With the passage of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (hereinafter collectively referred to as the “PPACA”), a new era in the history of the American health care system has begun. Many questions remain on whether the PPACA will achieve all of its intended goals. For example, will the new health care exchanges formed under the PPACA increase the transparency and efficiency of the insurance markets? How many new individuals will obtain health coverage? What impact will the new insurance mandates have on the cost of health insurance? No one knows these answers for sure.
Key elements of the PPACA include incentives and penalties that are designed to encourage large employers to offer health care coverage to their employees, coupled with incentives and penalties to encourage individuals to procure heath care coverage. The goal is to have almost all U.S. citizens and legal immigrants covered by health insurance. This goal will be facilitated by state run health care exchanges that will make it easier for individuals to obtain coverage under policies that have built in consumer protections (such as prohibitions on preexisting condition limitations, rescissions, and certain other unfavorable insurance practices). At its core, the PPACA is more focused on increasing access to health care than reducing health care costs. Accordingly, it will be interesting to see exactly what impact the PPACA will have on the cost of health care.
The PPACA will provide new challenges to employers. There are new mandates on what needs to be included in health plans, new reporting and disclosure requirements, new subsidies and tax credits, and new penalties. The purpose of this Alert is to summarize some of the significant implications the PPACA will have on employers. The good news is that many of the changes will not become effective for a few years so there will be time to understand and plan for them.
Play or pay
Congress recognized the importance of keeping employers incented to provide health care coverage. This incentive is provided through a penalty that is imposed on certain employers who do not provide health care coverage to their employees. Effective January 1, 2014, employers with at least 50 employees who do not offer their employees and dependents with certain specified minimum levels of health coverage and have at least one employee receiving premium assistance from the federal government will have to pay a monthly tax of $166.67 (i.e., one-twelfth of $2,000) per full-time employee (but ignoring the first 30 full-time employees).
A different penalty is imposed if the employer offers coverage but the coverage does not satisfy specified minimum levels. Generally, the specified minimums require: (i) the employee’s cost for the coverage to be less than or equal to 9.5% of the employee’s household income, and (ii) the actuarial value of the benefits covered under the plan to equal or exceed 60% of the cost of the covered services. Employers who offer coverage that does not satisfy these specified minimums must pay a monthly tax of $250 (i.e., one twelfth of $3,000) for each full-time employee who receives federal premium assistance for coverage (with a cap on such penalty equal to $166.67 times the number of the employer’s full-time employees but ignoring the first 30 full-time employees).
The play or pay penalties are indexed for inflation. For purposes of these rules, a full-time employee is an employee who works at least 30 hours per week. Beginning in 2014, penalties are also imposed on certain individuals who do not procure health insurance.
Employer and employee subsidies
The PPACA contains a number of subsidies to encourage employees to purchase health care coverage and to encourage employers to provide it.
After 2013, employers offering minimum essential coverage through an employer-sponsored plan for which they pay some portion of the cost will be required to provide what are known as “free choice vouchers” to each qualified employee. The employee can use the voucher to purchase coverage on one of the state health care exchanges described below. Employees eligible to receive vouchers are those whose required contribution for the employer-provided coverage exceeds 8%, but does not exceed 9.8%, of the employee’s household income; whose household income isn’t greater than 400% of the poverty level for a similarly-sized family; and who don’t participate in a health plan sponsored by their employer.
The amount of the voucher is the value of the employer’s contribution to its sponsored health plan. If the employer offers multiple options, the value of the voucher is the amount that the employer would have paid had the employee selected the option for which the employer pays the largest portion of the premium. After the voucher is used by the employee, the exchange will have to credit the amount of the voucher to the employee’s monthly premium, and the employer will have to pay those amounts to the exchange. The voucher is refundable in the sense that, if its amount exceeds the amount of the premium paid for exchange-based coverage, the excess must be paid to the employee. If an individual receives a voucher, he or she cannot take a tax credit or cost sharing credit otherwise associated with the purchase of a plan on the exchange. (Effective for vouchers provided after December 31, 2013.)
