HEALTH REFORM
IN A NUTSHELL
What Employers
Need to Know
Alson R. Martin
Randal L. Schultz
amartin@lathropgage.com
rschultz@lathropgage.com
© 2013, Lathrop & Gage LLP
Health Reform in a Nutshell:
What Employers Need to Know
• With the passage of the most significant reform
of America's modern-day health care system,
employers must assess what the Patient
Protection and Affordable Care Act (PPACA)
means for them. This presentation seeks to
provide you with an overview of the most
important things an employer needs to know
about health reform. This material is
informational only and does not constitute legal
advice regarding any specific situation.
© 2013, Lathrop & Gage LLP
Health Reform in a Nutshell:
What Employers Need to Know
• PPACA amends the Internal Revenue
Code, ERISA, and the Public Health
Service Act (PHS Act or PHSA). States
have the primary authority to enforce the
Public Health Service Act provisions with
respect to group and individual market
health insurance issuers, and HHS will
only step in to the extent HHS believes the
state has failed to substantially enforce
these provisions.
© 2013, Lathrop & Gage LLP
Health Reform in a Nutshell:
What Employers Need to Know
• HHS, IRS & DOL have already issued
many PPACA healthcare reform
regulations. Many more regulations will be
issued.
© 2013, Lathrop & Gage LLP
What’s Covered & What’s Not
• Healthcare reform covers insured and selffunded comprehensive medical health plans.
• Health reform does not regulate “Excepted
Benefits,” which include stand-alone vision,
stand-alone dental, cancer, long-term care
insurance, most FSAs, Medigap insurance, as
well as accident and disability insurance that
make payments directly to the individual.
• Healthcare reform also does not affect retiree
only plans.
© 2013, Lathrop & Gage LLP
US Supreme Court Decision
• The US Supreme Court in NFIB v. Sebelius (June 28, 2012) ruled
that (1) Congress had the power to adopt the individual mandate as
a tax under its taxing authority (but not under the Commerce Clause,
an important limitation on the Commerce clause); (2) for purposes of
the Anti-Injunction Act that prevents judicial decisions on taxes until
they are assessed by the IRS, the individual mandate is a penalty
and not a tax for this purpose; and (3) that while the 2014 Medicaid
expansion is constitutional but the law's remedy is unconstitutional.
The remedy was that a state that did not agree to the Medicaid
expansion lost its federal funding for the expansion and its current
funding.
• The Court held that a state not implementing the expansion would
only lose funds for the expansion, but not its existing federal funding,
in effect making the expansion optional for each state. Many states
are not increasing Medicaid eligibility to those making less that
133% of Federal Poverty Level.
© 2013, Lathrop & Gage LLP
2010
• SMALL BUSINESS TAX CREDIT: Tax credits for
employers with 24 or fewer employees (excluding
owners, certain relatives, and seasonal employees) with
average wages of less than $50,000, covering up to 35%
of employer-paid premiums (25% for tax-exempt
entities). In 2014, that credit increases to 50% for forprofit employers (35% for tax-exempt employers) and will
be available for an additional two consecutive years.
• YOUNG ADULTS: Health insurers are required to let
adult children stay on their parents' policy up to their
26th birthday. In addition, the employee has no taxable
income and the employer has a deduction for this
coverage of an adult child.
© 2013, Lathrop & Gage LLP
Plan Years Beginning On/After
Sept. 23, 2010
Grandfathered Health Plans Are Subject To:
• Prohibition of lifetime benefit limits
• No rescission except for fraud or intentional
misrepresentation
• Children, who are not eligible for employersponsored coverage, covered up to age 26 on
family policy
• Pre-existing condition exclusions for covered
individuals younger than 19 are prohibited
• Restricted annual limits for essential benefits
© 2013, Lathrop & Gage LLP
Plan Years Beginning On/After
Sept. 23, 2010
New & Non-Grandfathered Health Plans
Same requirements as Grandfathered Plans plus:
• No cost-sharing for preventive services
• Discrimination for comprehensive health insurance in favor of highly
compensated is prohibited. However, IRS has delayed effective date and
has yet to issue regulations.
• Children covered up to age 26 on family policy
• Internal appeal and external review processes
• Emergency services at in-network cost-sharing level with no prior
authorization
• Parents must be allowed to select a pediatrician as a primary care physician
for their children and women must be allowed to select an OB-GYN for their
primary care physician
Grandfathered plans are not subject to the requirements above.
For more on the importance and rules regarding grandfathering,
see the discussion under the question “What actions do I need to
take/not take to preserve grandfathered status, and why does
grandfathered status matter?”
© 2013, Lathrop & Gage LLP
Plan Years Beginning On/After
Sept. 23, 2010
• Any insurance policy sold to new entities or
individuals after March 23, 2010 will not be
grandfathered, even if the product was offered in
the group or individual market before March 23,
2010.
