applies to grandfathered and nongrandfathered
plans for taxable years beginning on or after 1/1/2013)
- This change may have significant current accounting implications for an employer.
Independent Medicare (Payment) Advisory Board. An Independent Medicare
(Payment) Advisory Board is established that can make certain binding Medicare recommendations
and non-binding private sector recommendations to reduce the per capita rate of
growth in Medicare spending (effective 3/23/2010).
Other Related Employer Changes
Maternal-Related Breaks. Employers covered by the FLSA are required to furnish nonexempt
employees with reasonable unpaid breaks (some states may require breaks to be paid),
and a private space (other than a restroom), for mothers to express breast milk
for their infants up to age one (appears to be effective 3/23/10, but this is not
entirely clear).
- Employers employing fewer than 50 employees will not be subject to this requirement
if it would impose an undue hardship.
Clinical Services Rebate
Clinical Services. Insurers of insured health plans must provide
annual rebates to participants for premiums spent on clinical services and health
care quality that are less than 85% for plans in the large group market, or 80%
for plans in the individual and small group markets, of total plan revenue (subject
to certain exclusions) (applies to grandfathered and nongrandfathered plans by 1/1/2011).
Access
High Risk Pools. Individuals with preexisting conditions have access
to temporary national high-risk pools established by HHS (by 6/21/2010, and ending
1/1/2014).
- Employers who provide financial incentives to individuals with pre-existing conditions
to disenroll from an employer group health plan before enrolling in the pool must
reimburse the pool for medical expenses incurred by the pool for such individuals.
Guaranteed Access and Renewals. Health insurance issuers in a state
must accept every employer and individual in that state who applies during open
or special enrollment periods, and must agree to renew coverage (effective for plan
years beginning on or after 1/1/2014).
Exchanges
Each state will establish a health Exchange through which qualified individuals
and businesses can elect to purchase qualified health plan insurance that provides
an essential health benefits package (by 1/1/2014). Essential Health Benefits Package.
An “essential health benefits package” must provide certain benefits, to be determined
by HHS based on the scope of benefits provided under a typical employer plan. The
package must generally provide at least four specified levels of coverage (“bronze,”
“silver,” “gold,” or “platinum” levels) or, in certain cases, a catastrophic plan.
- “Essential health benefits” generally include ambulatory patient services; emergency
services; hospitalization; maternity and newborn care; mental health and substance
use disorder services, including behavioral health treatment; prescription drugs;
rehabilitative and habilitative services and devices; laboratory services; preventive
and wellness services and chronic disease management; and pediatric services, including
oral and vision care.
Employers. States may allow all employers to participate effective
1/1/2017; before then, only employers with no more than 100 employees in the prior
calendar year may participate (for plans years beginning before 1/1/2016, states
may limit access to employers with no more than 50 employees).
Cafeteria Plans. Qualified employers may permit eligible employees
to pay the employee’s share of premiums for Exchange coverage offered by the employer
with pre-tax contributions under the employer’s cafeteria plan.
Individual Mandate
Health Insurance Mandate. All individuals (subject to certain exemptions)
and their eligible dependents are required to maintain minimum essential coverage
or pay certain tax penalties (this should have no direct impact on employers; however,
employers may want to provide coverage that satisfies the individual mandate) (applies
to nongrandfathered plans effective for taxable years ending after 12/31/2013).
- Minimum essential coverage includes certain services and supplies under public programs,
individual policies, and employer-sponsored plans (including grandfathered plans).
Premium Assistance
Premium Assistance Tax Credits. Individuals with income that exceeds
100%, but does not exceed 400%, of the federal poverty level (“FPL”) will be eligible
for refundable federal tax credits to help pay for essential health benefits coverage
purchased through an Exchange (effective for taxable years ending after 12/31/2013).
- Employees offered employer-provided minimum essential coverage are ineligible for
the credits, unless the employee declines to enroll in that coverage and the employer-paid
share of the total allowed costs of plan benefits is less than 60% or the employee’s
share of premiums is more than 9.5% of the employee’s income (based on the type
of coverage applicable).
