As discussed in our alert last week, the Supreme Court upheld the “individual mandate” provided under the Patient Protection and Affordable Care Act (“PPACA” or “the Act”) on the basis that the mandate is a constitutional exercise of the power of Congress to tax. Further, while the Court found part of the Act unconstitutional insofar as it affects the power of the federal government to terminate state Medicaid funding, the Court did not find the remainder of the Act unconstitutional as a result of this flaw. Therefore, employers are left with the continuing duty to comply with the Act, including several upcoming requirements that affect group health plans. The following provides a more detailed summary of the most significant obligations and deadlines under the Act that must be considered by employers in the future.
As noted in several of our alerts over the past two years, group health plans are already required to comply with several mandates of PPACA, including patient protections, annual and lifetime limit prohibitions, and preventive care coverage rules; new appeals requirements including external appeal rules; and dependent coverage rules. An employer’s compliance obligations are further influenced by whether the employer’s plan retains its “grandfathered status” under the Act.
Now that the Act has been upheld, additional compliance requirements are fast approaching which pose even more significant obligations on employers and require careful planning to ensure compliance. These upcoming requirements include the following:
Beginning with the 2012 tax year (for W-2s issued in January, 2013), employers must report the “aggregate cost” of “applicable employer-sponsored coverage” on an employee’s Form W-2. While the Act originally provided that this obligation would be effective in the 2011 tax year, the IRS made compliance optional in 2011. Employers should begin to work with their health care providers to determine how to collect and report this information.
Summary of Benefits and Coverage
As noted in a previous alert, plan sponsors and insurers will soon be required to provide a concise summary of their health plans that accurately describes the benefits and coverage under the plan in an understandable manner. Summaries of Benefits and Coverage (“SBCs”) serve a different purpose than current Summary Plan Descriptions (“SPDs”) required by ERISA, and must be significantly more concise (not to exceed four pages). SBCs must be delivered to participants who enroll or re-enroll in a plan on the first day of the first open enrollment period that starts on or after September 23, 2012. Plans that do not have a regular open enrollment period must comply beginning on the first day of the first plan year that begins on or after September 23, 2012.
Dollar Limitation on FSA Contributions
The Act imposes a $2,500 annual limit on salary reduction contributions to health flexible spending accounts (“FSAs”) offered under cafeteria plans. The IRS has clarified that this rule is effective for cafeteria plan years beginning after December 31, 2012.
Maximum Waiting Periods
Prior to PPACA, group health plans frequently imposed waiting periods ranging from 30 days to as long as two years. Health plan waiting periods frequently permit employers to maintain a group health plan for their permanent workforce while giving the employer the flexibility to hire temporary workers at a much lower total cost (i.e., without insurance premium costs or, for self-insured plans, the health costs for such workers themselves). It is also common for employers to tie a probationary employment period with the period necessary to gain coverage under the group health plan. For plan years beginning on or after January 1, 2014, however, waiting periods may not exceed 90 days.
State Health Benefit Exchanges
Individuals will be permitted to receive health coverage from a state health benefit exchange beginning in 2014. By January 1, 2014, each state must establish an “American Health Benefit Exchange” – a government agency or nonprofit entity that acts as a government-supervised (but not truly government-sponsored) marketplace for insurance products. Many individuals who do not have employer-sponsored group coverage will likely seek coverage from an exchange to comply with the individual mandate. Importantly, employers will be required to notify employees of the availability of the exchanges by March 1, 2013. Further, beginning in 2014, small employers (100 or fewer employees) will be permitted to offer employee health coverage directly through an exchange. And in 2017, states may permit large employers (more than 100 employees) to offer employee health coverage directly through an exchange.
Pay or Play
An “applicable large employer” (generally, an employer with at least 50 full-time employees on average during the previous calendar year) will be subject to a “pay or play” obligation under the Act. An “assessable payment” (i.e., a tax) will apply to such employers if they either offer no coverage at all, or offer coverage that isn’t “minimum essential coverage.” In addition, taxes will apply if the plan’s share of the total allowed cost of benefits provided by the plan is less than 60%, or if the employee premium exceeds 9.5% of the employee’s household income. Significant regulations are expected in the future that will assist employers in determining how to comply with these requirements. The pay or play regime is at the heart of the Act, and employers must soon face the decision of whether they will continue to offer group health coverage to their employees or, instead, simply pay the applicable tax.
Employers that offer health coverage and that have more than 200 full-time employees will be required to enroll all employees automatically in their plan. This mandate actually comes as an amendment to the Fair Labor Standards Act (“FLSA”). While PPACA itself does not provide an effective date for this rule, the DOL has issued guidance explaining that employers will not be required to comply with this requirement until the DOL issues explanatory regulations. The DOL has stated that its automatic enrollment regulations will not be ready to take effect by 2014.
Cadillac Plan Excise Tax
Beginning in 2018, group health plans with total premium levels above a specified threshold (e.g., $10,200 for individual coverage, $27,500 for family coverage, both subject to adjustments for inflation) will be subject to a 40% excise tax. This tax is commonly referred to as the “Cadillac plan excise tax,” and is memorialized in a new Section 4980I of the Internal Revenue Code. Although this particular tax is still several years away, employers hoping to stay below the applicable thresholds must consider taking actions now to ensure that this additional tax will not be assessed.
This alert is only a summary of the most significant provisions of the Act that are on the horizon. In the meantime, it is possible that there will be additional Congressional or regulatory action that further refines the Act – in particular to account for the Supreme Court’s decision concerning the Medicaid expansion and its overall effects on the insurance marketplace. We will continue to monitor both legislative and regulatory developments in this area and will provide further updates as events unfold.