• Collectively Bargained Plans. There is no
delayed effective date for collectively bargained
plans, whether fully insured or self-insured.
Thus, plans maintained pursuant to one or more
collective bargaining agreements in effect on
March 23, 2010, must comply with the new rules
at the same time as other grandfathered plans.
© 2013, Lathrop & Gage LLP
Collectively Bargained Plans
• The regulations provide that fully insured (but not self-insured)
collectively bargained plans retain their grandfather status until the
current agreement (i.e., the agreement in effect on March 23, 2010)
expires. Self-insured collectively bargained plans are subject to the
rules in the same way as other covered health plans.
• Thus, a change in carriers under a fully insured collectively
bargained plan does not result in loss of grandfather status if the
change is made before the current agreement (i.e., the agreement in
effect on March 23, 2010) expires.
• Changes to benefits that apply while the current collective
bargaining agreement is in effect, such as increasing co-payments,
do not result in loss of the grandfather.
• However, whether the grandfather applies after the expiration of the
collective bargaining agreement is measured by comparing the
benefits in effect at that time to the benefits in effect on March 23,
2010. If the changes are not within the permitted parameters then
the plan will cease to be grandfathered when the relevant
agreement expires.
© 2013, Lathrop & Gage LLP
Grandfathered Plans
POSTPONED INSURED HEALTH PLAN
NONDISCRIMINATION RULES do not apply to
“grandfathered” plans continuously in existence
March 23, 2010. As discussed in more detail
hereafter, grandfathered plans cannot be changed
except in minor respects.
© 2013, Lathrop & Gage LLP
Grandfathered Plans
Grandfathered health plans are subject to certain health reform
requirements, as follows:
• Prohibition of annual and lifetime benefit limits (except that
provisions annual limit prohibitions not applicable for individual
health insurance coverage).
• No rescission except for fraud or intentional misrepresentation.
• For plan years beginning before January 1, 2014, children, who are
not eligible for employer-sponsored coverage, covered up to age 26
on family policy.
• Pre-existing condition exclusions for covered individuals younger
than 19 are prohibited.
• Pre-existing condition exclusions prohibited for all persons in 2014.
• Prohibition on waiting period of more than 90 days.
• Summary of Benefits & Coverage (SBC).
• Medical Loss Ratio provisions.
© 2013, Lathrop & Gage LLP
Grandfathered Plans
Grandfathered plans DON'T have to:
• Cover preventive care for free
• Guarantee your right to appeal
• Protect your choice of doctors and access to emergency
care
• Be held accountable through Rate Review for excessive
premium increases
• Grandfathered individual health insurance plans (the
kind you buy yourself, not the kind you get from an
employer) don't have to:
End yearly limits on coverage
Cover you if you have a pre-existing health condition
© 2013, Lathrop & Gage LLP
Grandfathered Plans Notice
Requirement
• Unfortunately, while the law does not require
this, the current regulations require that a
grandfathered plan notify participants each year
that the plan is a grandfathered plan beginning
Sept. 23, 2010. This requirement, if
incorporated in final regulations, could cause
plans qualified as grandfathered plans not to be
grandfathered because many employers have
not given this annual notice as required.
© 2013, Lathrop & Gage LLP
2011 W-2 Information Reporting
• An employer was required show the value of health insurance for
employees’ on their Form W-2 for 2011 and thereafter. However,
this deadline was extended a year by the IRS, so the first time most
W-2s will include this information will be in 2013 for calendar year
2012.
• Smaller Employer Exemption: Until the issuance of further guidance,
an employer is not subject to the W-2 reporting requirement for any
calendar year if the employer was required to file fewer than 250
Forms W-2 for the preceding calendar year.
© 2013, Lathrop & Gage LLP
2011 – Simple Cafeteria Plan
• NEW SIMPLE CAFETERIA PLAN available for
businesses with 100 or fewer employees. This is
modeled after the Simple 401(k) plan - the employer
gets a pass on all nondiscrimination requirements if
– 1) eligibility and benefits meet stated requirements; and
– 2) a minimum contribution is made to the plan each year.
• However while it appears to be Congress’ intent to
exempt Simple cafeteria plans from the new PPACA
health insurance nondiscrimination rules, that is not yet
clear. Nevertheless, it is easy to design around.
Probably only owners of C corporations who are
“employees” can be covered, as in regular cafeteria
plans.
© 2013, Lathrop & Gage LLP
2011 – Nonprescription OTC
Drugs
• NONPRESCRIPTION OVER-THECOUNTER DRUGS (except insulin and OTC
equipment and supplies, like crutches,
bandages, contact lens solution, blood sugar
tests) are no longer an eligible medical expense
under a health care flexible spending account
(FSA), a health reimbursement arrangement
(HRA), a health care savings account (HSA).