Cost-Sharing Reductions. Individuals who are eligible for the tax
credit will also be eligible for a cost-sharing reduction (subsidy) to purchase
essential health benefits coverage through an Exchange (effective 3/23/2010).
Employer Play or Pay (Free Rider Penalty)
Annual Assessment for Employers that Do Not Offer Minimum Essential Coverage.
Employers that employ an average of at least 50 full-time employees (work more than
an average of 30 hours per week, on a monthly basis) during the prior calendar year
and do not offer minimum essential coverage to full-time employees are subject to
an annual nondeductible federal tax assessment for any month in which any full-time
employee is enrolled in a qualified health plan and receives the federal premium
tax credit or cost-sharing reduction (applies to nongrandfathered plans effective
for months beginning on or after 1/1/2014).
- The assessment is equal to $2,000 annually (indexed for inflation) times the total
number of all full-time employees, excluding the first 30 employees, and is determined
on a monthly basis.
- Special allocation rules apply to controlled group entities.
- Part-time employees, on a full-time equivalent basis, are included when determining
if an employer has 50 employees.
Annual Assessment for Employers that Offer Minimum Essential Coverage.
Employers that employ an average of at least 50 full-time employees (work more than
an average of 30 hours per week, on a monthly basis) during the prior calendar year
and offer minimum essential coverage are subject to an annual nondeductible federal
income tax assessment for any month in which any full-time employee is enrolled
in a qualified health plan and receives the federal premium tax credit or cost-sharing
reduction (applies to nongrandfathered plans effective for months beginning on or
after 1/1/2014).
- The employee must qualify for a premium tax credit or cost-sharing reduction because
the employee’s share of the premium exceeds 9.5% of income, or the actuarial value
of the coverage is less than 60% (in effect, the employer coverage is unaffordable).
- The assessment is equal to the lesser of $3,000 annually times the number of full-time
employees receiving the tax credit/reduction, or $2,000 annually times the total
number of all full-time employees (both indexed for inflation), excluding the first
30 employees, and is determined on a monthly basis.
- Special allocation rules apply to controlled group entities.
- No assessment is imposed with respect to employees who receive vouchers.
- Part-time employees, on a full-time equivalent basis, are included when determining
if an employer has 50 employees.
Employer Voucher Obligation
Vouchers. Employers that offer, and subsidize any portion of, minimum
essential coverage must provide free-choice vouchers to qualified employees to be
used toward the cost of alternate health coverage the employees purchase through
an Exchange (applies to grandfathered and nongrandfathered plans effective for taxable
years beginning on or after 1/1/2014).
- Exchanges will credit the amount of the voucher to the monthly premium of coverage
in the Exchange, and the employer must pay the credited voucher amount to the Exchange.
- A qualified employee is any employee during a plan year:
- Who does not participate in the employer’s health plan;
- Whose contribution towards minimum essential coverage
under the employer plan is more than 8.0%, but not more than 9.8% (indexed for inflation)
of the employee’s annual household income during the taxable year (it appears that
this upper limit of 9.8%, as stated in the Health Care Reform Law, is intended to
be 9.5%; if so, a technical correction to the Health Care Reform Law would appear
to be necessary); and
- Whose household income does not exceed 400% of FPL for
a family of the size involved.
- The voucher amount is equal to the employer’s monthly subsidy towards the cost of
the plan which would have been paid by the employer if the employee were covered,
based on the employee’s coverage (e.g., individual or family coverage), to which
the employer pays the largest portion of the cost.
- The voucher value is excludable from the employee’s federal taxable income to the
extent it does not exceed the amount paid for qualified health plan coverage, and
the employer deduct the amount of the voucher for federal income tax purposes.
- If the cost of Exchange coverage is less than the voucher, the difference is paid
to the employee and includible in income as wages.
