Health Care Reform: What Employers Need to Know
In March 2010, Congress enacted two laws, the Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act (HCERA). These two pieces of legislation are known as “health care reform” and constitute a massive overhaul of the United States health care system. For employers, the new laws represent the most significant changes to their health plans since the passage of ERISA. Federal regulators have been busy issuing several sets of regulations and other guidance in recent months to implement the health care reform law.
This bulletin summarizes the key changes, including details from the new regulations and other guidance.
1. Insurance Market Reforms
There are several new requirements for both fully-insured and self-funded employer group health plans, known as insurance market reforms. The changes begin to apply as of the first day of the first plan year beginning on or after September 23, 2010. For example, if the plan year for an employer’s health plan is the calendar year, these changes take effect as of January 1, 2011.
The changes include the following:
• Lifetime Limits Lifetime limits on the dollar value of essential health benefits are prohibited. For this purpose, the legislation defines essential health benefits as including emergency services, hospitalization, ambulatory services, maternity and newborn care, mental health and substance abuse treatment, prescription drugs, rehabilitative services, laboratory services, preventive services and pediatric services. Regulations are expected to be issued providing more guidance as to the meaning of essential health benefits. Individuals who have exceeded a plan’s existing lifetime limits (but who would otherwise be eligible for coverage) must be notified that they will again be eligible for benefits and given at least a 30-day period to reenroll in the health plan.
• Annual Limits Similar restrictions apply with respect to the annual limits on dollar value of essential health benefits. However, for plan years beginning before 2014, a plan may impose “restricted” annual dollar limits of no less than $750,000 for plan years beginning on or after September 23, 2010; $1.25 million for plan years beginning on or after September 23, 2011; and $2 million for plan years beginning on or after September 23, 2012. The annual dollar limit rules do not apply to medical FSAs and HSAs. Further, the annual dollar limit restrictions do not apply to a retiree only HRA or to an HRA that is integrated with a group health plan. HRAs not integrated with a group health plan and “mini-med plans” (i.e., limited benefit plans) may apply to HHS for an annual waiver of the rules for plan years beginning before 2014 if the plan can establish that the annual dollar limits are necessary to prevent a significant loss of coverage or increase in premiums.
• Eligibility of Dependent Children Plans must allow unmarried and married dependent children to be eligible until age 26. The eligibility of an employee’s natural, adopted, step or foster child can no longer be conditioned on requirements such as whether the child lives with or is financially dependent on the employee, or whether the child is a full-time student, unmarried or not working on a full-time basis. However, restrictions such as financial dependency can be imposed with respect to other categories of eligible children, such as grandchildren and children covered by legal guardianships. Plans are not required to cover spouses of children or children of children. Plans cannot vary the terms of coverage based on the age of the child or charge higher premiums with respect to older children. Plans must provide children who weren’t previously enrolled in or eligible for coverage under the plan’s old eligibility rules with a period of at least 30 days to enroll effective no later than the first day of the first plan year beginning on or after September 23, 2010. Written notice of this opportunity must be provided to the child (or to the employee who is the parent of the child).
• Pre-Existing Condition Exclusions Pre-existing condition limitations and exclusions are prohibited with respect to participants under age 19. For plan years beginning in 2014, pre-existing condition limitations and exclusions will also be prohibited with respect to participants age 19 and older.
• Coverage Rescissions A retroactive termination of health coverage is not permitted absent the participant’s fraud or intentional misrepresentation, or failure to timely pay the required premium. However, recent guidance clarifies that this rule does not prohibit retroactive termination as part of the monthly reconciliation of plan enrollment records nor does it prohibit termination of an ex-spouse’s coverage retroactive to the date of divorce where the employer learns of the divorce after the fact. The net effect of these changes is that more individuals will be eligible for an employer’s health plan and the plan will be required to provide more expansive coverage. As a result, these changes will likely increase the employer’s health insurance costs.
2. Special Relief for Grandfathered Plans A grandfathered plan is a fully-insured or self-funded health plan in existence on March 23, 2010 (the date the health care reform law was initially enacted). Grandfathered plans are subject to the insurance market reforms described above but have relief from others. For example:
• Eligibility of Dependent Children Grandfathered plans, like non-grandfathered plans, must allow dependent children to be eligible until age 26. However, for plan years beginning
before 2014, grandfathered plans are not required to offer coverage to an adult dependent child who is eligible for any other employer-sponsored health plan (such as through his or her own employer or the older child’s spouse’s employer).