• Solution – Get a Dr’s order for these OTC items
at your annual checkup.
© 2013, Lathrop & Gage LLP
2012 – Federal LTC Benefit
Eliminated
• FEDERAL LONG TERM CARE BENEFIT.
• Community Living Assistance Services and Supports
(CLASS) Act, and the employee, not the employer, was
pay for it through payroll deductions unless they opt out.
• HHS determined this benefit could not be adequately
funded on a sustainable basis, and it has now been
eliminated from the healthcare reform law.
© 2013, Lathrop & Gage LLP
2013 FSA CAP OF $2500
• FSA EMPLOYEE CONTRIBUTIONS
CAPPED AT $2500. Contributions to flexible
savings accounts (FSAs) for healthcare and child care will be limited
to $2,500 per year, indexed by the Consumer Price Index in
subsequent years.
• Employer contributions are limited to $500, so the total annual
medical reimbursement benefit can be $3000 if the employer also
contributes to the plan.
• Why this limit? To raise revenue because these items are not taxed.
© 2013, Lathrop & Gage LLP
2013 MEDICARE TAXES
Wages and earned income - from a rate of 1.45%
to 2.35% - for singles earning more than $200,000
a year and families above $250,000, for a total of
3.8% paid by employer and employee above the
threshold.
Investment Income - A new Medicare tax is
imposed on investment income for those with
income above the $200,000/$250,000 levels.
– Tax does not apply to income exempt from gross
income, such as exempt gain from the sale of a
principal residence, tax-exempt bonds, etc.
– Tax also does not apply to IRA and retirement plan
distributions.
© 2013, Lathrop & Gage LLP
July 31, 2013 Payment of PCORI Fees
•
•
•
•
IRS Form 720 is used to report and pay the Patient Centered Outcomes Research
Institute Fee ("PCORI fee") to the IRS by July 31 for the preceding year.
The PCORI fee for plan years ending on or after October 1, 2012, and before
October 1, 2013 is $1.00 multiplied by the average number of covered lives in the
group health plan. The PCORI fee for the second year will increase to $2.00 times
the average number of covered lives in the group health plan and is indexed for
increases in national health expenditures for the following years.
The fee applies to certain "specified health insurance" policies and includes medical
policies, retiree-only policies, any accident or health insurance policy (including a
policy under a group health benefit plan) issued to individuals residing in the United
States.
Health reimbursement arrangements (HRAs) are considered self-funded health plans
and are subject to the PCORI fee. If the plan sponsor also maintains a self-funded
medical plan with the same plan year, the medical plan and HRA may be treated as
one plan for purposes of the PCORI fee. However, if the medical plan is fully insured,
the medical plan and HRA must be treated as separate plans for purposes of the
PCORI fee, with the insurer paying the fee for the medical plan and the
employer/plan sponsor paying the fee for the HRA.
© 2013, Lathrop & Gage LLP
October 1, 2013 and Thereafter
Employer Provided Exchange Notice
•
•
•
•
•
The employer’s health plan year is not relevant as to the required delivery of this
notice. Originally required March 1, 2013, this notice must be provided by all
employers, regardless of size, to employees by Oct. 1, 2013. Notices must be
provided to both active part-time and full-time employees (not spouse or dependents)
regardless of whether eligible for the employer’s health plan, if any.
New employees hired on and after October 1, 2013 must receive the notice within 14
days of hire. This 14-day notification period for new hires is in effect from October 1,
2013 through 2014 (the timing to be revisited at that point).
Notice can be sent first class mail or electronically.
There are 2 model notices. For employers with a health plan, see
http://www.dol.gov/ebsa/pdf/FLSAwithplans.pdf. For employers with no health plan,
see http://www.dol.gov/ebsa/pdf/FLSAwithoutplans.pdf.
Part B of the Notice for employers with health benefits may be confusing to
participants, as it gives them current year information about the employer’s health
plan when many may be exploring exchange insurance in following year.
© 2013, Lathrop & Gage LLP
2014
Provisions Taking Effect in 2014
• Eliminate Preexisting Condition Exclusions
• Rating Rules (3:1 age: 1.5:1.0 Tobacco use)
• Guaranteed Issue (Subject to open Enrollment period)
• Guaranteed Renewal (permits use of open enrollment)
• Prohibit Discrimination or use of pre-existing conditions
on Health Coverage for Minimum Essential Benefits
• Maximum Deductible ($2,000 individual; $4,000 family) –
Only for policies sold through state exchange
• 90-day Maximum Waiting Period
© 2013, Lathrop & Gage LLP
2014 - Individual Mandate
•
Minimum Penalty. Most Americans must have major medical health
insurance or pay this tax of $95 in 2014, $325 in 2015, and $695 (or up to
2.5 % of household income above threshold amount for filing tax return, if
greater) in 2016. Families will pay half the penalty amount for children under
18, up to a cap of $2,085 per family (equal to 3 people, no matter how large
the family). After 2016, penalties are indexed to Consumer Price Index CPI-U.