- Voucher recipients are ineligible for tax credits or cost-sharing reductions through
an Exchange.
- Employers are not subject to the “free rider” penalty/assessment for voucher recipients.
Wellness Grants
Small Employers. Employers (including nonprofit employers) with
fewer than 100 employees who work 25 hours or more per week that do not have wellness
programs on 3/23/2010 are eligible for federal grants for up to 5 years if they
establish an eligible wellness program (effective for federal fiscal years 2011
through 2015, or ending earlier if the current funding limit of $200 million is
exhausted).
Plan Administration
Electronic Transaction Standards. Health plans must adopt a uniform
set of operating rules and standards for the electronic exchange of information
under HIPAA (generally effective 3/23/2010).
- Rules for eligibility and claims status transaction (must be adopted by 7/1/2011
and effective by 1/1/2013).
- Rules for electronic funds transfers and health care payment and remittance (must
be adopted by 7/1/2012 and effective by 1/1/2014).
- Rules for health claims, enrollment and disenrollment, premium payments, and referral
certification and authorization transactions (must be adopted by 7/1/2014, effective
not later than 1/1/2016).
Small Business Tax Credits
Credit. Employers with no more than 25 full-time equivalent employees
and average annual wages below $50,000 (adjusted for inflation for taxable years
beginning in 2014 or later calendar years) that provide qualified health plan coverage
for employees are eligible to receive a health insurance federal tax credit (applies
to taxable years beginning on or after 1/1/2010).
- The tax credit is up to 35% (50%, for taxable years beginning on or after 1/1/2014)
for taxable eligible small employers, or 25% (35%, for taxable years beginning on
or after 1/1/2014) for tax-exempt eligible small employers, of the lesser of the
employer’s contribution to health insurance coverage, or the amount of contributions
that the employer would have made during the taxable year if each employee had enrolled
in coverage with a certain benchmark premium (if the employer contributes a uniform
percentage that is at least 50% of the total cost).
- The full amount of the credit is available only to an employer with 10 or fewer
full-time equivalent employees and average annual wages below $25,000—the credit
is reduced for employers with more than 10, but not more than 25, such employees,
and for an employer for whom the average wages per employee is between $25,000 and
$50,000.
- For taxable years beginning after 2013, the credit is available only if the qualified
small employer purchases coverage through an Exchange, and is available only for
2 consecutive years thereafter.
Employer Taxes
High-Cost Plans. A 40% excise tax is imposed on group health plans
(excluding LTC, insured and, apparently, self-insured stand-alone dental or vision
plans, and certain other excepted benefits), whose annual cost exceeds certain amounts
(applies to grandfathered and nongrandfathered plans for plan years beginning on
or after 1/1/2018). The group health plan benefits that are considered in determining
the applicability of the excise tax include any group health plan made available
to an employee by an employer that would be excludable from the employee’s gross
income under Code section 106, or would be excludable if it was employer-provided
coverage. Therefore, in addition to traditional group health plans, coverages would
include any supplemental group health plan, health care FSA, or HSA contributions.
- Threshold amounts in 2018 are $10,200 for single coverage and $27,500 for non-single
coverage (indexed for inflation), calculated monthly.
- The cost includes employer- and employee-paid portions (based on a methodology similar
to that used under COBRA).
- Higher initial thresholds apply to non-Medicare retirees and certain high-risk professions.
- The threshold amounts are subject to adjustment for plans that have higher-than-average
costs due to the age or gender of covered employees, or if in a high-cost state.
- The (higher) family threshold amount applies to both single and family coverage
offered under a multiemployer plan.
- The tax is paid by the insurance company (if the plan is insured) or plan administrator
(if the plan is self-insured).
Comparative Effectiveness Research Fee. Sponsors of any self-insured
accident or health plan (other than certain excepted benefits including on-site
medical clinics, workers’ compensation, etc.) and health insurers for each plan
year are assessed a federal tax of $2 ($1, for plan years ending during 2013) (indexed
for inflation), times the average number of covered lives, for federal comparative
clinical effectiveness research (applies to grandfathered and nongrandfathered plans
for plan years ending after 9/30/2012 and before 10/1/2019).