• First Dollar Preventive Care Non-grandfathered plans must offer first dollar preventive care with no participant cost-sharing for in-network services. Grandfathered plans are not required to provide this coverage.
• Nondiscrimination Rules Fully-insured health plans are subject to new rules prohibiting discrimination in favor of highly compensated individuals. This restriction only applies to non-grandfathered plans and does not apply to grandfathered plans. The IRS recently announced a delay in the effective date for the new nondiscrimination rules. They will not apply until plan years beginning after regulations are issued. The regulations are expected to be issued no earlier than the second half of 2011.
• Patient Protections Non-grandfathered plans are subject to new patient protections to allow pediatricians and OB/GYNs to be named as primary care providers, to prohibit preauthorization requirements for emergency services and to require in-network coverage for out-of-network emergency room care. Grandfathered plans are not subject to these patient protections.
• Internal Appeals and External Reviews Non-grandfathered plans must expand their internal claim and appeal procedures to provide claimants with additional rights. Further, non-grandfathered plans must adopt new external review programs. Fully-insured plans will generally be subject to state external review requirements. Self-funded plans must generally comply with a new federal external review process under which independent
review organizations (IROs) will consider external appeals on behalf of the plan. Employers are required to notify participants in plan materials if a health plan is intended to qualify as a grandfathered plan. Model language is provided on the HHS website. Further, employers are required to maintain records documenting the coverage in effect on March 23, 2010 and any subsequent changes in order to demonstrate grandfathered status.
3. Changes Jeopardizing Grandfathered Plan Status Many plan changes will put a health plan’s grandfathered status at risk thus, forcing the grandfathered plan to also comply with the insurance market reforms applicable to non-grandfathered plans. Specifically, the following post-March 23, 2010 changes will cause a plan’s grandfathered status to be lost:
• Significant Reduction in Benefits The elimination of all or substantially all benefits to diagnose or treat a particular condition or the elimination of benefits for any element necessary to diagnose or treat a condition.
• Participant’s Coinsurance Any increase in a participant’s coinsurance percentage under the plan.
• Copay Increase An increase in an office visit copay, prescription drug copay or other copay beyond March 23, 2010 levels by more than the greater of $5 (adjusted annually for medical inflation) or a percentage equal to medical inflation (from March 23, 2010) plus 15%.
• Deductibles or Out-of-Pocket Limits An increase in deductibles and out-of-pocket limits above those in effect on March 23, 2010 by more than a percentage equal to medical inflation (from March 23, 2010) plus 15%. This restriction and the restriction on copay increases are cumulative. As a result, a modest increase may be permissible in the first year but subsequent increases will likely exceed the limits.
• Reduction in Employer Contribution A decrease in the percentage of the employer’s contribution toward the total premium/cost for any tier of coverage by more than 5% below the employer’s contribution rate in effect on March 23, 2010. So if an employee currently pays 20% of the premium and the employer pays the remaining 80%, that arrangement can continue in future years, with the employee absorbing 20% of any cost increases and the employer absorbing 80%. However, in this example, the employee can’t be required to pay more than 25% of the premium without triggering a loss in grandfathered status.
• Overall Annual Limit The addition of an overall annual limit unless the limit is replacing an overall lifetime limit and the annual limit is at least as high as the lifetime limit being eliminated.
• Change in Fully-Insured Policy In June 2010, regulations were issued indicating that a change in insurance policy or carrier with respect to a fully-insured plan will trigger a loss in the health plan’s grandfathered status. Subsequent guidance was issued in November 2010 reversing this position, but not on a retroactive basis. As a result, a new policy effective on or after November 15, 2010 does not jeopardize a plan’s grandfathered status. However, if a new policy takes effect after March 23, 2010 but before November 15, 2010, grandfathered status will be lost as a result of the change.
4. Special Rules for Certain Types of Plans
• Retiree Only Plans Retiree only plans are not subject to the insurance market reforms described above. Retiree only plans are health plans which are separate from the employer’s health plan for active employees.
• Dental, Vision and Medical FSA Plans Limited scope dental plans, limited scope vision plans and medical FSAs are exempt from the insurance market reforms provided that they constitute “excepted benefits” under HIPAA.
