On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (“PPACA”), the first part of Congress' historic health care reform legislation. One week later, on March 30, 2010, the President signed the Health Care and Education Reconciliation Act of 2010 (“HCERA”), which amended several pieces of the one-week old PPACA. By now, most employers have seen dozens of outlines and summaries of the new law. Rather than provide just another summary, we prefer to follow the more practical approach we've used with other major legal developments: sharing the answers to employers' most common questions about their obligations under the new law (PPACA and HCERA are collectively referred to as PPACA below).
This Q&A provides our thoughts on a variety of questions raised by employers and their service providers about how PPACA will impact employer-sponsored health plans, based on the statutory language, legislative history, and informal guidance available to date. We plan to update this list of questions and answers regularly on our Web site, as we receive more questions from our clients and guidance from government agencies, so please check back often.
Effect on Employer Plans Generally
1.How — and how soon — will PPACA affect us and our health plan?
PPACA will in some way impact every business that currently maintains a health plan for its employees and many that don't. If your business currently has a health plan, you will almost certainly need to make changes to that plan by the beginning of your next plan year (by January 1, 2011 for calendar year plans). If you don't currently have a group health plan and you (together with other companies under common control) employ the equivalent of at least 50 employees, then if you don't establish a plan by January 1, 2014, you'll start paying penalties in the form of an excise tax.
New health plan requirements imposed by PPACA include restrictions on lifetime and annual dollar limits, new restrictions on pre-existing condition limitations, waiting period restrictions, expanded coverage for adult dependent children, new nondiscrimination requirements for fully insured plans, cost-sharing requirements, special requirements for preventive care coverage, expanded claims and appeals procedures, and automatic enrollment for employees of larger employers.
2.Does PPACA affect self-insured employer health plans?
Yes. Many of the new requirements will apply to self-insured plans, as well as to plans funded by insurance products. For example, the new restrictions on lifetime and annual limits, waiting periods, and pre-existing condition limitations apply to both self-insured and fully insured plans, as do the new requirements expanding coverage for adult dependent children.
3.Will we have to make all the required changes to our plan immediately?
No. The new requirements have staggered effective dates, with some becoming effective almost immediately and others becoming effective in each of the next several years. Generally, the first set of new substantive group health plan requirements will be effective for the first plan year that begins on or after September 23, 2010. This means January 1, 2011, for calendar year plans.
4.What about plans covering union employees?
While the answer is not yet definitive, it appears that for plans governed by a collective bargaining agreement in effect on or before March 22, 2010, the effective date for changes required by the new law is postponed until the end of the term of that agreement. Of course, the parties (employer and union) could agree to an earlier effective date for the changes. Employers should consult with their labor counsel to determine how best to proceed.
5.Does PPACA require employers to provide health coverage to their employees?
No. PPACA's employer “mandate” is not a coverage mandate but is instead in the nature of a “play or pay” mandate for medium and large employers. Employers with the equivalent of at least 50 full-time employees will generally be subject to an excise tax — sometimes called a “free rider” penalty — if they do not provide coverage to their full-time employees or if the coverage they provide does not meet certain requirements (some of which are yet to be developed). The free rider penalties do not become effective until 2014.
6.Will employers be required to offer a minimum level of coverage?
Not directly. Again, employers are not required to provide coverage. However, to avoid excise taxes (or at least minimize the chances of being hit with the excise tax), an employer will need to provide coverage that offers the “minimum essential benefits,” as defined in forthcoming regulations from HHS.
It's also important to note that, beginning in 2014, PPACA will impose a mandate on individuals to obtain "minimum essential coverage" or pay an excise tax. If your plan isn't a grandfathered plan (see Q&A 12) or doesn't provide the minimum essential benefits, then it won't satisfy the individual mandate for your employees, and they will need to obtain coverage elsewhere or pay the excise tax.