•
For example, a couple with one child over 18 (or two children age 18 or
under), and no coverage, would pay a minimum of $285 in 2014, $975 in
2015 and $2,085 in 2016. That would be the total no matter how many
uninsured dependents a taxpayer has.
•
Maximum Penalty. The tax is more for persons with higher taxable incomes.
When phased in, it will be 2.5 percent of household income that exceeds
the income threshold for filing a tax return.
© 2013, Lathrop & Gage LLP
Exemptions From Individual Mandate
• Individuals Who Cannot Afford Coverage. If an employer offers
coverage that would cost the employee more than 8 percent of his or
her household income (for self-only coverage) that individual is
exempt from the tax.
• Taxpayers With Income Below Filing Threshold. Also exempt are
those who earn too little to be required to file tax returns. For 2011,
those thresholds were $9,500 for a single person under age 65, and
$19,000 for a married person filing jointly with a spouse, for example.
The thresholds go up each year in line with inflation, so those cut-offs
will be higher in 2014.
• Hardships. HHS can grant hardship exemptions.
• Other Exemptions. Also exempt are members of Indian tribes, persons
with only brief gaps in coverage, those in jail, religious objectors, and
members of certain religious groups currently exempt from Social
Security taxes, i.e., Anabaptist (Mennonite, Amish, and Hutterite).
© 2013, Lathrop & Gage LLP
2014 HEALTH CARE EXCHANGES
(MARKETPLACES)
• These new state-based marketplaces will give individuals and small
businesses (with 100 or fewer employees, or just 50 if state elects) a
place to shop for standardized, private health insurance. Subsidies
are provided for those earning less than 400% of the federal poverty
level. Offerings at platinum, gold, silver and bronze levels.
• 16 states are setting up their own exchanges. 8 additional states
are partnering with HHS to set up their exchanges. In the rest of the
states, HHS is required to set up the state marketplace.
• In June 2013, GAO reported that it "cannot yet be determined" if the
exchange marketplaces will be ready for enrollment in all states.
© 2013, Lathrop & Gage LLP
2014 – Additional Items
EXCHANGE SUBSIDIES: To help pay for insurance, subsidies will be
given to persons or families with incomes of less than 400% of the
federal poverty level ($94,200 a year for a family of four and $45,960
for an individual using 2013 FPL).
MEDICAID ELIGIBILITY will increase to 133 % of poverty level for all
nonelderly individuals in states adopting the Medicaid expansion.
States will receive increased federal funding to cover these new
populations. 13 states are not expanding their Medicaid program
and 6 others probably will not do so. 27 states are participating in
the expansion.
AUTO-ENROLLMENT. Any employer with 200 or more full-time
employees must begin auto-enrolling all eligible employees into its
health plan, providing employees notice and allowing them to optout of coverage.
© 2013, Lathrop & Gage LLP
2014 - Additional Items
• Employees are ineligible to receive federal tax credits if premiums of
employer sponsored coverage are less than 9.5 percent of income.
• When premium costs exceed 8 percent of income, employees are
exempt from individual mandate penalty.
© 2013, Lathrop & Gage LLP
2014 – Exchange Insurance
Loophole
• Persons purchasing insurance on exchange can
have 12 months of coverage by only paying first
9 months of premiums. Intent was to give
people who can’t pay premiums due to hardship,
such as layoff, a chance to catch up.
• If Individual does not pay last 3 months
premiums, the insurance pays providers in
month 10 but not months 11 and 12.
• Such an individual remains eligible to buy
exchange insurance the next year even if
missed premiums never paid!!
© 2013, Lathrop & Gage LLP
2014 – No More Stand Alone HRAs &
Medical Expense Reimbursement Plans
• Stand-alone (those not integrated with comprehensive medical
coverage) health reimbursement accounts (“HRAs”) and medical
expense reimbursement plans will not comply with the ACA “group
health plan” rules prohibiting annual and lifetime limits on the dollar
value of essential health benefits. FSAs are not subject to the rules
on annual and lifetime limits.
• The regulations allow annual limits of $750,000 for plan year 2011,
$1.25 million for plan year 2012, and $2 million for plan year 2013.
• Essential health benefits are ambulatory patient services;
emergency services; hospitalization; maternity and newborn care;
mental health and substance abuse services; 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).
© 2013, Lathrop & Gage LLP
Plan Years Beginning In 2014 – 90 Day
Waiting Period Maximum; PHSA 2708
• The maximum 90-day wait rule applies for plan years beginning on
or after January 1, 2014. All calendar days are included in the 90day period, including weekends and holidays. Both grandfathered
and non-grandfathered group health plans must comply. The test
applies solely for eligible employees.
