The Supreme Court Ruled on Health Reform – Now What is an Employer to Do?
Now that the Patient Protection and Affordable Care Act has been found to be constitutional, employers must act to implement changes.
The U.S. Supreme Court ruled on June 28, 2012 that the parts of the Patient Protection and Affordable Care Act that affect employers are constitutional (with the individual mandate falling within Congress' power to tax and certain limitations on Medicaid changes). That is the legality. The reality is that employers must start implementing the changes wrought by the Act. Even if there is a change of administration and the Republicans take control of the Senate with the upcoming election, it is unlikely that the entire Act will be repealed. Below is a summary of the major provisions that will require action on the part of employers.
NOTE: Health plans in existence on March 23, 2010 may be "grandfathered" and thus be exempt from some of the law's provisions. If a grandfathered plan significantly reduces benefits or increases out-of-pocket spending above what it was when the new law was enacted, the plan will lose its "grandfather" status. The application of the provisions to grandfathered plans is so noted below.
What Must Employers Do Now?
- Medical Loss Ratio Rebates. Under the law, insurance companies may only spend 80 percent (for individual and small businesses) or 85 percent (for large businesses) on health care costs and no more than 20 percent and 15 percent, respectively, on administrative costs. If administrative costs exceed that amount, the insurance company generally will have to refund the excess to policy holders. Effective August 1, 2012 employers must have procedures in place to handle any rebates received from the insurer, which should start arriving in late July. In general, if the employer paid the entire cost of the insurance coverage, the employer may retain distributions. If premiums are paid with employer and employee contributions, rebates generally need to be apportioned. The employer should look to the actual insurance policy, other related materials and communications with participants to determine if there is guidance on how to allocate the rebates. Employers generally have the flexibility to not distribute rebates to participants, but instead apply the amounts received against future contributions or toward benefit enhancements. For example, as a default rule, if the cost of distributing payments to former participants approximates the amount of the rebates, the employer may allocate the proceeds to current participants based upon a fair and objective method of allocation. Thus, plan sponsors should review their plan documents and plan communications to participants to ensure preparedness, e.g., possibly amending the document to address how the rebate should be allocated. Failure to properly allocate rebates could subject employers to a claim for breach of fiduciary duty. Applies to grandfathered plans.
- Summary of Benefits and Coverage. For enrollment beginning 9/23/12 and beyond, both self-insured and insured plans must provide a summary of benefits coverage to participants and beneficiaries (in addition to a summary plan description) at enrollment, renewal and on request. The SBC is a four-page (double-sided) description of the Plan provisions which are subject to government requirements. The SBC may be provided electronically or as an internet posting as long as paper copies are available on request, and it may only be posted on the internet if the individual is notified on paper. Applies to grandfathered plans.
- Material Modifications to the Summary of Benefits and Coverage. If there is a material modification to any of the terms of coverage that would affect the content of an SBC (other than at renewal or reissuance), the plan or issuer must provide notice of the modification at least 60 days before the effective date of the modification.
- Comparative Clinical Effectiveness Research Fees. Fees imposed for plan/policy years ending on or after October 1, 2012 and before October 1, 2019. For self-insured health plans, the fees must be paid by the plan sponsor; for insured health plans, the fees must be paid by the insurance company. Reported on IRS Form 720, the initial fee will cover plans with years ending between October 1, 2012 and September 30, 2013 and will be $1 per covered beneficiary. The fee will increase to $2 thereafter. Applies to grandfathered plans.
- Flexible Spending Account Limit. Cafeteria plans must be amended to provide that employees may elect no more than $2,500 (adjusted for inflation) in salary reduction contributions to a health FSA for plan years beginning in 2013 and beyond. Applies to grandfathered plans.
- FICA Tax. Systems must be modified to provide for an increase in the Hospital Insurance portion of FICA by 0.9 percent for employees with wages in excess of $200,000 ($250,000 for a joint return). This increase will be on the employee's portion of the Medicare premium only.
- W-2 Reporting. The 2012 Form W-2 must include the cost of employer-sponsored health insurance coverage but only for those for whom the employer is otherwise required to issue a Form W-2. In 2012, the reporting requirement only applies to employers filing 250 or more W-2s; starting in 2014, W-2 reporting is required for all employers. The reporting requirement does not apply to Health Savings Accounts, Health Flexible Spending Accounts, Health Reimbursement Arrangements, or Archer Medical Savings Accounts. Applies to grandfathered plans.