Also keep in mind that PPACA mandates the creation of state insurance exchanges, where citizens and legal residents will be able to purchase minimum essential coverage from "qualified health plans," in some cases with the help of federal subsidies (for those with incomes below 400% of the federal poverty level). Employees will be able to turn to the exchanges if they don't have employer-sponsored coverage or if they find that coverage available through an exchange is preferable to, or more affordable than, an employer's plan.
7.Will employers be better off offering health coverage, or simply paying the “free rider” penalty?
That's not clear — and the answer will likely vary from employer to employer and from industry to industry. As regulatory agencies fill in more of the details about the requirements and the “free rider” penalties, employers and their advisors will be better able to analyze which course of action will be better for a particular employer, financially and competitively. Historically, most employers who've offered health coverage to employees have done so to remain competitive — in many industries, failing to offer health coverage for at least some job classifications would place the employer at a competitive disadvantage in the quest to hire and retain qualified workers. The new law clearly recognizes, however, that some covered employers will not offer coverage, which is why it imposes the “free rider” penalties and requires employers to provide "free choice vouchers in some cases (see Q&A 39), to ensure that those employers still contribute in some way to the cost of covering their employees.
If only to remain competitive, covered employers that decide not to offer coverage (or to stop offering coverage) will almost certainly need to provide employees with some level of stipend to purchase health care coverage. In addition, it is probably safe to assume that the amount of the “free rider” penalty will increase as the true costs of PPACA are realized.
8.How are employees counted for purposes of determining whether our company has 50 full-time employees?
Generally, the determination is whether an employer employed the equivalent of “an average of at least 50 full-time employees on business days during the preceding calendar year.” For these purposes, a “full-time employee” is one who is employed on average at least 30 hours per week. In addition, an employer must take into account for these purposes employees of any other entity under common control with the employer (which will discourage businesses from dividing up into separate companies to avoid the 50-employee threshold).
9.So, for counting purposes, can we disregard our part-time employees who work on average fewer than 30 hours per week?
No. The 50-employee threshold is based on full-time equivalents — so you must take into account your part-time employees and convert them to a number of full-time equivalents (FTEs). For example, three part-time employees who each work on average 20 hours per week equates to two employees working on average 30 hours per week, so those three part-time employees will count as two FTEs.
10.How will temporary employees be treated for counting purposes?
It is not clear how temporary employees will be treated, and we expect further guidance on this issue before 2014. While PPACA permits the exclusion of certain “seasonal workers” for this calculation, many employers use “temporary employees” in capacities other than as seasonal workers. For example, many employers supplement their regular work force in various ways using either agency temporaries or new direct hires classified as “temporary.” If temporary employees are leased through an agency, it is possible that these employees would count as employees of the leasing agency for purposes of the 50-employee threshold. However, it is certainly possible that HHS will determine that, at least after a certain period of service, an agency temporary should count as an employee of the company receiving the services for purposes of determining whether that company has 50 FTEs. Further, we suspect this result will be even more likely when a leasing arrangement looks more like a payroll and benefits arrangement (for example, certain PEO arrangements).
Impact on Existing Plans
11.Will PPACA require changes to our existing health plan?
Yes. You will almost certainly have to make some changes to your existing health plan, whether it is insured or self-insured. While “grandfathered plans” are exempt from some new requirements, they are subject to others, including several that will become effective with your next plan year that begins on or after September 23, 2010 (so January 1, 2011, if you have a calendar year plan and sooner if your plan year begins between September 23 and January 1).
12.What is a grandfathered plan?
Generally, a grandfathered plan is a health plan in existence on the date PPACA became law, March 23, 2010. Under PPACA, grandfathered plans generally would have been exempt from PPACA's new health plan requirements. However, HCERA substantially lessened the benefits to grandfathered plans by requiring all plans, including grandfathered plans, to comply with certain of PPACA's reforms. The reforms that apply to grandfathered plans include restrictions on pre-existing condition limitations, restrictions on lifetime and annual limits, expansion of coverage for adult dependent children, and waiting period restrictions. These new requirements apply equally to fully insured and self-insured plans.