For 2010 through 2013, the law also provides qualified small employers a special tax credit for employer contributions to purchase health insurance for their employees. (Employer contributions do not include employee pre-tax contributions). For these purposes, an eligible small employer is one with 25 or fewer full-time employees whose employees have annual full-time equivalent wages averaging $50,000 or less (indexed for inflation after 2013). For tax years 2010 through 2013, the credit is up to 35% (25% for a tax-exempt qualifying employer) of the lesser of: (1) the amount of the eligible small employer’s nonelective contributions for premiums paid for health insurance coverage; or (2) the average premium for the small group market in the area in which the employer is offering health insurance coverage (determined by the Secretary of Health and Human Services). For tax years 2014 and beyond, the credit will be up to 50% (35% for a tax-exempt qualifying employer) of the lesser of: (1) the amount of contributions the employer made on behalf of the employees during the tax year for premiums for health coverage purchased through an exchange; or (2) the amount of contributions that the employer would have made during the tax year if each employee had enrolled in coverage with a premium equal to the average premium for the small group market in the rating area in which the employee enrolls for coverage. In each instance, the full tax credit is available only to employers with 10 or fewer full-time equivalent employees and average annual wages of less than $25,000 (indexed for inflation after 2013). The credit is subject to a phase-out for employers with between 10 and 25 full-time equivalent employees or average wages between $25,000 and $50,000. For tax-exempt eligible employers, the credit is equal to the lesser of the amount of the credit described above or the amount of payroll taxes of the employer and its employees during the calendar year in which the tax year begins. (Effective for amounts paid or incurred in tax years beginning after December 31, 2009).
Beginning in 2014, premium credits and cost-sharing subsidies are available to help certain individuals purchase health insurance through a health care exchange.
Health care exchanges
Under the PPACA, effective in 2014, states will be required to establish and administer health care exchanges where certain individuals and small businesses can purchase “qualified health plans.” Generally, “qualified health plans” are plans that offer coverage meeting specified standards, including the following:
- The coverage must provide for “essential health benefits,” which include ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance use disorder services; prescription drugs; rehabilitative services and devices; laboratory services; preventive and wellness services; chronic disease management; and pediatric services.
- The coverage must provides limits on cost-sharing; and
- The coverage must provide bronze, silver, gold, or platinum level of benefits (i.e., benefits that are actuarially equivalent to 60%, 70%, 80%, or 90%, respectively, of the full actuarial value of the benefits provided under the plan).
The Secretary of HHS is authorized to regulate and specify other criteria that must be included in “qualified health care plans.”
One of the objectives of the PPACA is to increase the transparency of health insurance. The goal is to give consumers better tools so that they can make informed choices when selecting health insurance. To this end, the PPACA requires the Secretary of HHS to promulgate new disclosure requirements for health policies. These new disclosure requirements, which must be published by March 23, 2011, will be four-page summaries of the policies that include a description of the coverage, cost-sharing rules, renewability, exceptions, and other information. By March 23, 2012, insurers and sponsors of self-insured plans will be required to provide these summaries to individuals covered by the policies. If a policy is materially modified, the plan sponsor must provide participants with notice of the modification at least 60 days before the modification becomes effective. Penalties will be imposed on plan sponsors who fail to provide the required disclosures.
Congress understands the power of inertia and recognized that it could be difficult to get many employees to affirmatively enroll in health care coverage. So borrowing a trick employed by 401(k) plans, employers with more than 200 employees must automatically enroll new full-time employees in health coverage. If an employee does not want health care coverage, the employee has to affirmatively opt out of the coverage. Employers will be required to notify employees of the plan’s auto-enroll provisions and their right to opt out of coverage.
Furthermore, effective March 1, 2013, when an employer hires a new employee, the employer must notify the employee about the health care exchange and the availability of premium assistance for insurance purchased through the exchange if the employer provides less than 60% of the cost of coverage under its plan. The notice must also state that if the employee chooses coverage through the exchange, the employee will lose the benefit of the employer’s contribution toward the cost of coverage (other than in those instances where the employee is eligible to receive a voucher).
