This article is the second in a two-part series that offers an overview of health-plan-related provisions in the Health Care and Education Reconciliation Act of 2010 and Patient Protection and Affordable Care Act of 2010. The first installment appeared on March 26 and is available online at ebn.benefitnews.com.
Exchange-related issues
PPACA provides funds to states to establish a health insurance exchange through which individuals may purchase health insurance beginning in 2014. Although generally directed at individuals, the exchange-related provisions in PPACA impact employers in the following ways:
Beginning in 2017, states may allow all employers of any size to offer coverage through the exchange. Prior to 2017, only small employers (employers with 100 employees or fewer) may participate. For years before 2016, a state may limit small employers to those with 50 or fewer employees.
Employers who offer coverage through the exchange may permit employees to pay for such coverage with pre-tax dollars through the employer’s cafeteria plan; however, exchange-related coverage that is not offered by the employer may not be offered through the employer’s cafeteria plan.
Individual responsibility
Effective Jan. 1, 2014, individuals who do not enroll in qualifying coverage, including qualifying employer-sponsored coverage, must pay an excise tax. Self-insured plans and insurers will be required to report certain coverage-related information to the individual and to the IRS.
Under PPACA, individuals generally pay the greater of a flat dollar amount and a percentage of income payment. The flat dollar amount penalty is $95 in 2014, $495 in 2015 and $750 in 2016 and thereafter. The percentage of income limit is 0.5% in 2014, 1.0% in 2015, and 2.0% in 2016 and thereafter.
Reconciliation Act Alert: As under PPACA, individuals generally pay the greater of a flat dollar amount and a percentage of income payment under the Act. The flat dollar amount penalty is $95 in 2014 under both PPACA and the Reconciliation Act.
The Reconciliation Act reduces the flat dollar amount to $325 in 2015 and to $695 in 2016 and thereafter. The percentage of income limit is increased to 1.0% in 2014, 2.0% in 2015, and 2.5% in 2016 and thereafter.
Grandfathered plans
Under PPACA, group health plans in effect on the date of enactment are exempt from many of the health care reforms. The grandfather rule is not limited to individuals enrolled on the date of enactment, but rather:
• New employees (and their families) may be covered under an employer’s grandfathered plan; and
• Family members of current employees who are covered by the grandfathered plan may also be added.
Grandfathered plans are permanently exempt from the following reforms:
• Prohibition on lifetime or annual limits
• Rescission of benefits
• Preventive services
• Dependent coverage
• Limits on cost sharing
• Nondiscrimination rules imposed under PPACA (i.e., the application of Code Section 105(h) to fully-insured plans)
• Reporting requirements
• Appeals process
• Selection of doctors and referral requirements
• Coverage of clinical trials
• No discrimination against providers
• Individual responsibility requirements: Coverage under a grandfathered plan satisfies the individual responsibility provisions of the Act.
• Waiting periods: Under PPACA, no waiting periods in excess of 90 days are allowed. While this prohibition does not apply to grandfathered plans, as described below, a penalty may be imposed on waiting periods in excess of 60 days even for grandfathered plans.
• Preexisting condition exclusions.
Under PPACA, grandfathered plans are subject to the following requirements:
• Changes in tax rules relating to health plans
• Uniform explanation of coverage
• Cost reporting and rebates
• Automatic enrollment
• Notification of availability of the exchange and subsidies
• Notices regarding the exchange
• Requirement to provide employees with vouchers
Reconciliation Act Alert: Under the Act, grandfathered group health plans are also subject to the following requirements from which they would otherwise be exempt under PPACA:
• Limitation on lifetime and annual limits
• Limitation on preexisting condition exclusions
• Prohibition on rescissions
• Limitation on waiting periods
• Coverage of adult children; however, for years before 2014, the coverage requirement applies only if the adult child is not eligible to enroll in another eligible employer plan
PPACA also contains a delayed effective date for collectively bargained plans for many of the reforms.
Tax on high-cost coverage
Under PPACA, beginning in 2013, a nondeductible 40% excise tax is imposed on the monthly value of high cost coverage in excess of 1/12 of $8,500 for single coverage and 1/12 of $23,000 for family coverage, indexed to CPI + 1 beginning in 2014.
The annual limit for retirees between ages 55 and 64, individuals engaged in certain high-risk professions (e.g., law enforcement professionals, EMTs, construction, mining) and those employed to install electrical or telecommunication lines is increased to $8,850 for individual coverage and $26,500 for family coverage.
The limit for employees in “high cost states” (as determined by HHS) is increased to 120% in 2013, 110% in 2014 and 105% in 2015.
“High cost states” are each of the 17 states estimated by HHS to have the highest average cost (based on aggregate premiums) during 2012 for employer-sponsored health plans. In calculating the tax, the value of coverage for retirees under age 65 and coverage for retirees age 65 or older may be combined.
Reconciliation Act Alert: The Act makes the following changes to PPACA:
• The tax is delayed until 2018.