13.Which new requirements do not apply to a grandfathered plan?
While HCERA significantly reduced the benefits of grandfathered status, there are still a number of new requirements that will not apply to grandfathered plans. It is clear that the extension of the Code Section 105(h) nondiscrimination requirements to fully insured plans will not apply to grandfathered plans. Further, grandfathered plans apparently will not have to comply with the newly expanded appeals rights or the “minimum essential benefits” design package that new health plans will have to adopt. There are certain additional requirements from which grandfathered plans appear to be exempt, including the new rules requiring first dollar coverage (no cost sharing) for certain preventive care services and immunizations, new requirements to cover certain treatment related to clinical trials, and certain provider choice requirements for pediatric and ob/gyn care.
14.Do the grandfathered plan exemptions apply only to people covered by our plan on the date of PPACA's enactment?
No. The statute makes clear that the grandfathered plan exemptions will apply to new employees and new dependents who join the plan and to existing employees and dependents who first become covered after the date of PPACA's enactment.
15.Will our plan lose grandfathered status if we make changes to it other than the changes specifically required by PPACA?
We don't know yet. HHS has not yet issued regulations or other guidance on what will be required to maintain status as a grandfathered plan. Accordingly, we do not yet know whether, and to what extent, a grandfathered plan will retain its grandfathered status once the employer makes material changes to that plan (other than changes to comply with applicable PPACA requirements). Until more guidance on the grandfather rules becomes available, employers will want to tread carefully in making material changes to grandfathered plans.
16.Is it worth seeking the protections provided to a grandfathered plan?
That is not yet clear, and the answer may vary from one employer to another. The analysis will likely turn on an employer's particular plan design, the importance of the grandfathered features of that plan design, and how onerous it is to maintain grandfathered status under as yet to be issued HHS rules. For example, if your plan is fully insured and discriminatory (within the meaning of the Code Section 105(h) rules that previously applied only to self-insured plan), maintaining grandfathered status may be very important to your company. However, until you and your advisors can evaluate how rigidly you will have to maintain your current plan design in order to preserve grandfathered status, it will be difficult to determine if the grandfathering protections will be worth the cost.
Say Goodbye to Pre-Existing Condition Limitations
17.How will PPACA affect pre-existing condition limitations?
PPACA will prohibit insured and self-insured group health plans from applying any pre-existing condition exclusions or limitations (including those that have been lawful under HIPAA).
18.How soon will we have to eliminate our plan's current pre-existing condition limitation?
The new prohibition becomes effective in two phases. Effective for plan years beginning on or after September 23, 2010 (January 1, 2011, for calendar year plans), insured and self-insured group health plans may not impose any pre-existing condition limitation or exclusion against a child under age 19. Effective for plan years beginning on or after January 1, 2014, insured and self-insured group health plans may not impose any pre-existing condition exclusion or limitation on a covered person of any age.
19.What are the new restrictions regarding lifetime and annual limits?
Generally, effective for plan years beginning on or after September 23, 2010 (January 1, 2011, for calendar year plans), PPACA prohibits insured and self-insured health plans from imposing a lifetime dollar limit on the value of “essential health benefits.” Further, effective that same date, HHS will establish restrictions on the types of annual limits that may be imposed by an insured or self-insured plan for “essential health benefits.” At this point, we do not know what “essential health benefits” will mean; HHS will define this term by regulation. Effective for plan years beginning on or after January 1, 2014, insured and self-insured group health plans cannot impose any annual limits on “essential health benefits.”
20.Will all lifetime limits become “off limits”?
Not quite. Although not entirely clear, it appears that plans may be permitted to apply annual and lifetime limits to benefits that are not considered “essential health benefits.” The key question will be whether anything outside the scope of “essential health benefits” will warrant an annual or lifetime limit.
21.Do the rules on lifetime and annual limits apply to retiree medical plans?