New mandates for health care plans
The new rules include a host of new mandates for health care plans, which apply to both insured plans and self-funded plans. Here are some of the key changes:
- Plans that extend coverage to dependent children must allow such coverage to continue until age 26 for dependents (irrespective of the dependent’s marital status). For certain grandfathered plans (described below) the continued dependent coverage applies for the period prior to 2014 only if the dependent is not eligible to receive benefits under another group plan. The Secretary of HHS is authorized to provide a definition for “dependent” for this purpose. The cost of this coverage is not taxable to the employee. (Effective for plan years beginning on or after September 23, 2010.)
- Plans may not impose lifetime limits on coverage for essential health care benefits. Annual limits are also prohibited except that through 2014 certain “restricted annual limits” may be permitted in accordance with regulations that will be promulgated by the Secretary of HHS. (Effective for plan years beginning on or after September 23, 2010.)
- Health plans cannot rescind coverage for current enrollees except in the case of fraud or intentional misrepresentation. (Effective for plan years beginning on or after September 23, 2010.)
- Plans may not provide any pre-existing condition exclusions on children (i.e., enrollees under the age of 19). (Effective for plan years beginning on or after September 23, 2010.)
- Plans may not provide annual dollar limits on essential health care benefits. (Effective for plan years beginning on or after January 1, 2014.)
- Plans may not impose waiting periods in excess of 90 days. (Effective for plan years beginning on or after January 1, 2014.)
- Plans may not provide any pre-existing condition exclusions. (Effective for plan years beginning on or after January 1, 2014.)
Additional limitations and rules apply to plans that are not grandfathered. It appears that a plan will not be grandfathered if the plan is not in existence as of March 23, 2010. The limitations on non-grandfathered plans include:
- Plans must cover, and cannot impose cost sharing for, preventive services. (Effective for plan years beginning on or after September 23, 2010.)
- Insured group health care plans cannot discriminate in favor of highly compensated employees. (Effective for plan years beginning on or after September 23, 2010.)
- Plans must provide participants with expanded appeal rights, including the right to an external appeal. (Effective for plan years beginning on or after September 23, 2010.)
- Plans will have to permit participants to choose their primary care physician from those physicians covered by the plan. (Effective for plan years beginning on or after September 23, 2010.)
- Plans cannot require pre-authorizations or referrals for obstetrical or gynecological care. (Effective for plan years beginning on or after September 23, 2010.)
- Emergency care services must be provided without prior authorization and without regard to whether the provider is in-network or out of network. (Effective for plan years beginning on or after September 23, 2010.)
- Plans may not establish eligibility rules based on health status, medical condition (including both physical and mental illnesses), claims experience, receipt of health care, medical history, genetic information, evidence of insurability (including conditions arising out of acts of domestic violence), disability, or any other health status-related factor determined appropriate by the Secretary of HHS. (Effective for plan years beginning on or after January 1, 2014.)
- Plans will have to provide certain coverage to individuals participating in clinical trials. (Effective for plan years beginning on or after January 1, 2014.)
In an effort to encourage and expand wellness programs, the PPACA has codified ERISA’s regulations allowing plans to encourage and provide financial incentives for participation in wellness plans. Under the new rules, plans can provide wellness incentives of up to 30% of the cost of coverage. The federal regulators can increase this percentage to 50% of the cost of coverage.
An opportunity for employers providing benefits to early retirees
Within 90 days of March 23, 2010, the Secretary of HHS will adopt a program to help employers pay the cost of health insurance provided to early retirees (i.e., retirees between the ages of 55 and 65). Employers will have to submit an application to participate in the program, and there are certain requirements that must be satisfied to participate. If accepted, the federal government will reimburse the plan for 80% of the cost of claims that are between $15,000 and $90,000. (These amounts are indexed for inflation.) Federal reimbursements must be used to reduce premium costs or to reduce premium contributions, co-payments, deductibles, co-insurance, or other out-of-pocket costs for plan participants. There is a $5 billion limit on the funds that will be dedicated to this program and the program ends in 2014.
Limitations on health-related pre-tax contributions and deductions
The PPACA imposes several new limitations on health-related pre-tax contributions and deductions that will be of particular interest to both employers and employees, including the following:
- The cost of over-the-counter medicines can no longer be reimbursed through a health FSA or HRA. (Effective for expenses incurred with respect to tax years beginning after December 31, 2010.)
- Employees will be permitted to contribute a maximum of $2,500 by salary reduction to a health FSA. (Effective for tax years beginning after December 31, 2012, and adjusted for inflation beginning after 2013.)