• If a group health plan conditions eligibility on an employee regularly
working a specified number of hours per period (or working full
time), and it cannot be determined that a newly hired employee is
reasonably expected to regularly work that number of hours per
period (or work full time), the plan may take a reasonable period of
time to determine whether the employee meets the plan’s eligibility
condition. The plan may require that any employee having
completed a number of cumulative hours of service not to exceed
1,200 hours.
• Violations are subject to the 4980H excise tax.
© 2013, Lathrop & Gage LLP
2015 - EMPLOYER MANDATE
• IRS Postponed Effective Date From 2014 to 2015.
Employers with at least 50 full-time (30 or more hours
per week) and full-time equivalent employees must offer
insurance meeting specified requirements or pay a
$2,000 per full-time worker penalty after its first 30
employees if any of its full-time employees receive a
federal premium subsidy through a state exchange.
• A different penalty, not exceeding that above, applies for
employers of at least 50 full-time and full-time and
equivalent employees that offer insurance that does not
meet federal requirements and at least one employee
purchases insurance on an exchange.
© 2013, Lathrop & Gage LLP
2018 - TAX ON HIGH-COST
HEALTH PLANS
• A 40% excise tax will be imposed on insurance
companies for high-cost "Cadillac" plans starting in 2018.
• “High cost” is defined as employee-only coverage
costing $10,200 or more and family coverage costing
$27,500 or more (high-risk specialty employees have
higher limits). These amounts will be indexed in 2019
and beyond.
• The cost of stand-alone (separate) dental and/or vision
insurance, cancer insurance, and other specified types
of coverage is not counted in determining this cost.
© 2013, Lathrop & Gage LLP
Practical Results - Holtz-Eakin & Smith, “Labor Markets
and Health Care Reform: New Results,” AMERICAN
ACTION FORUM (May 2010),
Health reform provides strong incentives for employers,
perhaps with the agreement of their employees, to drop
employer-sponsored health insurance for as many as 35
million Americans . . . and raising the gross taxpayer cost
of the subsidies to roughly $1.4 trillion in the first 10 years.
This could be the cost of health insurance subsidies and
government long-term care coverage.
© 2013, Lathrop & Gage LLP
Practical Results - Holtz-Eakin & Smith, “Labor Markets
and Health Care Reform: New Results,” AMERICAN
ACTION FORUM (May 2010),
• $450 billion was projected for subsidies for individuals
who do not receive health insurance from their
employers. For example a family earning $59,000 a year
in 2014 would receive a premium subsidy of about
$7,200. A family making $71,000 would receive about
$5,200; and even a family earning about $95,000 would
receive a subsidy of almost $3,000. By 2018, subsidy
amounts and the income levels to qualify will grow
substantially.
© 2013, Lathrop & Gage LLP
Practical Results - Holtz-Eakin & Smith, “Labor Markets
and Health Care Reform: New Results,” AMERICAN
ACTION FORUM (May 2010),
• The simplest calculation focuses on the tradeoff between
employer savings and the $2,000 penalty (per FTE
employee over 30 FTEs) imposed by the PPACA on
employers whose employees are not covered.
• Caterpillar recently noted that it could save 70 percent
on health care costs by dropping coverage and paying
the penalties. AT&T’s $2.4 billion cost of coverage would
drop to $600 million for the penalties if it ceased to
provide health benefits.
© 2013, Lathrop & Gage LLP
Practical Results - Holtz-Eakin & Smith, “Labor Markets
and Health Care Reform: New Results,” AMERICAN
ACTION FORUM (May 2010),
Health insurance is only one portion of the overall
compensation package employees receive. If one portion
of that package is reduced or eliminated, wages will likely
be increased to retain and attract valuable labor where
there is competition for these employees. Thus, the key
question is whether the employer can keep the employee
happy by discontinuing health coverage and increasing
wages. Of course, this would subject larger employers to
the employer mandate penalty, but that penalty is far less
that the cost of health coverage.
© 2013, Lathrop & Gage LLP
Practical Results - Holtz-Eakin & Smith, “Labor Markets
and Health Care Reform: New Results,” AMERICAN
ACTION FORUM (May 2010),
The CBO estimated that 19 million people would receive
exchange insurance subsidies at a cost of about $450
billion over the first 10 years. This analysis suggests that
the number could easily be triple that (19 million plus an
additional 38 million in 2014) –for a cost of $1.4 trillion.
The gross cost would be partially offset by the receipt of
the $2,000 employer mandate penalties.