• The thresholds for the tax are increased to $10,200 for single coverage and $27,500 for family coverage ($11,850 and $30,950 for retirees and employees in high risk professions). These amounts are to be adjusted automatically if health costs increase by more than anticipated before 2018. The thresholds are increased by CPI + 1 in 2019 and by CPI thereafter. An employer may make an adjustment to reduce the cost of plans when calculating the tax if the employer’s age and gender demographics are not representative of a national average. The transition rule for high cost states does not apply.
• The higher family threshold applies to both single and family coverage offered under a multiemployer plan.
“Coverage providers” are defined to include the following:
• In the case of fully-insured plans, the health insurer
• In the case of HSA or MSA contributions, the employer making the contributions
• In the case of a self-insured plan, the person who administers the plan (e.g., the third-party administrator)
In many cases, employer-sponsored coverage will include both fully insured and self-insured contributions (and may also include HSA contributions). The coverage provider’s applicable share of the tax will bear the same ratio to the total excess benefit as the cost of the coverage provider’s coverage to the total value of employer-sponsored coverage.
Although the coverage provider is responsible for paying the tax, the employer must calculate the tax, including each coverage provider’s applicable share, and notify each coverage provider.
The coverage subject to this rule includes the following:
• The applicable premium (determined in accordance with COBRA rules) for all accident and health coverage provided by the employer, even if paid for with after-tax dollars by the employee, except accident and disability insurance, long-term care and hospital indemnity and/or specified disease coverage that is paid for with after-tax dollars.
• Both nonelective and salary reduction contributions to a health FSA and employer contributions (presumably including salary reductions) to an HSA are also subject to the rule.
Furthermore, employers must include the value of all such coverage on the employee’s W-2. The W-2 reporting requirement applies to all tax years beginning on or after Jan. 1, 2011.
Other group health plan related issues
A number of other provisions will impact group health plans generally:
FSA cap: Effective taxable years beginning Jan. 1, 2011, health FSA salary reductions are limited to $2,500 each year. The limit is indexed for inflation based on the CPI beginning in 2012.
Reconciliation Act Alert: Under the Act, the effective date of the $2,500 cap on contributions to a health FSA is delayed so that the provision is effective starting in 2013. The cap is indexed to the CPI starting in 2014.
Over-the-counter reimbursements: Effective for tax years beginning on or after January 1, 2011, over-the-counter medications or drugs are not eligible for reimbursement under an FSA, HRA, or HSA without a doctor’s prescription.
HSA distributions: The excise tax for nonqualified distributions from HSAs is increased to 20%, effective for distributions after Dec. 31, 2010.
Deduction of retiree medical costs: Effective for tax years beginning on or after Jan. 1, 2011, the deduction previously permitted for amounts allocatable to the Medicare Retiree Part D subsidy is eliminated.
Reconciliation Act Alert: The effective date of the provision relating to deductions allocatable to the Part D subsidy is effective starting in 2013.
HI tax changes: Beginning in 2013, individuals with wages above $200,000 for a single return and $250,000 for a joint return would be subject to an additional 0.9% tax on wages in excess of these thresholds.
Reconciliation Act Alert: Under the Act, such individuals would also be subject to a 3.8% tax on their net investment income (to the extent that total income exceeds the thresholds). This new tax would be effective starting in 2013.
Safe harbor rules for cafeteria plans of small employers: A new safe harbor from the nondiscrimination rules for cafeteria plans (and certain plans offered through a cafeteria plan, such as group term life insurance, self-insured medical and dependent care assistance benefits) is provided for plans maintained by eligible employers to the extent certain requirements are met, such as (i) all “nonexcludable” employees are eligible to participate and (ii) certain minimum contribution requirements are met.
An eligible employer is an employer with 100 or fewer employees during either of the two preceding years (provided it is a full year). The safe harbor applies for tax years beginning on or after Jan. 1, 2011.
Credit for small employers: Effective for taxable years beginning on or after Jan. 1, 2011, small employers with fewer than 25 “full-time equivalent” employees are eligible for a tax credit equal to a portion of the employer’s cost to provide health insurance.
Fee on health insurance providers: Effective starting in 2011, there is a nondeductible annual fee on health insurance providers based on market share. The fee is structured so as to raise $60 billion over 10 years. The fee does not apply to self-insured plans. Certain other exceptions also apply; for example, the fee does not apply to long-term care coverage, or to coverage for specified disease or hospital indemnity policies.
Reconciliation Act Alert: Under the Act, the fee is effective Jan. 1, 2014. Certain other modifications also apply.
CER fee: To fund comparative effectiveness research, effective for each policy year ending after Sept. 30, 2012, a fee equal to $2 ($1 in the case of policy years ending during fiscal year 2013) multiplied by the average number of covered lives is imposed. The fee applies to accident or health insurance policies other than policies covering benefits exempt under HIPAA. The fee also applies to self-insured plans.
John Hickman can be reached at john.hickman@alston.com and Ashley Gillihan can be reached at ashley.gillihan@alston.com.
Related coverage: Legal Alert: Dissecting the health reform legislation (Part 1)
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