Originally published April 20, 2010
Keywords: Patient Protection and Affordable Care Act, employer-sponsored health care plans, reform, Cadillac Plan
On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (the "Patient Protection Act") and one week later he executed the accompanying "sidecar" bill, the Health Care and Education Reconciliation Act, which significantly modified certain provisions of the Patient Protection Act. The goal of these two pieces of legislation is to ensure that virtually all US citizens and legal residents have access to health care coverage that satisfies certain minimum standards.
Whether the legislation will achieve those goals, and at what cost, is yet to be determined in these early days following enactment and probably long into the future given the phased-in effective dates over the next several years. In the meantime, however, it is important for employers to understand what challenges and opportunities lie ahead. The purpose of this summary is to provide an overview of the more significant provisions of this landmark legislation that will have the greatest impact on employers and employer-sponsored health care plans.
Under the new law, state-run "Exchanges" will be established. The Exchanges will provide different levels of benefit choices, will limit cost-sharing and will provide coverage for "essential health benefits," including ambulatory patient services, emergency services, hospitalization, maternity and newborn care, mental health and substance use disorder services, preventative and wellness services and chronic disease management, and pediatric services (including oral and visions care).
The new legislation uses a "carrot and stick" approach to encourage large employers (generally those that employ more than 50 employees) to offer health coverage to their employees or to provide a subsidy for employees who receive coverage under a plan offered through an Exchange. Most of the "carrots" are provided to smaller employers in the form of tax credits to encourage those employers to provide health coverage to their employees. The "sticks" are primarily directed at large employers and take the form of financial penalties for failing to comply with the applicable requirements, for providing expensive coverage (the "Cadillac plan" tax) or for failing to provide coverage in certain cases (the "play or pay" provisions).
Many of the new rules either do not apply to "grandfathered plans," i.e., plans in existence on date of enactment of the Patient Protection Act (March 23, 2010), or they will apply to grandfathered plans with a later effective date than applies to new plans. In addition, grandfathered plans are generally treated as providing "minimum essential coverage" which is important for some of the penalty rules applicable to employers under the new law as discussed below. The scope of the grandfather rules is not entirely clear at this time. For example, it is not clear whether or to what extent a plan might lose grandfathered status if changes are made to the coverage as in effect as of March 23, 2010. Pending further guidance, employers should be careful about making changes to existing plans without full consideration of the possible consequences of the applicable changes.
Changes That Are Effective Immediately
The changes described below are effective for plan years beginning on or after September 23, 2010 (six months after the date of the enactment of the Patient Protection Act). Thus, for calendar year plans, the following changes would need to be implemented effective January 1, 2011. Plan sponsors, however, may want or need to address some of these changes in open enrollment materials that will need to be prepared significantly prior to the actual effective date.
Dependent Coverage Extended Until Age 26. Group health plans that provide coverage for dependent children must extend coverage for them through age 26. Group health plans are not required to provide coverage for dependent children. The extended dependent coverage is excludible from the employee's gross income through the end of the year in which the individual attains age 26 (although the new legislation does not modify the definition of a "dependent" for other tax purposes). Grandfathered plans are subject to this requirement; provided, however, that for plan years beginning prior to January 2014, the requirement applies to grandfathered plans only if the dependent is not eligible to enroll in an employer-sponsored group health plan other than the grandfathered health plan. It is not clear, in any event, how the new rule will work for dependents who were previously dropped from the plan due to loss of dependent status (and who may or may not be on COBRA as a result thereof) but who would be eligible for dependent coverage under the provisions of the new law.
Prohibition on Lifetime Limits. Group health plans (including grandfathered plans) may not impose lifetime limits on the dollar value of essential health benefits for any participant or beneficiary. The restrictions are less stringent prior to 2014, but additional guidance will be needed to determine what will be permitted and what will not.
Prohibition on Rescissions/Notice of Cancellation. Group health plans (including grandfathered plans) may not rescind coverage except in cases of fraud or intentional misrepresentation of material fact. It appears as though the plan would need to specifically provide for rescission, and it is not clear whether rescission would be permitted in a situation where an individual was enrolled by mistake. The new rules also will require advance notice of plan cancellation.
Prohibition Pre-Existing Condition Limits on Children. Group health plans (including grandfathered plans) may not impose pre-existing condition exclusions on children under age 19.
Nondiscrimination Testing. Insured group health plans must satisfy Internal Revenue Code nondiscrimination requirements that previously applied only to self-insured plans. The full import of this requirement is not clear. The new law, as written, seems to prohibit discrimination in favor of highly compensated employees as to both coverage and benefits. As applied to self-insured plans, the same nondiscrimination requirements do not prohibit discrimination. Rather, as currently applied to self-insured plans, discrimination results in adverse tax consequences to the highly compensated individuals receiving the discriminatory benefits (or coverage). It is also likely that a plan that does not comply with this requirement may be treated as failing to provide minimum essential coverage, thus giving rise to possible penalties. Thus, additional guidance is needed to determine proper application of this rule.