• Collectively-Bargained Plans Health plans maintained pursuant to a collective bargaining agreement are subject to the same insurance market reforms and same grandfathered plan rules as non-union plans. However, a fully-insured (but not self-funded) collectively bargained plan in effect on March 23, 2010 will still be considered a grandfathered plan until the last applicable collective bargaining agreement terminates. After the collective bargaining agreement terminates, the plan’s grandfathered status will be determined in the same manner as other plans.
5. Assistance for Employers
While the insurance market reforms may impose greater financial burdens on employers, there are some changes in the legislation designed to assist employers. They include the following:
• Early Retiree Reinsurance Program A temporary reinsurance program has been established for employer-sponsored retiree health plans. The program provides reimbursement beginning as of June 1, 2010 for early retirees age 55 and older who are not yet eligible for Medicare and their dependents with respect to 80% of claims in excess of $15,000 but less than $90,000 per year. The program sunsets at the end of 2013.
• Small Employer Tax Credit Starting in 2010, certain small employers who provide health coverage to their workers will be eligible for a tax credit. To qualify, an employer must have no more than 25 full-time equivalent employees (FTEs) with average annual wages of less than $50,000 per FTE. For tax years through 2013, the tax credit is up to 35% of the employer’s contribution toward health coverage provided the employer is contributing at least half the cost. The full credit is available to employers with 10 or fewer FTEs with average annual wages of less than $25,000 per FTE. The credit phases out as the size of the employer’s workforce and average annual wages increase. For tax years 2014 and later, the maximum tax credit increases to 50%. In December 2010, the IRS issued guidance regarding the tax credit and published Form
8941 and its instructions to calculate and claim the tax credit for 2010. To qualify for the tax credit after 2010, not only must the employer contribute at least half the premium cost, the employer’s contribution share must also be a uniform percentage for each employee.
6. Changes Affecting FSAs, HSAs and HRAs
Some of the provisions in the health care reform legislation are designed to raise tax revenue to pay for other provisions. Several of the revenue raisers affect medical FSAs, HSAs and HRAs.
Here is a summary:
• Discontinuation of Pre-Tax Reimbursement of Over-the-Counter Drugs Medical FSAs, HSAs and HRAs may no longer reimburse drugs which are not prescribed. As a result, an over-the-counter (OTC) drug may not be reimbursed unless it is prescribed by a physician or is insulin. This change takes effect as of January 1, 2011. In September 2010, the IRS issued a notice indicating that debit cards generally could not be used to purchase OTC
drugs after January 15, 2011 in order to comply with this new rule. However, in late December 2010, the IRS issued a new notice allowing debit cards to be used at all pharmacies and vendors for the purchase of prescribed OTC drugs when certain requirements are satisfied.
• Cap on Medical FSA Contributions Effective for 2013 and later tax years, annual medical FSA contributions will be capped at $2,500 per participant. This is a calendar year maximum similar to the $5,000 dependent care FSA maximum (rather than a plan year maximum for those employers operating their Section 125 plans on a non-calendar year basis). The cap will be adjusted for inflation after 2013.
• Excise Tax for HSA Distributions The excise tax on early distributions from an HSA for nonmedical expenses is increased from 10% to 20% effective in 2011. These changes, particularly regarding over-the-counter drugs and the medical FSA cap, will make medical FSAs, HSAs and HRAs benefits less attractive to employees.
7. Other Revenue Raisers
Other revenue raising provisions in the legislation include the following:
• Cap on Itemized Deductions for Medical Expenses Currently, taxpayers may deduct unreimbursed medical expenses exceeding 7.5% of their adjusted gross income. The 7.5% threshold is being increased to 10% effective for 2013 and later tax years. However, if a taxpayer or his or her spouse is age 65 or older, the threshold continues at 7.5% through 2016.
• Payroll Tax Increase Currently, the Medicare hospital insurance payroll tax for employees is 2.9% (1.45% paid by the employee and 1.45% paid by the employer, with self-employed individuals paying 2.9%). Beginning in 2013, single taxpayers with wages in excess of $200,000 and married taxpayers filing jointly with annual wages in excess of $250,000 will be subject to an additional 0.9% Medicare hospital insurance payroll tax on wages in
excess of these thresholds. In addition, these higher income individuals will be subject to a 3.8% tax on their net investment income which includes interest, dividends and royalties. However, net investment income for this purpose does not include distributions from a 401(k) plan or other qualified retirement plan.