Other Related Taxes
Health-Related Providers. New taxes will be imposed on health insurance
companies (excluding certain nonprofit entities and VEBAs established by nonemployers),
pharmaceutical manufacturers, and medical device manufacturers (effective for calendar
years beginning on or after 1/1/2011, or later depending on the industry). These
taxes do not apply directly to self-insured plans; however, an insurer’s administrative
fees are included in the allocation determination. Taxes are likely to increase
the underlying cost of health services, which will result in escalating costs to
employer plans.
FICA
Medicare Taxes. Certain additional Medicare taxes are assessed
(effective for remuneration received, and taxable years beginning, on or after 1/1/2013).
- An additional Medicare tax of 0.9% (from 1.45% to 2.35%) applies to wages in excess
of $200,000 annually ($250,000 joint return).
- Applicable only to the employee portion of FICA (no matching
employer payment).
- An additional Medicare tax of 3.8% on net investment income applies to individuals
with adjusted gross incomes above $200,000 annually ($250,000 joint return).
- Investment income includes interest, dividends, annuities,
royalties, rents, net gains from sale of property, and certain other income, but
excludes distributions from a plan that satisfies Code sections 401(a), 403(a),
403(b), 408, 408A, or 457(b).
- Additional taxable income limited to the amount the individual’s
adjusted gross income exceeds the $200,000 (or $250,000) threshold.
Forms W-2
Nontaxable Health Benefits. Employers must include on annual Forms
W-2 the aggregate cost (based on a methodology similar to that used under COBRA)
of group health plan benefits (excluding FSA, HSA, or Archer MSA contributions,
or the cost of LTC, stand-alone dental or vision plans, and certain other excepted
benefits) provided to employees (applies to grandfathered and nongrandfathered plans
effective for taxable years beginning on or after 1/1/2011—i.e., Forms W-2 issued
in 2012 for 2011 wages, and issued thereafter for subsequent years).
Forms 1099
Corporate Service Providers. Employers must provide Forms 1099
for all corporate service providers that receive more than $600 per year (applies
to payments made on or after 1/1/2012).
MEWA Registration
Registration Forms. Multiple employer welfare arrangements (“MEWAs”)
must register with the U.S. Department of Labor before the MEWA can operate in any
state.
Employer Communications and Reports
Uniform Summary of Benefits. Sponsors of self-insured plans and
insurers must provide participants (before any enrollment restriction applies),
at initial and annual enrollment, with a uniform summary of benefits and coverage
explanation that includes certain standardized information and is written in a “culturally
and linguistically appropriate” manner; this is in addition to any summary plan
descriptions (“SPDs”) or other enrollment material that may be provided. (Although
these rules appear to apply to grandfathered plans effective for plan years beginning
on or after 3/23/2010 and to nongrandfathered plans effective for plan years beginning
on or after 9/23/2010, summaries must be provided to participants not later than
3/23/2012, based on guidance to be issued by HHS by 3/23/2011; or, if later, when
the last of the CBAs relating to CBA coverage terminates, as applicable.)
Material Modifications. Group health plans must give at least 60
days’ prior written notice if there are any material modifications; this apparently
is in addition to any summary of material modifications (“SMM”) that may be required
under ERISA (applies to grandfathered plans effective for plan years beginning on
or after 3/23/2010 and to nongrandfathered plans effective for plan years beginning
on or after 9/23/2010; or, if later, when the last of the CBAs relating to CBA coverage
terminates, as applicable).
Exchange Programs. Employers covered by the FLSA must provide employees
with certain information related to available Exchange programs and subsidies (applies
to grandfathered and nongrandfathered plans effective 3/1/2013).