In addition, although this requirement does not apply to grandfathered plans, care should be taken with respect to new arrangements with executives as they may not be covered by the grandfather provisions even if the plan under which coverage is otherwise provided is a grandfathered plan.
Plan Design Changes. Group health plans must provide coverage for preventative care without cost sharing. Preventative care includes immunizations, certain preventative care measures for children, and certain preventative care measures and screenings for women, including mammograms and other breast cancer screening programs. Participants must be able to choose primary care physicians. Plans may not require pre-authorization or referrals for obstetrical or gynecological care. Emergency care services may not require prior authorization and must be covered without regard to whether the provider is in the network.
Reinsurance Program for Early Retirees. Effective within 90 days following enactment of the Patient Protection Act, a temporary reinsurance program will be created to reimburse employers for a portion of the cost of health insurance coverage for retirees who are over age 55 and who are not eligible for Medicare. The program will expire on January 1, 2014. To participate in the program, an employer must obtain certification for its plan. The program will reimburse employers for 80 percent of eligible claims between $15,000 and $90,000. Reimbursements must be used to reduce premium costs or other plan costs, such as co-payments, deductibles and other out-of-pocket limits for participants. A total of $5 billion has been appropriated for this program. Applications may no longer be accepted once the limit has been reached.
Changes That Are Effective in 2011
The changes described below are generally effective as of January 1, 2011. It is important to note that the effective date for the following changes is not tied to a specific plan year as is the case with some of the changes described above. Therefore, these changes may raise special issues for plans with non-calendar year plan years that cross over 2010 to 2011.
Additional Tax on HSA and Archer MSA Withdrawals. The tax imposed for health savings account (HSA) withdrawals and Archer medical savings accounts (MSA) distributions that are not used for qualified medical expenses will be increased to 20 percent.
Reimbursement of Over-the-Counter Drugs. Only doctor-prescribed over-the-counter drugs or insulin may be reimbursed on a pre-tax basis through a health reimbursement arrangement (HRA) or health flexible savings account (FSA) or reimbursed on a tax-free basis through an HSA or Archer MSA. Other over-the-counter drugs are not eligible for pre-tax reimbursement.
Simple Cafeteria Plans. Small employers (i.e., employers that have employed an average of 100 or fewer employees during the business days of either of the preceding two years) may establish "simple cafeteria plans." Such plans will be treated as satisfying the nondiscrimination requirements under Internal Revenue Code section 125 if certain contribution and eligibility requirements are satisfied. Generally, for each qualified employee covered under the plan, the employer must contribute either a uniform percentage of not less than 2 percent of the employee's compensation for the plan year, or an amount not less than the lesser of 6 percent of the employee's compensation for the plan year or twice the amount of the salary reduction contributions of each qualified employee. Generally all employees who complete at least 1,000 hours of service for the preceding plan year must be eligible to participate, with certain exclusions, such as collectively bargained employees and nonresident aliens.
Appeals Process. A group health plan must implement an effective appeals process for appeals of coverage determinations and claims. Notice of the appeals process must be provided in a culturally and linguistically appropriate manner. The new legislation provides for the establishment of an ombudsman to assist enrollees with the appeals process. It is not yet entirely clear how the new procedures will be integrated into the ERISA appeals procedures.
Summary of Benefits. No later than March 23, 2011, the applicable federal regulators are required to develop standards for use by group health plans for purposes of summarizing benefits and coverage. The standards will ensure that the summary is presented in a culturally and linguistically appropriate manner and that it utilizes terminology understandable by the average plan enrollee. Such summaries must be provided to enrollees and new participants not later than March 23, 2012. These summaries are in addition to, not in lieu of, the current summary plan description requirements of ERISA.
Changes That Are Effective in 2013
The changes described below are generally effective as of January 1, 2013. As with the changes discussed above for 2011, the effective date for the following changes is not tied to a specific plan year.
Limits on Pre-tax Contributions to Health FSAs. Contributions to health FSAs may not exceed $2,500 (indexed periodically for inflation).
Automatic Enrollment. An employer with more than 200 full-time employees that maintains a group health plan must automatically enroll new full-time employees in the plan (subject to any waiting period authorized by law) and continue the enrollment of current employees. Employees must be provided notice of automatic enrollment and must be able to opt out of coverage.
Notice of Exchanges and Premium Assistance. Beginning not later than March 1, 2013, employers will be required to provide notices to new employees relating to the availability of coverage under an exchange and the availability of premium assistance. Such notices are required to inform the employee (i) of the existence of an Exchange (as well as describe the services provided by the Exchange and the manner in which an employee may contact an Exchange to request assistance); (ii) that he or she may be eligible for a premium tax credit and a cost sharing reduction if the employee purchases a qualified health plan through an Exchange if the employer provides less than 60 percent of the cost of the benefits under its plan; and (iii) that if he or she purchases a qualified health plan through an Exchange and the employer does not offer a free choice voucher, the employee may lose the employer contribution (if any) to any health benefit plan offered by the employer and that all or a portion of such contribution may be excludible from income for Federal income tax purposes. (Information about the voucher must be included beginning in 2014 when vouchers are effective.) Notice must also be provided to existing employees by March 1, 2013.