That is not yet clear, but our best guess is that these rules will apply to retiree medical plans (because there is no express statutory exclusion for stand-alone retiree medical plans, as there was for the HIPAA portability requirements).
22.Will these new restrictions on limits and pre-existing condition exclusions apply to stop-loss insurers for self-funded plans?
Probably not. Because stop-loss policies are not considered to be health care insurance, PPACA should not affect these policies—which means that stop-loss insurers could still lawfully impose lifetime or annual limits on the extent to which they will reimburse a self-insured employer for a participant's covered expenses and could continue to “laser” pre-existing conditions or the participants who have them from the scope of stop-loss coverage. We understand that stop-loss carriers are reviewing the maximum exposure they are willing to accept, as well as the cost of increasing the scope of coverage. Employers will need to review any stop-loss policy to determine the maximum benefit provided and should contact their stop-loss carrier to discuss this issue.
Waiting Period Restrictions
23.What are the new restrictions on waiting periods?
Effective January 1, 2014, insured and self-insured group health plans (including grandfathered plans) may not impose a waiting period that exceeds 90 days.
24.Are there any “pitfalls” that employers should avoid in complying with the new waiting period restrictions?
Yes. Employers should be careful to avoid any terms in their plans that might unintentionally extend the waiting period beyond the 90-day limit. For example, if a plan provides (as do many existing plans) that new enrollees enter the plan on the first day of any month after completing 90 days of employment, the “first day of the month” requirement, when combined with the 90-day waiting period, would seem to violate the new prohibition on waiting periods longer than 90 days.
25.We lease employees through an employee leasing company during their probationary period so that we can evaluate an individual during his or her probationary period and then decide whether to hire that person as our employee. Will we be required to count the employee's service with the leasing company toward the 90-day maximum waiting period?
The answer is not yet clear, but we suspect that in this situation, the employee's service with the leasing company will count toward the 90-day limit.
Expansion of Coverage for Adult Dependent Children
26.What are the new rules for extending coverage to adult dependent children under a group health plan?
Effective for plan years beginning on or after September 23, 2010 (so January 1, 2011 for calendar year plans), insured and self-insured group health plans that offer dependent coverage must make coverage available to any dependent child of a participant until the child reaches age 26, even if the child is married.
27.So, we can terminate coverage on the adult child's 26th birthday?
In most cases, yes—subject to COBRA rights, of course (because the adult child would be a child losing dependent status). Keep in mind, however, that approximately 30 states now have laws requiring extended adult child coverage under group health plans in that state—so if your plan is fully insured, it will also have to conform to the applicable state law requirements.
28.How does an adult child qualify as a “dependent” under the new rules?
We don't know yet. The statute directs HHS to issue regulations defining “dependent” for these purposes. Indications are that the definition will be broad and will not be limited by student status, marital status, or residency.
29.May a plan deny coverage to an otherwise eligible adult child if the adult child is eligible to enroll in another employer-sponsored plan?
Yes, during a transition period—but this transition rule applies only to grandfathered plans. Through the end of 2013, a grandfathered group health plan does not have to provide coverage to an otherwise eligible adult child who is eligible to enroll in another employer-sponsored group health plan. However, this transitional exception expires with the first plan year beginning on or after January 1, 2014.
30.Does this expanded coverage requirement for adult dependent children obligate a plan to cover dependents of adult dependent children?
No. PPACA expressly states that plans are not required to make coverage available to the child of a child receiving dependent coverage.
31.Our plan previously eliminated all dependent coverage and now covers employees only. Does PPACA require plans to offer coverage to employees' dependents?
No. PPACA does not require plans to offer dependent coverage. It simply requires that if a plan covers dependent children it must cover them to age 26. Because most group health plans still offer dependent coverage, however, most plans will need to comply with the expanded coverage requirement.
32.If a plan has excluded an adult dependent child under its current terms, will the plan need to give that child a chance to enroll for coverage once the new PPACA provision becomes effective?