- In a change that has received a significant amount of press, the new law reduces an employer deduction for retiree prescription drug expenses. Since 2003, sponsors of qualified retiree prescription drug plans have been eligible for a subsidy to cover a portion of their costs. Not only has the subsidy been excludable from the employer’s gross income, the employer has been able to claim a deduction for all of its retiree prescription drug expenses, including those amounts allocable to the subsidy. Under the PPACA, this “double dip” has been eliminated. The amount otherwise permitted as a deduction is reduced by the amount of excludable subsidy payments received by the employer. (Effective for tax years beginning after December 31, 2012.)
New excise taxes and fees
Health care reform will be expensive. To help offset the cost of the PPACA, new taxes and fees will be imposed on a variety of constituencies, including:
- The employee portion of the FICA Hospital Insurance tax is increased by 0.9% (i.e., from 1.45% to 2.35%) for wages exceeding a prescribed threshold, though unlike the basic HI tax, this additional tax is imposed on the combined wages of an employee and his/her spouse in the case of a joint return. The threshold, which is not adjusted for inflation, is $250,000 for a joint return or surviving spouse, $125,000 for a married individual filing separately, and $200,000 in all other cases. The same additional tax of 0.9% applies to the HI portion of SECA for self-employment income exceeding the threshold. (Effective for remuneration received, and tax years beginning, after December 31, 2012.)
- The law creates a new 3.8% Medicare tax on investment income for certain high income individuals, estates, and trusts. More specifically, this tax is imposed on a taxpayer’s net investment income, or, if less, the amount that the taxpayer’s modified adjusted gross income exceeds certain specified thresholds (i.e., $250,000 for joint returns or surviving spouses, $125,000 for separate returns, and $200,000 in other cases). For these purposes, net investment income is investment income (including interest income, dividends, annuities, royalties, rents, and capital gains) reduced by certain deductions. Distributions from qualified retirement plans are not treated as investment income. (Effective for taxable years beginning after December 31, 2012.)
- The PPACA includes a new excise tax on certain types of high-cost health coverage (what is often colloquially referred to as “Cadillac coverage”). The 40% tax is imposed on the “excess benefit”—the amount by which the cost of applicable employer-sponsored health care coverage exceeds certain prescribed thresholds (generally, $10,200 for an employee with self-only coverage and $27,500 for an employee with any other coverage, although different thresholds apply under certain circumstances), subject to future adjustment. Health care benefits taken into account for purposes of calculating the tax include the value of health care coverage, health flexible spending accounts, health reimbursement accounts, and employer contributions to health savings accounts. The tax does apply to stand alone dental and vision benefits. (Effective for tax years beginning after December 31, 2017.)
- A 2.3% tax is imposed on the sale of taxable medical devices (i.e., generally, any FDA-regulated device intended for humans, other than eyeglasses, contact lenses, hearing aids, and any other device expressly excluded by the IRS as a type of device that is generally purchased by the general public at retail for individual use) by a manufacturer, producer or importer. (Effective for sales after December 31, 2012.)
- The new law imposes a 10% tax on indoor tanning services. (Effective for services performed on or after July 1, 2010.)
- Effective for plan years ending after September 30, 2012, a $2 per participant fee ($1 in the case of plan years ending during fiscal year 2013) will be assessed against insured and self-insured plans.
- The PPACA imposes annual fees on health insurers and pharmaceutical companies that will raise billions of dollars of revenue for the federal government.
Other Provisions of Note
There are a host of other important provisions in the PPACA that will have implications for employers, including:
- Subsidies for Medicare supplemental plans will be phased out, which will likely increase the costs of these plans.
- Employers must report the cost of employer-provided health care coverage on an employee’s Form W-2 beginning with W-2s issued for 2011.
- Effective 2011, the PPACA creates a new voluntary, public long-term care insurance program.
- The Medicare Part D “doughnut hole” will be gradually reduced so that it is fully closed by 2020.
The above discussion is just a summary of the PPACA. Moreover, there are still lots of open issues on which the federal regulators will need to provide guidance—so stay tuned. If you have any questions about the new legislation, please do not hesitate to call any member of our benefits team.