NEW HEALTH CARE LAW – A First Primer
The recently enacted Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, referred to collectively as “Health Care Reform”, mark the dawn of a new age of mandated health coverage that will affect virtually all employers nationwide. Health Care Reform imposes sweeping change with multiple rolling deadlines, but it provides little in terms of practical, concrete guidance. While we cannot be certain today of the eventual health care landscape of tomorrow, we can be certain of preliminary steps that employers should take as they brace for the impact of Health Care Reform.
Key Health Care Reform Dates
March 23, 2010
- Certain large employers must auto-enroll employees in group health plans
- Certain small employers eligible for tax credit for offering group health coverage
- Adoption assistance credit and reimbursement amounts increased for 2010
June 23, 2010
- HHS opens Early Retiree Reinsurance Program
September 23, 2010
- Certain group health plans with plan years beginning on or after this date must comply with certain coverage mandates
January 1, 2011
- Health FSAs may no longer reimburse non-prescription OTC drugs, except insulin
- Employers must calculate value of group health insurance and report on Form W-2
- Penalties increase for early withdrawals/distributions from HSAs & MSAs
- Simple cafeteria plans become available
March 23, 2012
- Certain plan sponsors must provide benefit summaries to participants and applicants
January 1, 2013
- FSA annual reimbursement limit capped at $2,500
- Tax deduction for retiree prescription drug coverage eliminated
March 1, 2013
- Employers must provide state health exchange notices to employees
January 1, 2014
- Large employers must offer group health coverage or pay penalty
- Certain group health plans with plan years beginning on or after this date must comply with certain coverage mandates
- Certain employers must offer free choice vouchers to certain employees
- Most employers must notify employees and IRS as to whether or not they offer minimum essential coverage
January 31, 2015
- Employers who provide minimum essential coverage must begin filing annual information returns
January 1, 2018
- Excise tax levied on high-cost health plans
Health Care Reform Action Items
Plan for Auto-enrollment. Effective immediately, any employer with 200 or more employees that sponsors a group health plan offering enrollment to its employees must begin automatically enrolling new employees (and maintaining/re-enrolling current participants), subject to plan waiting periods. Employers also must provide employees written notice of the plan’s auto-enrollment provision, as well as their right to opt out of coverage.
Though Health Care Reform makes auto-enrollment effective “immediately”, it provides no guidance on how to comply with the edict. Forthcoming regulations and guidance should clarify auto-enrollment timing, as well as detail the form and content of any required notices. Employers should talk to their benefits counsel to determine what steps to take now for auto-enrollment compliance.
Gauge the Impact of New Tax Credits. Certain small employers that offer group health coverage will be eligible for tax credits to help offset the costs of providing such benefits. Health Care Reform defines “small employer” as an employer with 25 or fewer full-time (including full-time equivalents) employees with average annual wages of $50,000 or less. For 2010 through 2013 plan years, these small employers may qualify for a federal tax credit of up to 35% of their costs of providing group health benefits. Beginning with the 2014 plan year, small employers may elect a tax credit in two years of up to 50% of their group health care costs for coverage purchased on a state health exchange.
Consider Utilizing Early Retiree Reinsurance Program. The Department of Health and Human Services (“HHS”) on June 23, 2010, will open a temporary Early Retiree Reinsurance Program (“ERRP”) to reimburse employers for up to 80% of between $18,000 and $90,000 of their costs of providing medical, surgical, hospital and prescription drug coverage to retirees age 55 or older (and their spouses, surviving spouses and dependent children) who are ineligible for Medicare. Employers that offer qualifying retiree health coverage must decide whether or not to avail themselves of ERRP and, if they do, complete an HHS-required application.
Examine Current Health Plan Offerings. Many popular media reports have trumpeted that every Health Care Reform provision applies to every employer and every health plan. The truth is that, though Health Care Reform will affect virtually all employers and plans to some degree, not all Health Care Reform provisions apply to all employers or plans. For example, Health Care Reform recognizes group health plans in existence as of March 23, 2010, as part of a class of “grandfathered” plans. Such plans will avoid some of the mandated provisions outlined below.
Effective for plan years beginning on or after September 23, 2010, all plans must:
- Offer coverage to adult children up to age 26, unless they have coverage under their own employer-sponsored plan;
- Eliminate pre-existing condition exclusions for children under age 19;
- Eliminate lifetime dollar limits;
- Restrict annual dollar limits; and
- Eliminate coverage rescission provisions except for cases of fraud or intentional misrepresentation.
Effective for plan years beginning on or after September 23, 2010, non-grandfathered plans must:
- Cover certain preventative care at 100%;
- Cover emergency services on an in-network basis and with no pre-authorization requirement;
- Cover certain clinical trials;
- Allow participants to select OB/GYN or pediatrician as primary care provider; and
- Adopt appeals procedures, including internal claims and external review, for coverage determinations and claims.
Effective for plan years beginning on or after January 1, 2014, all plans must:
- Eliminate pre-existing condition exclusions for all enrollees;
- Eliminate annual dollar limits on all essential coverage;
- Limit deductibles and copayments to prescribed amounts; and
- Cap waiting periods at 90 days.
Additionally, fully insured, non-grandfathered plans will become subject to the same nondiscrimination requirements now imposed on self-insured plans effective for plan years beginning after September 23, 2010. Thus, new fully insured group health plans will be unable to offer broader or richer benefits to certain key employees unless they can pass strict nondiscrimination tests.
Address Adoption Assistance Benefits. Health Care Reform extends the sunset provision on favorable tax treatment of qualifying adoption assistance expenses through 2011, and increases the amount that can be reimbursed, starting in 2010, to $13,170. Employers who offer adoption assistance benefits to their employees will need to update relevant communication materials.