What Must Employers Do In 2013?
- Notice of Exchanges. A notice must be provided to employees by March 1, 2013 (once guidance is issued) of the existence of state exchanges and options and implications of obtaining health care through an exchange.Applies to grandfathered plans.
- Elimination of the tax deduction for employer-provided retiree prescription drug coverage, effective January 1, 2013. Under Medicare Part D, retirees may enroll in prescription drug coverage. To encourage employers to continue to provide prescription drug coverage to their retirees after the enactment of Medicare Part D, Congress provided a subsidy, equal to 28 percent of the employer's allowable retiree drug costs. Prior to the ACA, these subsidies were not included in taxable income, and the employer's deduction for health care expenses was not offset by the value of any subsidy received. In effect, the subsidy was tax-free. The ACA requires employers to subtract the amount of any Medicare Part D subsidy received from the amount of health care expenses that may be deducted, thus eliminating the tax-free nature of the subsidy.
What Should Employers Start To Plan for 2014 (subject to the issuance of guidance)?
- Pay or Play. Employers with 50 or more full-time (30+ hours/week) employees must provide health insurance that meets affordability and value requirements or pay a penalty of the lesser of $2,000 per employee (less 30 employees) or $3,000 per exchange-certified employee. Employers can start to do a cost/benefit analysis of their current plan and possible alternative, but no meaningful decisions can be made until guidance is issued. Furthermore, employers may want to analyze their work force and consider whether or not establishing categories of employees at less than full-time to avoid medical coverage may result in an ERISA or tax code violation or other types of illegal discrimination, albeit inadvertent.
- Automatic enrollment (with the opportunity to opt out) for employers with more than 200 full-time employees. Applies to grandfathered plans.
- Notices required as to whether the health coverage offered qualifies as minimum essential coverage.
- New nondiscrimination rules for fully-insured group health plans. These were to be effective January 1, 2011 and have been delayed. Potentially discriminatory insured health plans are those that benefit only highly paid executives. One key area of concern is retiree medical coverage for highly compensated retirees. These rules, when effective, could have a significant impact on executive employment and severance agreements in that they would effectively prohibit providing richer medical benefits for executives and their families or providing post-termination medical insurance only for executives and their families. Plan sponsors are subject to an excise tax of $100 per day per individual discriminated against in an insured plan.
- Cadillac Tax. Beginning in 2018, employers will have to pay a 40 percent excise tax on the cost of coverage exceeding $27,500 for a family or $10,200 for an individual in high deductible (self-funded) health plans.
Other things to note, effective in 2014:
- Reward for wellness programs is increased from 20 percent to 30 percent of the cost of coverage. Health plans may provide a premium reduction for participation in wellness programs that require individuals to satisfy a standard related to a health factor in order to obtain the reward ("health-contingent wellness programs"). Such wellness programs include, for example, those that require an individual to obtain or maintain a certain health outcome in order to obtain a reward (such as being a non-smoker, attaining certain results on biometric screenings, or exercising a certain amount).
- Individual mandate. In general, an individual who does not maintain health insurance must pay an additional amount to the IRS when he pays his taxes. The penalty is the greater of a flat dollar amount ($95 for 2014, $325 for 2015 and $695 in 2016 – capped at 300 percent of the flat dollar amount) or a percentage of taxable income (1 percent in 2014, 2 percent in 2015 and 2.5 percent thereafter).
- Annual dollar limits on essential health benefits prohibited. (Note that lifetime limits have already been eliminated and annual limits, beginning with plan years on or after September 23, 2010, are gradually being eliminated.) The elimination of limits on coverage will result in an increased cost to employers. Applies to grandfathered plans.
- Cost-sharing (deductibles and co-payments) limits cannot exceed limits in effect for high-deductible health plans (HDHPs) (For example, in 2012, this amount would be $6,050 for self-only coverage and $12,100 for family coverage. These amounts will be adjusted in 2014.)
- Pre-existing condition exclusions prohibited. Applies to grandfathered group health plans.
- Waiting periods for coverage over 90 days prohibited. Applies to grandfathered plans.
Employers, to the extent that they have not yet begun to implement the changes required by heath reform, should begin the process now. Employers could face some major headaches if they wait until the upcoming elections to take action. While addressing the items that require action in 2012, employers should look for additional guidance from the federal government that will flush out additional details regarding health care reform…there still is much important guidance that needs to be issued.
For more information about the Patient Protection and Affordable Care Act, click here.