Elimination of Medicare Part D Subsidy. The new law repeals the subsidy that is currently available to employers that offer retiree prescription drug coverage provided that the value of the employer-provided coverage is at least as valuable as the Medicare Part D coverage.
Changes That Are Effective in 2014
The changes described below are generally effective as of January 1, 2014.
"Play or Pay" and Other Employer Penalties. An employer with at least 50 full-time employees (determined on a controlled group basis, a "large employer") that does not offer minimum essential coverage must pay an annual tax of $2,000 per full time employee (pro rated monthly) if any employee purchases coverage through an Exchange and receives premium assistance. If a large employer offers minimal essential coverage but an employee's contribution for coverage exceeds 9.5 percent of his or her household income or the plan has an actuarial value of less than 60 percent, the employer must pay $3,000 per each full time employee (again, pro rated monthly) who purchases coverage through an Exchange and receives federal premium assistance for coverage. "Minimum essential coverage" is broadly defined as an employer-sponsored health plan and may include grandfathered plans. For purposes of calculating the fee, the first 30 full-time employees are disregarded. Full-time employees are generally employees that work an average of at least 30 hours per week. No fees are imposed if the employer provides free choice vouchers (discussed below). The penalties are indexed for inflation.
Free Choice Vouchers. Employers that provide employees with minimum essential coverage, and that pay a portion of the cost of coverage, must provide qualified employees with "free choice" vouchers, which can be used to purchase coverage under a plan maintained by an Exchange. A "qualified employee" is any employee (i) whose required contribution for minimum essential coverage through an employer-sponsored plan is more than 8 percent but less than 9.8 percent of his or her household income, (ii) whose household income is not greater than 400 percent of the poverty level, and (iii) who does not participate in a health plan sponsored by his or her employer. The amount of the voucher must equal the amount that the employer would have contributed toward the cost of coverage had the employee enrolled in coverage under the employer-sponsored plan. If the employer sponsors more than one plan, the amount is based on the plan under which the employer contribution is the largest. Employees are not required to use the vouchers to purchase health coverage but, if they do, the value of the voucher that is used to purchase the coverage is excludable from the employee's income.
Prohibition on Pre-Existing Condition Exclusions. Group health plans (including grandfathered plans) may not apply any pre-existing condition exclusions based on health status. (See earlier discussion regarding pre-existing condition exclusions for children under the age of 19.)
Prohibition on Exclusions Based on Health Factors. Eligibility for coverage under group health plans (other than wellness programs) may not be determined on certain health factors, such as health status, physical or mental medical conditions, claims experience, receipt of health care, medical history, genetic information, evidence of insurability or disability. Wellness programs may condition a financial reward (such as the premium discount or a rebate) on satisfying a health status factor, subject to certain limitations. The reward may not exceed more than 30 percent of the cost of employee only coverage under the plan. (The foregoing limit may be increased to up to 50 percent by the applicable federal regulators.)
In addition, the full reward must be made available to all similarly situated individuals. If it would be unreasonably difficult for an individual to satisfy the standard, the wellness program must provide for a reasonable alternative standard or waive the otherwise applicable standard. Since there are disparities between these rules and the rules that were added to ERISA and the Internal Revenue Code by the Health Insurance Portability and Accountability Act (HIPAA) there may be further guidance on such provisions.
Prohibition on Annual Limits. Group health plans (including grandfathered plans) may not place annual limits on the dollar value of benefits for any participant or beneficiary. Prohibitions on annual limits prior to 2014 may apply to essential health benefits only as provided in future guidance.
Prohibition on Waiting Periods. Group health plans (including grandfathered plans) may not impose waiting periods that exceed 90 days.
Coverage of Clinical Trials. Group health plans must provide certain coverage to individuals participating in clinical trials.
Changes that are Effective in 2018—"Cadillac Plan" Tax
An excise tax will be imposed on employer-sponsored health coverage if the annual cost of the coverage exceeds $10,200 for individual coverage and $27,500 for family coverage, with certain exceptions for high risk professions or plans covering retired individuals age 55 and older. The aggregate cost of the plan includes health FSA reimbursements and employer contributions to an HSA but generally excludes dental and vision coverage. The excise tax is equal to 40 percent of the "excess benefit" which is generally the cost of the plan coverage over the permitted cost outlined above. The tax is imposed on the health insurance issuer (in the case of an insured plan) or the "person that administers the plan" (in the case of a self-insured plan).
There are a variety of other provisions in the new law that are not discussed above but that may affect employers. These include an increase in the employee portion of the FICA "Medicare" tax, a new Medicare tax on investment income of certain high income individuals (and estates and trusts), changes to the W-2 reporting obligations with respect to health care coverage, and limitations on deductions for compensation paid to certain employees of qualified health insurance providers. In addition, there are many requirements that apply to insurers that provide health coverage and the policies provided by such insurers.
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