© 2013, Lathrop & Gage LLP
Practical Results - Holtz-Eakin & Smith, “Labor Markets
and Health Care Reform: New Results,” AMERICAN
ACTION FORUM (May 2010),
If high-wage workers want to continue to receive health
insurance, the new non-discrimination rules, if and when
they become effective, force employers to offer equivalent
insurance to most workers. For those firms dominated by
lower-wage workers that will provide no coverage and, if
they now provide it, then discontinue it, and pay the
workers increased compensation and the employer
mandate penalty, then once the nondiscrimination rules are
effective for insured plans, it will not be able to provide
health insurance solely for the high wage workers or the
employer will have a $100/day ($36,500 per year) penalty
times 75% of its employees.
© 2013, Lathrop & Gage LLP
Health Reform
Unaffordable Coverage
One of the most challenging provisions to interpret and
apply is the requirement that employers provide
“affordable” coverage – meaning that full-time employees
must generally be asked to pay no more than 9.5% of their
household income for coverage. Regulations will have to
clarify whether the 9.5% affordability standard applies to
just employee-only coverage or to family coverage as well,
and whether all plans offered or just the lowest-cost plan
will need to meet the standard.) 38% of US employers
have at least some employees for whom coverage would
be considered “unaffordable.
© 2013, Lathrop & Gage LLP
Health Reform
Additional Practical Impact
Mercer found that 31% of all employers with 500 or more
employees and 20% of those with 20,000 or more
employees offer unaffordable coverage.
• If employer coverage is “unaffordable,” and at least one
employee receives government assistance to buy
individual coverage through a health insurance
exchange, beginning in 2014 the employer must pay a
yearly penalty of $3,000 per full-time employee who gets
government assistance and buys coverage in an
exchange (up to a maximum of $2,000 times the number
of full-time employees in excess of the first 30).
© 2013, Lathrop & Gage LLP
Health Reform
Additional Practical Impact
• For employers trying to understand their potential risk for
incurring the penalty, determining each employee’s
household income presents a significant challenge.
Employers don’t have access to information on
employee household income. Safe harbors exist, e.g.,
an employer can use the Box 1 W-2 income it pays.
• Employers’ Reactions. Employers’ reactions to
enactment have run the gamut from shock to shrug as
they consider reform’s impact on their benefit budgets.
Some anticipate a whole new strategy, while others
expect they’ll tweak a few plan provisions. Variations
tend to reflect size, industry, workforce structure, and
employee demographics.
© 2013, Lathrop & Gage LLP
Health Reform
Additional Practical Impact
• Mini-Med Limited Benefit Plans. Mini-med, or limited
benefit, plans, which typically limit coverage to $50,000
to $100,000 per year, will no longer be an employer
option for employees who work an average of 30 or
more hours a week.
• Majority Of Employers Can Anticipate Making Some
Plan Design Changes. It will generally cost an employer
more to offer a generous plan and cap the contributions
for low-income employees at 9.5% of their income.”
Employers that continue to provide coverage may adopt
a safety-net plan that meets the minimum requirements
as the new standard plan and offer a more generous
plan at higher cost to employees.
© 2013, Lathrop & Gage LLP
Health Reform
Does Nothing For Cost Shifting
Health insurance reform does not address the inequities
between provider costs paid by government-sponsored
plans and those paid by employer-sponsored plans.
Medicare and Medicaid have lower payment rates than
private insurers, leaving providers looking to the private
sector to make up for these lower reimbursements.
The one thing reform does for states participating in the
Medicaid expansion is to reduce uncompensated charity
care, a help to providers.
© 2013, Lathrop & Gage LLP
Health Reform
Employer Strategies
• Mercer says employers face not only new sources of
cost, but also the risk of continued and more intensive
cost shifting from government-sponsored programs. As a
result, it is highly likely that the cost trend may increase
at a higher rate than expected over a 10-year period.
• Make More Employees Part-Time; Subcontract Work To
Independent Contractors; Increase Part-Time
Employees; Hire Older Workers On Medicare.
Employers that are facing significant cost increases
because of the requirements to cover new groups of
employees will weigh all possible alternatives .
© 2013, Lathrop & Gage LLP
Health Reform
May Reduce Coverage For Many
Rather than expanding access to coverage, the law may
result in employers reducing the number of hours
employees are eligible to work to under 30 hours per week,
as there is no employer penalty for not providing health
coverage to these part-time employees. Such employees
would have no health coverage and lower incomes that
what they might have otherwise had. Mercer found 34% of
employers would consider changing their workforce
strategy so that fewer employees work 30 hours or more
per week, and 38% would consider offering only a lowercost plan for part-timers.
© 2013, Lathrop & Gage LLP
Frequently Asked Questions –
Small
Employer
Tax
Credit
What do I need to know about the small employer health care tax
credit – Do I qualify?
• For-profit and non-profit businesses are eligible for a tax credit for
their health insurance premiums if they have (1) 24 or fewer full-time
equivalent (FTE) counted employees (employees not counted are
owners, designated family members, and seasonal employees
working fewer than 120 days per year) and (2) if the counted
employees’ average compensation is less than $50,000 per year.