It would appear that plan will need to treat the adult child as a newly eligible dependent, effective with the first plan year beginning on or after September 23, 2010, which will generally mean that the dependent can enroll during the open enrollment period for that plan year. (Because the new requirement becomes effective as of the first day of a plan year, we do not expect that a plan would have to offer the child special enrollment rights, unless the plan sponsor elects to expand coverage earlier than required.) (See Q&A 34 below.)
33.Can we charge our employees the full cost of coverage for dependents above a certain age, say 23?
We would expect so—at least until January 1, 2014. As for plan years beginning on or after January 1, 2014, we will need to wait for guidance to see how the cost-sharing requirements (discussed below) affect this issue.
34.I have read that several large health plan insurers are allowing adult dependents who graduate in the spring to remain on their parents’ health plan even if those student dependents would exceed the plan's current non-student dependent age limit. We are self-funded, but should we consider expanding the definition of dependent now?
As noted above, the new law requires insured and self-insured group health plans that cover dependent children to extend that coverage to age 26, beginning with the first plan year that begins on or after September 23, 2010. For calendar year plans, this would mean an effective date of January 1, 2011. This will leave a gap for dependent children who are currently covered under their parents' plans as full-time students but will graduate from college this spring. Having recognized this gap, HHS Secretary Sebelius requested that insurers and employers voluntarily extend coverage to these graduating students early, before the law would actually require that extension of coverage. Several insurers recently announced that they have agreed to roll out this change early to their insured employer groups.
The insurer announcements that we have seen so far have suggested that those insurers are implementing this change automatically for insured group health plans. We have also seen commentary from those insurers indicating that they do not intend this change to affect the current plan costs (i.e., they will not adjust premiums when they implement the change). This appears to be based on the assumption that this extension simply continues an existing aspect of plan coverage, although this position seems to ignore the possibility that the employer pays a portion of the premium for coverage of these dependents (that is, if the dependent were losing plan coverage, the employer might have a resulting premium savings if, for example, dropping the dependent child moved the employee into a less costly coverage category, such as employee and spouse instead of family).
These insurer decisions will not automatically affect self-funded plans, so in the case of a self-funded plan, the sponsoring employer will need to decide whether to implement early the expansion of dependent child coverage. This decision will likely turn on the answers to a number of questions, including:
- Will the early roll-out of this change only apply to spring college graduates, or will it also extend or restore coverage to other adult dependent children who have already lost eligibility for coverage but will become eligible again under the new law?
- What are the cost ramifications of the early roll-out?
- Will the employer need its stop-loss carrier's approval for the early roll-out and will the carrier grant approval?
- Will this change adversely affect the plan’s grandfathered status?
35.Does PPACA impose cost-sharing requirements for group health plans?
Indirectly, through the “free rider” penalties. Although PPACA does not directly impose cost-sharing limits on group health plans, beginning in 2014, employers will incur “free rider” penalties if the health coverage they provide does not meet certain “affordability” standards and at least one employee is eligible for premium or cost-sharing assistance and opts to purchase coverage through a state health insurance exchange. A plan does not meet the affordability standards if: (1) the employer does not pay at least 60% of the cost of group health plan coverage; or (2) the employee's required contribution for coverage is greater than 9.5% of household income.
In addition, new health plans (not grandfathered plans) are required to cover certain preventive care without any cost-sharing requirements (no copayments, no deductibles, etc.). See Q&A 40 below.
36.How much is the “free rider” penalty if an employer's plan fails to meet the affordability standards?
If the employer has the equivalent of more than 50 full-time employees and its health coverage doesn't meet affordability standards, the “free rider penalty” is $3,000 per year (assessed on a monthly basis) for each employee who is eligible for premium or cost-sharing assistance and receives coverage through the state health insurance exchange (limited to a total of $2,000 per year times the total number of full-time employees). Free rider penalties are not tax deductible.
37.How does this compare to the “free rider” penalty for not offering any coverage?
