Health Care Reform’s Impact on Employers
Please click here to view a summary of important dates for employers.
On March 23, 2010, President Obama signed into law the “Patient Protection and Affordable Care Act” (P.L. 111-148) (“PPACA”), otherwise called Health Care Reform. By Friday, March 26, the final reconciliation, or what some have called a “fix-it” package that makes modifications to the PPACA, will have passed both the House and Senate. This provides a brief summary of the major provisions that will have an impact on employers.
The centerpiece of Health Care Reform is the requirement that, with limited exceptions, all individuals must be covered by an employer-provided health plan or individual health insurance policies that provide “minimum essential coverage.” In order to help individuals find such coverage at reasonable expense, states must set up insurance exchanges that are intended to help individuals find coverage and individuals will be provided with tax credits to help pay insurance premiums. Employers will have the choice to offer compliant health coverage for employees or pay significant penalties.
Affected Health Care Plans
The PPACA distinguishes among several categories of health plans for purposes of application of certain restrictions and requirements.
- PPACA applies to both fully-insured and self-insured employer health plans.
- PPACA distinguishes between grandfathered group health plans, which are those group health plans in existence as of March 23, 2010, and new group health plans.
- Self-insured employer group health plans and multi-employer welfare arrangements (“MEWA”) are subject to these reforms unless otherwise noted.
Grandfather Provisions: PPACA exempts so-called “grandfathered plans” from certain requirements applicable to health plans in the group and individual markets. Grandfathered plans include any group health plan or individual plan that was in existence on the date of enactment. PPACA provides that family members are permitted to join the grandfathered coverage if the terms of the plan in effect on the date of enactment would allow such enrollment. New employees (and their families) may enroll in a grandfathered group health plan. Grandfathered group health plans provided by employers are deemed to meet the “minimum essential coverage” for purposes of the individual mandate to have insurance.
Comment: The PPACA is silent with respect to whether an employer may modify or change the group health plan, including changing insurance carriers, as the plan exists on the date of enactment and maintain the group health plan’s status as a grandfathered plan. HHS may issue guidance or regulations on this issue.
Requirements and Prohibitions: Effective beginning with the first plan year beginning on or after September 23, 2010, grandfathered plans are subject to the following:
- No lifetime benefit limits.
- No revocation of coverage (except for fraud/intentional conduct).
- No restrictions on annual limits on the dollar value for “essential health benefits” as determined by HHS.
- Requirement of plan coverage of dependent children up to age 26 if the dependent is not eligible to enroll in another employer-sponsored health plan.
- No preexisting condition exclusions for enrollees under age 19.
Effective for the first plan year beginning on or after September 23, 2010 (six (6) months after enactment), non-grandfathered plans are subject to the following:
- No lifetime benefit limits.
- No revocations of coverage (except for fraud/intentional conduct).
- No restrictions on annual limits on the dollar value for “essential health benefits” as determined by the Department of Health and Human Services ("HHS").
- Requirement for coverage of certain preventive health services and immunizations without cost to covered individuals.
- No discrimination in favor of higher-wage employees (self-insured plans continue to be subject to prior non-discrimination rules).
- No preexisting condition exclusions for enrollees under age 19.
- Requirement for plan coverage of dependent children up to age 26.
Reinsurance: Within 90 days of enactment of PPACA, HHS is required to implement a temporary program that provides reimbursement to employers whose group health plans cover individuals who retire, do not currently qualify for Medicare, and are between the age of 55 and the date on which the individual is eligible for Medicare. Employers providing such coverage may qualify for reimbursement of up to 80 percent of the costs of providing the coverage to such individuals to the extent the costs exceed $15,000 and do not exceed $90,000. The reimbursements must be used to lower costs in the employer’s plan. The temporary program expires on January 1, 2014.
Comment: For those employers who provide some form of retiree health benefits, this reimbursement is an opportunity to recoup some of the expense associated with the benefit.