• Premium Taxes Beginning with plan years ending after September 30, 2012 (e.g., January 1 through December 31, 2012 for a calendar year plan), a premium tax will be assessed against fully-insured and self-funded plans to finance a research program evaluating and comparing health outcomes and clinical effectiveness. The premium tax is $1 per covered life for the first year and increases to $2 per covered life for subsequent years.
• Excise Tax on Cadillac Health Plans Beginning in 2018, there will be a 40% excise tax on the value of “cadillac” health plans. For this purpose, a cadillac health plan has an aggregate value of more than $10,200 for single coverage and $27,500 for family coverage. The total value of medical and prescription drug coverage is included in the calculation but dental and vision coverages are excluded. The value of FSA, HSA and HRA coverages are also included in the calculation. The thresholds are increased to $11,850/single and $30,950/family for employees engaged in certain high risk professions and for early retirees (individuals age 55 or older). If the dollar thresholds are exceeded, the excise tax is imposed on the insurer in the case of fully-insured plans, on the “person that administers the plan benefits” (appears to be the TPA) in the case of self-funded plans, and on the employer with respect to HSAs.
8. Pay or Play System
Beginning in 2014, the centerpiece of the health care reform legislation will begin to apply. Each state will establish an exchange. The exchange will be similar to a gateway or clearinghouse to help individuals and groups shop for health coverage in a more efficient and comprehensive manner. At the same time, individuals will be required to either enroll in their employer’s health plan or alternatively, enroll in coverage through the exchange or a government program. Most individuals who fail to enroll will pay a penalty. Certain larger employers will also be required to offer health insurance to their full-time employees or pay a penalty.
Here are the details:
• Exchange Health plans offered on the exchange will be required to offer “minimum essential coverage” at one of four levels of “actuarial value” (the percentage of covered expenses paid by the plan):
• Bronze (60% actuarial value)
• Silver (70% actuarial value)
• Gold (80% actuarial value)
• Platinum (90% actuarial value)
The out-of-pocket limits for these health plans cannot exceed the maximum out-of-pocket limits for HSAs (which are currently $5,950/single and $11,900/family for 2011). Lowincome individuals with income no greater than 400% of the federal poverty level will be subject to lower out-of-pocket limits. There will also be a “young invincibles” option available to individuals age 30 and younger. The state exchanges will initially offer coverage to individuals and certain small employer groups. Before 2017, exchanges may only cover small employer groups with 100 or fewer employees. Beginning in 2017, states can open up their exchanges to larger employers. If an employer offers coverage to its employees through the exchange, it can allow employees to purchase the coverage on a pre-tax basis under the employer’s Section 125 plan.
• Individual Mandate Individuals will be required to enroll in health insurance with minimum essential coverage or pay a penalty. For this purpose, minimum essential coverage is available through public programs such as Medicaid or Medicare, individual coverage on the exchange or employer-provided coverage. Minimum essential coverage generally provides a comprehensive set of services that has an actuarial value of at least 60% and has maximum out-of-pocket limits no greater than the HSA limits. A grandfathered employer group health plan can still constitute minimum essential coverage even if it doesn’t provide the same comprehensive set of services and has maximum outof- pocket limits exceeding the HSA limits. The penalty is the greater of a flat dollar amount and a percentage of household income. The flat dollar amount is $95 for 2014, $325 for 2015 and $695 for 2016. For later years,
the flat dollar amount will increase for changes in the cost-of-living. The percentage of household income is .5% for 2014, 2% for 2015 and 2.5% for 2016 and later years. However, no penalty applies for a year if the taxpayer’s household income is below the threshold for filing a federal income tax return. The penalty will also not apply to individuals who cannot afford coverage because the lowest cost option would exceed 8% of their household income, individuals who do not maintain coverage for qualifying religious reasons, U.S. citizens residing outside the country, illegal aliens, incarcerated individuals, individuals allowed to be a dependent for tax filing purposes, American Indians, and individuals with no minimum essential coverage for a period of less than three continuous months.
Low income individuals will be provided with assistance to obtain health care coverage on the exchange:
• Premium Credit Individuals with incomes no greater than 400% of the federal poverty level will be eligible for an advanceable, refundable premium credit when they purchase health coverage on the exchange. The premium credit will be set on a sliding scale depending on the individual’s income. These low income individuals will also be eligible for cost-sharing subsidies to help pay their out-ofpocket costs. Individuals who are offered coverage by their employer are not eligible for the premium credit or cost-sharing subsidy unless the employer’s plan does not have an actuarial value of at least 60% or the employee’s required premium for the employer’s plan exceeds 9.5% of the employee’s income.