For an employer that has the equivalent of more than 50 full-time employees and does not provide health coverage to all full-time employees, if at least one full-time employee receives premium or cost-sharing assistance to purchase insurance through a state exchange, then the nondeductible “free rider” penalty is $2,000 per year (assessed on a monthly basis) times the total number of the employer's full-time employees—disregarding the first 30 full-time employees. Remember that for these purposes, “employer” is defined on a controlled group basis.
38.We impose a spousal surcharge if our employee's spouse is eligible for other coverage. Can we still impose this additional cost?
We would think so, but given the current legislative and regulatory attitude, employers may need to review any spousal surcharge or penalty.
39.If we offer a plan but an employee chooses to purchase health insurance through a state insurance exchange, are we required to pay a portion of the cost of that coverage?
Yes, in certain circumstances, beginning in 2014. Specifically, an employer must issue a “free choice voucher” to an employee if: (1) the employee meets certain income standards (household income less than 400% of the federal poverty level); (2) the employee's required contribution under the employer plan is between 8% and 9.8% of household income; and (3) the employee does not enroll in the employer's group health coverage. The “free choice voucher” is used to purchase health coverage through a state insurance exchange, and it results in the employer paying the amount of the voucher directly to the exchange. (If the cost of the exchange coverage is less than the voucher, the difference will be paid to the employee.) The amount of the voucher is the amount the employer would have paid toward the cost of coverage had the employee enrolled in the highest cost option available under the employer's plan (for single or family coverage, depending on which the employee purchases through the exchange). The amount paid for exchange coverage with the voucher is not includable in the employee's gross income, and the employer can deduct the cost of the voucher. The voucher is tax deductible, and the employer will not be assessed a “free rider” penalty with respect to employees who receive free choice vouchers.
40.Are there special coverage requirements for preventive care?
Effective for the first plan year beginning on or after September 23, 2010 (January 1, 2011, for calendar year plans), new insured and self-insured group health plans are required to cover certain types of preventive care, immunizations, child preventive services, and women’s preventive services without any cost sharing. "Cost sharing" includes co-payments, co-insurance charges and deductibles—so this is a requirement to provide first dollar coverage. HHS is required to establish a minimum interval for various types of preventive services, which cannot be less than one year. Grandfathered plans are not subject to these requirements.
Nondiscrimination for Insured Plans
41.What are the new nondiscrimination rules for insured plans?
Effective with the first plan year beginning on or after September 23, 2010 (January 1, 2011, for calendar year plans), insured group health plans (other than grandfathered plans) are subject to the same nondiscrimination rules that apply to self-insured plans under Internal Revenue Code Section 105(h). The Section 105(h) rules prohibit discrimination in favor of highly compensated employees as to eligibility to participate and benefits. If a plan that is subject to the Section 105(h) rules does not comply with them, then highly compensated participants will be taxed on all or part of the benefits paid to them under the plan. (Note: under Section 105(h), the amounts subject to tax are the benefits — that is, the actual payments or reimbursements the plan makes for medical care, rather than the premiums paid for coverage. As a result, a highly compensated employee will take a big tax hit under a discriminatory plan in a year in which the employee or his or her dependents have an injury or illness for which the plan pays significant benefits.)
42.Does this change affect self-insured plans?
No. Internal Revenue Code Section 105(h) already applies to self-insured plans. The new requirements for insured plans appears to be an effort to level the playing field with regard to insured and self-insured plans.
43.We currently maintain a fully insured retiree health plan for certain retired executives, nearly all of whom were highly compensated. Will the new nondiscrimination rules affect this plan?