Transparency. Group health plans and health insurance issuers must
provide certain disclosures to HHS and (if the plan is offered through an Exchange)
the public regarding claims procedures, enrollment information, financial information,
out-of-network coverages, etc. (apparently applies to nongrandfathered and, possibly,
grandfathered plans effective 1/1/2014, although the effective date of this requirement
is not entirely clear).
Quality of Care Reports. Group health plans and health insurance
issuers must provide annual reports to HHS and participants regarding plan benefits
that improve health outcomes (by 3/23/2012, based on guidance to be issued by HHS;
or, if later, when last of the CBAs relating to CBA coverage terminates, as applicable).
Coverage Reports. Employers that are subject to the “play or pay”
requirements (see page 9), or that provide subsidized minimum essential coverage
through an eligible employer-sponsored plan with employee contributions exceeding
8% of wages (as indexed for inflation), must file annual reports with the IRS and
participants regarding certain coverage and related information (effective 1/1/2014).
HIPAA
Compliance Statements. Health plans must file a statement with
HHS certifying compliance with new, required administrative simplification standards
under HIPAA (no later than the effective date of the particular standard).
Next Steps Health care reform will have a significant
impact on employers, their health plans, and related administration—both in the
short-term and for years to come. Clearly, a substantial amount of regulatory guidance
is expected, and it will be difficult for employers to make final decisions until
certain issues are resolved. Nevertheless, employers should now begin carefully
to review the Health Care Reform Law and how it affects their employee and executive
health benefit plans. In particular, employers should: • Inventory all health plans
and arrangements and determine which of their health plans or arrangements may qualify
as “grandfathered plans” and consider how future design changes or modifications
may affect such plans.
- Identify the particular plan year applicable to each health plan for purposes of
complying with the Health Care Reform Law.
- Confirm which changes must be made to their existing plans and when those changes
must be made, based on the particular plan year and type of plan involved.
- Consider modeling the potential cost impact of the Health Care Reform Law.
- Before adopting any new employee health benefit plan, merging any plans, or making
any changes to existing plans, ensure that all applicable requirements are timely
satisfied and consider any possible impact of such action on the grandfathered status
of existing plans under the Health Care Reform Law.
- Evaluate the impact of Health Care Reform Law on:
- Plan documents.
- Wellness programs.
- New disclosure requirements (including the new uniform
summary of benefits).
- Information contained in SPDs.
- Enrollment materials.
- Employee notices and other communications.
- Reports to the government (including Forms W-2 and 1099).
- Internal administrative procedures.
- Third-party administrative and business associate agreements.
- Nondiscrimination testing
- Controlled group issues.
- Update all documentation (although employers may consider issuing summaries of material
modifications to information contained in existing SPDs rather than updating their
SPDs, it may be preferable to update SPDs for changes made by the Health Care Reform
Law, given its wide-ranging changes).
- Determine what action needs to be taken to satisfy the new coverage summary disclosure
and reporting obligations.
- Consider conducting a health care compliance review to assess compliance by their
health plans with existing regulatory requirements and the changes that will be
necessary to ensure compliance with the Health Care Reform Law.
Employer Plan of Action Employers need to understand the many changes
that the Health Care Reform Law makes to their employee benefit program. The following
highlights some timing issues that apply to health plans (different rules may apply
depending on whether any particular plan is sponsored by a small or large employer):
Before First Plan Year Beginning on or after 9/23/2010 (as of Applicable Effective
Date)
- Perform cost analysis (including accounting implications) of employer health program
alternatives that comply with Health Care Reform Law.
- Assess applicable effective dates for grandfathered and nongrandfathered collectively
bargained and noncollectively bargained plans.
- Determine applicability of Health Care Reform Law provisions to retiree plans.
- Perform nondiscrimination testing to ensure compliance with current and new nondiscrimination
requirements applicable to certain welfare benefits.
- Redesign employee benefit programs to satisfy new plan design changes for all nongrandfathered
plans and, to extent applicable, grandfathered plans that are applicable as of first
day of such plan year.