• Vouchers Where the individual is eligible for employer-provided health coverage, the employer must make its employer contribution for coverage available to the individual as a voucher to purchase coverage on the exchange. However, this option is only required for employees with income no greater than 400% of the federal poverty level where the employee’s premium for the employer’s plan would be between 8% and 9.8% of the employee’s income. The vouchers are excludable from the individual’s taxable income and must be equal to the contribution that the employer would have made to its own plan. The voucher can only be used to purchase coverage through the exchange, but any excess funds are payable to the individual on a taxable basis.
• Employer Mandate The employer must offer health coverage to its employees or pay a “free rider” penalty. The penalty only applies to employers with more than 50 full-time employees. For this purpose, a full-time employee is an employee who works, on average, 30 or more hours per week. A part-time employee is counted as a full-time employee equivalent for purposes of the 50 full-time employee threshold. If the threshold is exceeded, however, any part-time employee is disregarded in determining the amount of the employer’s penalty. Seasonal employees are generally disregarded for purposes of the 50 full-time employee threshold. All employers in the same IRS controlled group are aggregated for purposes of the 50 full-time employee threshold. If the penalty applies, the employer’s first 30 full-time employees are excluded when calculating the penalty. If the employer does not offer a health plan and has at least one full-time employee who enrolls in health coverage through the exchange and becomes eligible for the premium credit, the employer must pay a penalty of $2,000 per full-time employee per year. The penalty is determined and assessed on a monthly pro rata basis (i.e., 1/12 of $2,000). If the employer does offer a health plan but has at least one full-time employee who enrolls in health coverage through the exchange and receives the premium credit, the employer is subject to a penalty of $3,000 per individual receiving the premium credit. However, the employer’s total penalty is capped at $2,000 per full-time employee as described above. Again, the penalty is determined and assessed on a monthly pro rata basis.
• Automatic Enrollment If an employer offers at least one health benefit option and has 200 or more full-time employees, it must automatically enroll all new employees in a health benefit option and continue enrollment of current employees. The employer must provide notice to allow employees to opt out of the automatic enrollment option and select any other available option or opt out altogether. Guidance was recently issued to clarify that this requirement will not apply until the DOL issues regulations (which it intends to do by 2014).
9. Increased Reporting
Employers will be responsible to provide more information to the federal government and to employees in order to implement health care reform. For example:
• W-2 Reporting Employers must include on the W-2 statements issued to employees, the aggregate cost of employer-sponsored health benefits. The amount to be reported is similar to the COBRA cost. The total value of all health plans must be included except for contributions to an HSA and employee contributions to an FSA. Health care reform made this new reporting requirement effective starting with the 2011 tax year. But in October 2010, the IRS issued a notice delaying the implementation of this requirement for one year. Reporting of these amounts will now first be required with respect to W-2s issued for 2012.
• Summary of Benefits No later than March 23, 2012 participants must be provided with a four-page summary of benefits regarding the employer health plan in which they are enrolled, including a description of coverage, exceptions and limitations on coverage, costsharing provisions and renewability and continuation of coverage provisions. This document is in addition to the SPD.
• Notice of Availability of Exchange and Premium Tax Credit Before the exchanges become effective in 2014, at the time an individual is hired, the employer must notify the employee of the existence of the exchange, that the employee may be eligible for a premium credit/cost-sharing subsidy under the exchange and that if the employee purchases health coverage through the exchange, he or she will lose the employer contribution toward health benefits offered by the employer except as otherwise provided under the voucher program.
• Reporting to IRS Beginning in 2014, large employees with 50 or more full-time employees must report to the IRS certain prescribed information such as whether full-time employees are eligible for minimum essential coverage, the length of any waiting period, the number of months during the calendar year for which coverage under the plan is available, the monthly premium for the lowest cost option in each of the enrollment categories under the plan, the employer’s contribution share, the number of the employer’s full-time employees on a monthly basis, and the name, address and Social Security number of each full-time employee enrolled in the plan and the months during the year they were covered. The health care reform legislation is complex and contains many provisions. In many cases, it will be necessary for federal regulators to issue additional guidance explaining how the laws will be interpreted and establishing the various procedures and programs contemplated by the legislation.
We will continue to keep you informed as developments unfold. In the meantime, if you have any questions, please contact your Benecept Consultants representative.