Small Business Tax Credit: Beginning in 2010, qualifying small businesses will receive a federal tax credit to offset up to 35 percent of health insurance costs. In order to qualify, employers generally must have no more than 25 full-time equivalent employees employed during the year, the average annual full-time equivalent wages of an employee must be no more than $50,000, and the employer must contribute at least half of the premium. The credit is reduced for each full-time employee in excess of 10, as well as average annual compensation of those employees in excess of $25,000. Additionally, beginning in taxable years after 2013, the employer must participate in an insurance exchange in order to claim the credit, which may be up to 50 percent, and may only claim the credit for up to 2 years after 2013.
Nondiscrimination Rules: Effective beginning with the first plan year beginning on or after September 23, 2010, fully-insured group health plans are subject to the same nondiscrimination rules imposed upon self-insured group health plans under section 105(h) of the Internal Revenue Code.
Comment: Employers with fully-insured group health plans were able to maintain different coverage with respect to certain highly-compensated employees because those group health plans were not subject to nondiscrimination rules. Those differences in coverage must now be revisited and revised to avoid nondiscrimination issues.
Health Insurance Exchanges
Beginning in 2014, states will begin to operate health insurance exchanges for both the individual and the small group market, referred to as the Small Business Health Options Program (“SHOP”) Exchange. Exchanges are intended to facilitate the purchase of health care insurance for the individual and small group markets. The exchanges will serve as portals for consumers and will provide consumer-oriented information to enrollees and prospective enrollees. Exchanges will also certify that insurance offered through them complies with new federal standards for “essential health benefits.”
States may combine the individual and SHOP exchanges. For the purposes of SHOP, a small employer is defined as having between one and 100 employees. However, until 2016, states can limit the small group market to employers with 50 or fewer employees. Beginning in 2017, states may allow large companies, those with more than 100 employees, to participate in the exchanges.
Delayed Employer Requirements
Employer Penalties: While there is no mandate that an employer provide health care coverage, effective 2014, PPACA imposes a fine on employers if an employee purchases health insurance through an exchange and receives a federal subsidy. Presumably an employee would do this only if his or her employer does not offer coverage or the coverage is expensive. The fines are as follows:
- Employers (1) with more than 50 employees; (2) that do not offer health care coverage; and (3) have at least one full-time employee (FTE) who receives a premium tax credit from the federal government will be fined $2000 per FTE per year. In calculating the number of FTEs, the first 30 FTEs are subtracted.
- Employers (1) with more than 50 employees; (2) that do offer health care coverage; and (3) have at least one FTE who receives a premium tax credit from the federal government will be fined the lesser of $3,000 for each employee receiving a credit or $2000 for each FTE.
- Employers who are part of a controlled group must count all employees in the controlled group to determine whether it is subject to the fines. The deduction for the first 30 FTEs are allocated ratably to each member of the controlled group based upon the number of employees.
- In determining the number of FTEs, an employer must aggregate the number of hours of service of non-FTEs for a month and divide by 120 to determine the number of additional FTEs it should add to its actual number.
Pre-existing Condition Exclusions: Effective January 1, 2014, the prohibition of pre-existing condition exclusions applies to all enrollees in non-grandfathered plans.
Cost Accounting Reports/Medical Loss Ratio Requirements: Beginning not later than January 1, 2011, the PPACA requires that health insurance issuers report to HHS the percentage of premiums used to pay medical claims as opposed to administrative expenses. In the case of the large group market, if the ratio of costs expended on medical-related coverage or other activities to increase health and wellness to the total amount of revenue is less than 85 percent, the plan would be required to provide an annual rebate to each enrollee on a pro rata basis.
Employee Notifications: Employers must provide a summary of benefits to each employee that is not more than four pages in length, that is written in a culturally and linguistically appropriate manner, and contains certain content related to covered benefits, exclusions, cost sharing, and continuation coverage. HHS has twelve (12) months from the date of enactment to provide guidance regarding the uniform explanation of coverage and employers have twenty-four (24) months from the date of enactment to provide such explanation to employees. In addition, the explanation must be updated for material modifications to coverage not less than 60 days in advance of effective date of the change. Failure to comply may result in a $1,000 penalty for each failure.