• The credit is largest for employers with 10 or fewer FTE employees
with average compensation of no more than $25,000 for the counted
employees.
• The tax credit phases out gradually, and no longer applies once an
employer's counted FTE employees’ average wages equal or
exceed $50,000 per year or once the employer has 25 or more
counted FTE employees.
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Frequently Asked Questions
• To obtain the credit, an employer must pay at least 50% of the cost
of health care coverage for each counted worker with insurance.
• In 2010, the employer could qualify if it paid at least 50% of the cost
of employee-only coverage, regardless of actual coverage elected
by an employee. For example, if employee-only coverage costs
$500 per month and family coverage costs $1,500 per month, and
the employer pays at least $250 per month (50% of employee-only
coverage) per covered employee, then even if an employee selected
family coverage, the employer would meet this contribution
requirement to qualify for the tax credit in 2010.
• Beginning in 2011, however, the percentage paid by the employer
for each enrolled employee must be a uniform percentage for that
coverage level. If the employee receives coverage that is more
expensive than single coverage (such as family or self-plus-one
coverage), the employer must pay at least 50 % of the premium for
each employee’s coverage in 2011 and thereafter.
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Frequently Asked Questions –
Tax Credit
• Thus, grandfathered health insurance plans that, for instance,
provide for 100% of family coverage for executives and employeeonly coverage for staff will qualify for the tax credit in 2010 but not in
2011 or beyond.
• For tax-exempt entities, the federal tax credit is applied against
federal income tax withholding and Medicare taxes, and both the
employee and employer shares. The credit is 35% of covered
premiums (25% for non-profits) and, for 2 consecutive years in 2014
and thereafter, 50% (or 35% for non-profits) respectively.
Example: In 2010, a qualified for-profit employer has nine FTEs (not counting the owner,
certain relatives, and seasonal employees working fewer than 120 days per year)
with average annual wages of $24,000 per counted FTE. The employer pays $75,000
in health care premiums for those counted employees (which amount does not
exceed the average premium for the small group market in the employer's state and
otherwise meets the requirements for the credit). The credit for 2010 equals $26,250
(35% x $75,000). For tax years beginning in 2010 through 2013, the maximum credit
for a tax-exempt (not-for-profit) qualified employer is 25 % of the employer’s premium
expenses that count towards the credit.
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Frequently Asked Questions –
Increased
Insurance
Premiums
We’ve just been told that our premiums are going up by 20% if we
want to keep our same health insurance plan. What are our
options?
This is one of the most difficult situations under the new law, and it is
quite common. Assuming this health insurance plan was in existence
on March 23, 2010, if the plan is discriminatory (for example, owners
receive 100% employer paid family coverage while employees receive
80% employer paid single coverage, or new highly compensated
employees have no waiting period to enroll in plan but rank and file do),
and if the employer wants to keep this discriminatory coverage, it must
pay for virtually all of the extra cost itself for the first health insurance
plan year beginning on or after September 23, 2010 for the health
insurance to remain a grandfathered plan.
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Frequently Asked Questions
• Otherwise, the employer’s choices are to
– (1) use the new SIMPLE cafeteria plan,
– (2) meet the new nondiscrimination requirements,
– (3) pay an excise tax of $100/day/affected participant (75% of the
employees) for a discriminatory health plan, or
– (4) discontinue the plan altogether.
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Frequently Asked Questions –
Grandfathered
Plans
What actions do I need to take/not take to preserve grandfathered
status, and why does grandfathered status matter?
• As to their policies in effect on March 23, 2010, grandfathered plans
cannot do any of the following without losing grandfathered status:
– Significantly cut or reduce benefits – for example, if your plan covers care for
people with diseases such as diabetes, cystic fibrosis or HIV/AIDS, the plan
cannot eliminate coverage for those diseases and still retain its grandfathered
status;
– Increase to any extent co-insurance charges – for example, it increases your
share of a hospital bill from 20% to 25%;
– Significantly raise co-payment charges – for example, it raises its copayment
from $30 to $50 over the next 2 years;
– Significantly raise deductibles – for example, it raises a $1,000 deductible by
$500 over the next 2 years;
– Significantly lower employer contributions by more than 5 % – for example, it
increases its workers’ share of the premium from 15% to 25%;
– Add or tighten an annual limit on what the insurer pays.
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Frequently Asked Questions
The following changes do not cause a plan to lose its grandfathered
status:
– Voluntary changes to increase benefits, to conform to required
legal changes (including health care reform mandates), and to
voluntarily adopt health care reform requirements do not cause a
plan to lose its grandfathered status.