- Implement appeals process for denied claims.
- Develop effective and compliant employee communications program.
- Apply for federal reinsurance program if employer maintains retiree health program.
- Establish procedure for reporting required health plan-related information to applicable
governmental agencies.
Before 1/1/2011 (as of Applicable Effective Date)
- Address accounting issues relating to elimination of federal tax deductions for
Medicare Part D subsidies beginning 2013.
- Prohibit reimbursement of OTC drugs (except insulin) through HRAs, FSAs, HSAs, or
Archer MSAs, unless prescribed by physicians.
- Apply for federal grants for establishment of wellness programs by small employers.
- Establish procedures for large employers (more than 200 employees) automatically
to enroll employees into health insurance plans and provide employees with opt-out
rights.
- Revise applicable Plan documents, SPDs, enrollment materials, etc., for plan years
beginning on or after 1/1/2011.
Before 7/1/2011
- Adopt single set of electronic transaction standards for eligibility verification
and claims status. • Issue applicable SMMs for prior plan (calendar) year.
Before 1/1/2012 (as of Applicable Effective Date)
- Revise wage reporting procedures to ensure that Forms W-2 report nontaxable health
benefits for wages paid in 2011 and later years.
- Develop uniform summary of benefits and coverage explanation to provide to participants
not later than 3/23/2012
Before 7/1/2012
- Adopt single set of electronic transaction standards for electronic funds transfers
and health care payment and remittance.
Before 1/1/2013 (as of Applicable Effective Date)
- Establish procedures to ensure that Health FSAs under cafeteria plans are limited
to $2,500 per year (subject to increase in CPI).
- Increase Medicare Part A (HI) tax rate (from 1.45% to 2.35%) effective 1/1/2013
on earnings over $200,000 for individual taxpayers and $250,000 for married couples
filing jointly.
- Revise applicable Plan documents, SPDs, and employee communications for plan years
beginning on or after 1/1/2013.
- Revise third party payments reporting procedures to ensure that expanded Forms 1099
corporate information reporting requirements are satisfied for amounts paid in 2012
and later years.
Before 1/1/2014 (as of Applicable Effective Date)
- Review health plans to determine if they offer essential health benefits package.
- Ensure that required provisions for nongrandfathered plans (e.g., out-of-pocket
limits, limit on deductibles of $2,000 for individuals and $4,000 for families,
waiting periods limited to 90 days) apply effective 1/1/2014.
- Communicate insurance reform changes to all employees, including individual coverage
mandate/tax penalties and phase-in of excise taxes for individuals without coverage.
- Determine applicability of federal tax assessment and voucher requirements (depending
on whether group health plan provides minimum essential coverage).
- Establish procedures that ensure qualified health plan meets new operating standards
and reporting requirements.
- Determine whether to offer employees rewards of up to 30% (increasing to 50%) of
coverage costs for participating in wellness program and meeting certain health-related
standards.
- Determine whether eligible small employer (up to 50 or 100 employees, as applicable)
should purchase coverage through Exchange.
- Revise applicable Plan documents, SPDs, enrollment materials, etc., for plan years
beginning on or after 1/1/2014.
Before 7/1/2014
- Adopt single set of electronic transaction standards for health claims, enrollment
and disenrollment in health plan, health plan premium payments, and referral certification
and authorization.
Before 1/1/2016
- Determine whether small employer (up to 100 employees) should purchase coverage
through Exchange.
Before 1/1/2017
- Determine whether eligible large employer (over 100 employees) should purchase coverage
through Exchange.
Before 1/1/2018
- Assess whether any health plan is considered high-cost plan subject to new excise
tax.
ADP is committed to obtaining the most current information on health care reform
to help ensure that our Benefits, HR and Payroll outsourcing solutions remain compliant
with the changing laws while you focus on your business. This content is subject
to change. We will continue to provide updates on this page through our partner,
AON Consulting, as the situation continues to evolve.