Not if it’s a grandfathered plan. While this type of executive-only retiree health plan would fail the Section 105(h) eligibility nondiscrimination test once it applies to insured plans, plans in existence on March 23, 2010 are grandfathered and consequently exempt — at least initially — from the Section 105(h) nondiscrimination rules. Accordingly, it appears that you will be able to retain your grandfathered discriminatory fully insured retiree health program, without adverse tax consequences to the highly compensated participants, as long as you don't take any actions with respect to the plan that cause it to lose grandfathered status. As discussed in Q&A 15, we do not yet know to what extent an employee can make changes to a grandfathered plan without jeopardizing its grandfathered status. That said, these plans may be subject to the Cadillac tax starting in 2018 (see Q&A 57).
44.Does PPACA make any changes that affect wellness programs?
Yes. PPACA codified the wellness program requirements contained in the HIPAA nondiscrimination regulations that were previously issued by HHS/IRS/DOL. Under those rules, if a wellness plan reward is not conditioned on meeting a standard relating to a health status factor, then no special requirements apply so long as participation is offered to all similarly situated individuals. However, if a reward is conditioned on meeting a standard relating to a health status factor, then the program must meet the following requirements:
1.The reward cannot exceed a specified percentage of the cost of employee only coverage under the health plan;
2.The program must be reasonably designed to promote health and to prevent disease;
3.The participating individuals must have an opportunity to qualify for the reward at least once per year; and
4.The full reward must be made available to all similarly situated individuals (including possible alternative standards for certain medical situations).
45.How are the requirements codified in PPACA different from what's in the current HIPAA regulations?
In general, the structural requirements are the same. However, when these provisions go into effect in 2014, the permissible reward percentage will increase to 30% of the cost of employee only coverage (up from 20% under current regulations). Further, HHS and IRS are specifically authorized to raise that percentage up to 50% of that cost.
46.Will the EEOC treat compliance with the PPACA wellness program rules as sufficient to satisfy concerns about whether a program is “voluntary” for purposes of the American With Disabilities Act?
The answer isn't clear. The ADA prohibits employers from requiring medical examinations or making medical inquiries of current employees, except under limited circumstances. One of those limited exceptions is for exams and inquiries in the context of voluntary wellness programs. However, as many employers know, the EEOC has informally expressed its view that certain wellness program rewards, despite satisfying HIPAA requirements, may constitute a “penalty,” thereby raising questions about whether the program is truly “voluntary.” Incorporating these rules into law may force the EEOC to acknowledge these programs more directly. However, until the EEOC issues guidance on this issue one way or the other, their position remains uncertain.
New Disclosure and Reporting Requirements
47.Does the new law impose any new disclosure requirements on employers or plan administrators?
Yes. Effective March 23, 2012, insured and self-insured plans must provide a uniform summary of the plan's coverage and benefits provisions to applicants and participants. Within 12 months of enactment, HHS will issue guidance on the standards applicable to these summaries. The statute requires the summary to be no more than four pages (ironic when the statute itself is more than 1,200 pages), to be in print no smaller than 12-point font, to be in “culturally and linguistically” appropriate language, and to use uniform definitions of standard insurance and medical terms (to be established by the forthcoming regulations). The summary must describe coverage, including cost sharing for each category of “essential health benefits” and must include examples that illustrate common scenarios. The summary can be distributed in paper or electronic form and will need to be distributed to all applicants and participants prior to enrollment.
48.What is the penalty for failing to provide the required summary?
Penalties of up to $1,000 per day may apply for each willful failure to provide the required summary.
49.What if the employer or insurer makes changes in the group health plan?
PPACA requires that if a health plan or insurance insurer makes any material change to a health plan that affects the information reflected in the most recent summary, participants must be given 60-days' advance notice of the change. This will significantly affect the timing of health plan changes and will require employers and insurance carriers to alter their current practices regarding health plan amendments and design modifications. Nothing in ERISA currently requires advance notice for health plan changes, so employers and insurance carriers routinely make changes on very short timetables and then notify employees of the change sometime after it has become effective. This is particularly true of modifications made in connection with annual insurance renewals, as many carriers only submit their renewal terms 60 days before the end of a plan year—and employers often continue to negotiate and/or shop for alternative coverage until shortly before the new plan year begins. When the new advance notice requirements become effective in March of 2012, however, material plan changes cannot become effective until 60 days after employees are given the required notice. Accordingly, this new requirement will effectively serve as a substantial restriction on the implementation of health plan changes.