– Increasing a fixed-amount copayment, deductible and/or out of
pocket limit if less than $5 increased by medical inflation as
measured from the grandfather date, or a total percentage
measured from the grandfather date that is more than the sum of
medical inflation plus 15 percentage points.
– In addition, recognizing that group health plans and health
insurance issuers may have made design changes since the
grandfather date, the preamble to the Interim Final Rules states
that changes made in good faith compliance with the health care
reform grandfathering requirements prior to June 14, 2010 may
be disregarded by regulators for enforcement purposes if the
changes only modestly exceed the permitted changes described
above.
© 2013, Lathrop & Gage LLP
How Can A Simple Cafeteria Plan Be Used To Avoid
Insured Plan Nondiscrimination Rules (when implemented)
•
Simple cafeteria plans are a new optional choice for small employers. Simple
cafeteria plans can be used by employers with 100 or fewer employees (counting
controlled group and affiliated service group members). Simple cafeteria plans
automatically are considered to have met the nondiscrimination requirements and
concentration test of section 125(b). In regular cafeteria plans, the total plan benefits
for “key employees” is to 25% of total plan benefits. This rule does not apply to
Simple cafeteria plans. If a Simple cafeteria plan offers, medical reimbursement plan,
and/or dependent care assistance benefits (childcare), those nondiscrimination rules
are met as well. Through an apparent drafting oversight, the new law does not
provide an express exception for the new insured health plan nondiscrimination rules.
It is hoped that regulations or technical correction legislation will cure this problem.
•
Where a business wants a Simple cafeteria plan to avoid the 25% concentration test
and contribute for owner-employees on a pre-tax basis, unless regulations provide
otherwise, only a regular C corporation can do so and include its owners who are
employees. No other form of business can use the Simple or regular cafeteria plan to
cover sole proprietors, more than 2% shareholders in a subchapter-S corporation,
partners in a partnership, or LLC members (unless the LLC is taxed as a C
corporation).
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Simple Cafeteria Plan
• All non-excludable employees who had at least 1,000 hours of
service during the preceding plan year must be eligible to participate
in a Simple cafeteria plan. Excludable employees are those who:
– have not attained age 21 (or a younger age provided in the plan)
before the end of the plan year;
– have less than one year of service as of any day during the plan
year;
– are covered under a collective bargaining agreement; or
– are nonresident aliens.
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Simple Cafeteria Plan
An employer may have a shorter age and service requirement but only
if such shorter service or younger age applies to all employees.
Employees who previously worked 1000 hours in a plan year but do not
currently can be excluded, as can employees who do not have a year
of service (1000 hours) in the current plan year.
Next, employers electing to utilize the new Simple cafeteria plans must
make a uniform contribution to the plan on behalf of all eligible
employees, consisting of at least:
– 2% of each eligible employee’s compensation; or
– A matching contribution equal to the lesser of: (a) 6% of the employee’s
compensation for the plan year, or (b) twice the amount of the salary
reduction contributions of each qualified employee.
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Example Of How Employer Mandate
Works – Attribution Rules
•
A married couple owns two businesses: a financial planning business (with
14 full-time (FT) employees (full time means regularly scheduled to work 30
hours or more per week) and 6 part-time employees), and a franchise (with
18 FT employees and 50 part-time employees).
•
The businesses are treated as a single employer because they are
commonly owned (80% or more by same 5 or fewer people) by the husband
and wife.
•
Assuming the part-time employees each work an average of 80 hours per
month, they collectively count as 37 full-time equivalent employees (FTEs the FTE calculation is average hours worked per month times number of
part-time employees [those regularly scheduled to work less than 30 hours
per week] divided by 120, rounded down to the whole number).
•
Thus, the combined business will be subject to the employer mandate once
it takes effect in 2015 (32 FT employees and 37 FTEs is a total of 69 FTEs).
•
The maximum penalty is $2000 times (32-30) = $4000.
© 2013, Lathrop & Gage LLP
Employer Mandate Example
Example Of How “The Mandate” Works For Smaller Business:
•
First, if the businesses do not provide all of the full-time employees of both
businesses with coverage that meets the new standards, the combined
businesses will be subject to a $4,000 per year nondeductible excise tax
because while the businesses are subject to the employer mandate, the
penalty is calculated on the basis of full-time employees only (not FTEs), a
total of 32, and there is an exemption for the first 30 full-time employees.
•
Thus, 32 less 30 times $2000 is $4,000. Second, even if the businesses do
not provide affordable minimum essential coverage, the penalty will not
exceed $4,000 per year even if one or two (or more) full-time employees opt
out of the coverage, purchase their own coverage on an exchange, and
qualify for taxpayer-subsidized coverage (because their family incomes fall
below the applicable federal thresholds).
•
The overall penalty is limited to what it would be if the employers provided
no coverage at all.
© 2013, Lathrop & Gage LLP