Modify Health Flexible Spending Account (“FSA”) Plans. Health Care Reform prohibits employees from using health FSA monies to pay for most over-the-counter (“OTC”) drug expenses (other than insulin and prescription OTC drugs) effective January 1, 2011. Additionally, Health Care Reform caps at $2,500 the amount that may be reimbursed through a health FSA, beginning effective January 1, 2013. Employers who sponsor health FSAs must modify those plans accordingly.
Communicate Increased Healthcare Savings Account (HSA) and Archer Medical Savings Account (MSA) Distribution Penalties. Effective January 1, 2011, individuals who take a distribution from either an HSA or MSA prior to age 65 for a purpose other than covering qualified health care expenses will pay a 20% tax. Employers should review any employee communications regarding HSAs and MSAs to make sure employees are fully informed of the potential impact of unqualified distributions.
Weigh the Benefits of Offering a New Simple Cafeteria Plan. Health Care Reform creates a simple cafeteria plan for employers with 100 or fewer employees. Starting January 1, 2011, these employers can adopt a plan if it offers uniform benefit choices to all employees who work at least 1,000 hours per year, and the plan provides for uniform contributions of at least certain minimum prescribed amounts. Employers will need to analyze the impact of offering such a plan.
Prepare for New Reporting Requirements. Health Care reform imposes several new reporting requirements on employers:
- All employer plan sponsors must calculate and report to employees their share of the aggregate cost of employer-sponsored health care, beginning January 1, 2011 (effectively W-2s that will issue in 2012). A new box on Form W-2 will allow employers to report this amount. Employers will need to work with their payroll departments and third-party processors to ensure that this information is properly reported using the forthcoming revised Form W-2.
- Beginning on March 23, 2012, self-insured plan sponsors must provide a benefits summary to each participant and plan applicant stating whether the plan meets certain coverage and cost-sharing provisions of Health Care Reform. Plans must provide 60-day advance notice of any changes to the benefits summary. HHS will prescribe the structure and content of this form in forthcoming guidance.
- Beginning March 1, 2013, employers must notify employees of the existence of a state health exchange and provide a summary of available exchange services, as well as exchange contact information. Also, this notice must inform employees of tax credits, cost-sharing subsidies and free choice vouchers, as well as the effect of an employer not offering a free choice voucher. HHS will prescribe the structure and content of this form in forthcoming guidance.
- Beginning January 1, 2014, most employers must notify employees and the IRS as to whether or not the employers offer minimum essential coverage as defined under Health Care Reform. These notices, which the IRS will develop, must identify individuals receiving group coverage, as well as information on the length of coverage, whether they obtained coverage on a state health exchange and any amount they received in federal assistance to pay for such coverage.
- Beginning January 31, 2015, employers who provide minimum essential coverage to an individual during a calendar year must file an annual information return.
Assess the Effect of Losing Retiree Prescription Drug Double Benefit. Health Care Reform closes what had become a rather lucrative loophole for employers who claimed a tax deduction for providing retiree prescription drug benefits and also accepted a federal subsidy for such benefits. Starting January 1, 2013, employers who provide retiree prescription drug benefits must offset their related tax deduction by the amount of any federal subsidy they received. Finance committees will need to assess the bottom line impact; several large employers already are claiming massive expected earnings charges.
Determine Whether to Play or Pay. Health Care Reform dictates that effective January 1, 2014, large employers must offer qualifying minimum essential group health coverage to their employees or pay a penalty euphemistically dubbed a “shared responsibility payment”. A large employer is one that has employed an average of 50 full-time employees during the preceding calendar year.
A large employer must determine whether it wishes to offer group health benefits or pay the penalty imposed by Health Care Reform. If the employer fails to offer coverage (or offers coverage that is unaffordable, or for which its share of costs is less than 60%), and at least one employee certifies receiving coverage through a state health exchange (to be implemented by January 1, 2014) and receiving a governmental tax credit or cost-sharing subsidy, the employer must pay $167 per month per employee. The employer may disregard 30 employees in calculating its overall penalty.
Additionally, if a large employer offers qualifying group health coverage but an employee opts out in favor of coverage from a state health exchange, the employer must pay a penalty of $250 for each such employee. Health Care Reform caps this penalty at the maximum amount that would have been due had the employer failed to offer coverage.
Benefit plan committees and human resources personnel will need to begin assessing whether their companies employ 50 employees, whether their plans conform to Health Care Reform’s minimum essential coverage standards, and whether it will be cheaper and more efficient to modify nonconforming plans or to terminate or not modify such plans and pay any resulting penalties.
Plan to Provide Free Choice Vouchers. Health Care Reform requires certain employers to offer free choice vouchers to qualified employees so they can purchase group health coverage on the state health exchange effective January 1, 2014. The vouchers aim to help certain low-income individuals comply with Health Care Reform’s individual coverage mandate in certain situations when they cannot afford employer-sponsored coverage. Employers will be permitted to deduct the amount of free choice vouchers as compensation expenses. HHS and IRS presumably will provide more detail about this program.
Brace for High-Cost Health Plan Excise Tax. Effective January 1, 2018, Health Care Reform imposes a 40% excise tax on the excess benefit, as defined in the legislation, with respect to coverage provided by an employer. IRS apparently will require employers to calculate the amount of the tax. Self-insured plan sponsors will pay the tax directly, while IRS will assess insurers of insured high-cost plans directly. Employers should monitor regulatory developments and IRS pronouncements as the effective date nears.