In addition, beginning on March 1, 2013, employers must provide written notice to current employees—and new employees as they are hired—of the existence of a health insurance exchange and how the employee may contact the exchange to request assistance. If the employer’s share of the total costs of benefits is less than 60 percent of the costs (actuarial value), the employer must inform each employee that he or she may be eligible for a premium tax credit if the employee purchases insurance through the exchange, but that the employee will lose the employer contribution (if any) made with respect to health coverage.
Vouchers for Health Insurance Exchange: Effective January 14, 2014, employers with more than 50 employees that offer health insurance coverage must provide a “free choice voucher” to those employees who meet the following requirements: (1) an income less than 400 percent of the federal poverty level; (2) share of the premium exceeds 8 percent but is less than 9.8 percent of income; and (3) choose to enroll in the exchange. The voucher amount must be equal to what the employer would have paid if the employee had chosen the employer’s plan. Employers will not be subject to fines for such an employee’s participation in the exchange.
IRS Reporting: Effective January 1, 2014, employers with more than 50 FTEs must certify to the IRS whether they offer employees minimum essential coverage, the length of any waiting period, monthly premiums, the employer’s share of the total costs of benefits, number of FTEs per month, and identifying employee information, including whether the employee was covered under any benefit plan. The IRS may by regulation require additional information. Employers must also provide employees with notice of the information provided to the IRS.
Automatic Enrollment: Beginning on January 1, 2014, employers with more than 200 FTEs that offer health insurance are required to automatically enroll employees in a group health plan if a plan is offered by that employer. Employees must be given reasonable advance notice and the opportunity to elect to enroll in a different level of coverage, if available, or to opt-out altogether.
No Excessive Waiting Periods: Effective for plan years beginning on or after January 1, 2014, group health plans may not impose waiting periods in excess of 90 days.
Health and Wellness
PPACA adopts standards that are substantially similar to those in existence under HIPAA. Importantly, however, PPACA increases the maximum incentive available to 30 percent of the cost of COBRA coverage for those participating in the program and authorizes the Secretaries of Labor, Treasury, and HHS to increase the incentive to 50 percent by regulations.
Comment: The increased incentive provides employers an opportunity to implement more aggressive wellness programs through larger incentives and premium discounts.
FSA: Effective January 1, 2013, contributions to a flexible spending account for medical expenses are limited to $2,500 per year, increased annually by a cost of living adjustment.
Medicare Tax: Effective January 1, 2013, PPACA increases the employee-side Medicare Part A tax rate from 1.45 percent to 2.35 percent on individuals earning more than $200,000 (indexed) and married couples filing jointly earning more than $250,000 (indexed). There is no corresponding increase in the employer-side payroll taxes. PPACA also imposes a 3.8 percent tax on unearned income for higher-income taxpayers, for which the thresholds are not indexed.
Excise Tax on Insurers of High-Cost Plans: Beginning on January 1, 2018, PPACA imposes an excise tax with respect to employer-sponsored group health plans (both self-funded and fully-insured) whose annual premiums exceed $10,200 for an individual and $27,500 for family. The bill indexes the threshold premium to the consumer price index for urban consumers (CPI-U) beginning in 2020. In addition, threshold amounts will be increased for retirees age 55 and older who are not eligible for Medicare and for employees in high-risk professions. The tax is equal to 40 percent of the value of the plan that exceeds the threshold amounts.
New “Voluntary” Assisted Living Insurance
The Health Care Reform bill includes the Community Living Assistance and Supports (“CLASS”) program, which is a voluntary insurance program that will pay cash benefits of an average of $50 per day to individuals with functional limitations to purchase non-medical services. It is intended to provide the support necessary to enable individuals to continue living in residential setting. This is relevant to employers because they are required to automatically enroll employees in a system of voluntary payroll deductions. Employees must opt-out of the program. It is effective January 1, 2011, but requires a five year vesting period before benefits are provided.
This summary does not address all of the PPACA provisions applicable to employers. If you have any additional questions or concerns, please contact one of our professionals.