50.Are there any new reporting requirements for employers?
Yes. There are several new reporting requirements for employers. First and foremost, for calendar years 2011 and beyond, employers will be required to report the value of health plan coverage on employees’ W-2 forms. In addition, most employers will have to comply with various other reporting requirements with regard to their health plans and some of the features of those plans, including reports that will certify whether a plan provides “essential health benefits,” as well as reports focused on quality of care and improving health outcomes. Insurers that issue coverage under employer group health plans will also be subject to various reporting requirements with respect to the coverage provided under the insurer's product. In addition, employers with more than 200 full-time employees will have to satisfy certain notice requirements in connection with the required automatic enrollment feature described in Q&A 52.
Expanded Plan Appeals Process
51.If our plan has ERISA-compliant claims and appeals procedures, will this be sufficient to satisfy the new internal and external review requirements?
Probably not. Generally, ERISA-compliant claims procedures will likely satisfy the internal review requirements, but PPACA also requires plans to add an external review component. For insured plans, this will mean following any state law requirements for external review. If the plan is self-insured (or if insured and the state does not impose any external review requirements), then the plan will be required to incorporate the external review process as developed in forthcoming regulations. Some self-insured plans administered by insurance companies may already have external review procedures for at least some types of claims, but we don't yet know whether these will be sufficient to meet the standards to be established by the forthcoming regulations. (Note: the PPACA claims and appeals procedure requirements do not apply to grandfathered plans.)
52.Are we required to automatically enroll employees in our group health plan?
Employers with more than 200 full-time employees that offer at least one health benefit plan will be required to automatically enroll new employees in a plan and offer them an effective opportunity to opt out of the coverage. In connection with this required automatic enrollment, employers will be required to provide a written notice at the time of hiring (or, with respect to current employees, by March 23, 2013) that describes the automatic enrollment and opt-out procedures and also provides information about the state insurance exchange and the potential availability of premium and cost-sharing assistance to purchase coverage through the exchange. The Department of Labor is required to issue regulations with respect to the automatic enrollment requirement and the notice requirement.
Small Employer Tax Credit
53.I am a small employer. Will the new law do anything to help me afford health insurance for my employees?
Perhaps. Starting in 2010, certain small employers may qualify for a tax credit for a payment of the portion of premiums for employee health plan coverage. To be eligible for the credit, however, an employer must employ fewer than 25 full-time employees, must pay average annual wages of less than $50,000 per full-time employee, and must contribute a uniform percentage of at least 50% of the premium cost of single coverage for enrolled employees. If an employer qualifies for the credit, the maximum credit through 2013 is 35% of the premiums paid (25% for eligible tax-exempt employers). Beginning in 2014, the maximum credit will increase to 50% (35% for eligible tax-exempt employers). However, the credit is also phased out for employers who employ more than 10 employees and whose average annual wages are between $25,000 and $50,000. Therefore, employers that hire under these scales may receive little benefit from this credit.
More information about the small employer tax credit is now available on the IRS website at http://www.irs.gov/newsroom/article/0,,id=220809,00.html?portlet=6.
Early Retiree Temporary Reinsurance Program
54.We currently maintain a retiree health insurance program for retirees who are not yet eligible for Medicare. Does PPACA offer me any assistance with the cost of our early retiree health insurance?
Yes, if you qualify. Within 90 days of enactment, HHS will establish a temporary reinsurance program to reimburse participating employers for a portion of the cost for providing coverage to early retirees and their dependents. For these purposes, an early retiree is someone who is 55 and older but not yet Medicare eligible (so under age 65) and not actively employed by the employer maintaining the plan. The plan must also meet certain substantive requirements to be eligible. If the employer qualifies for the reinsurance, the employer is eligible to be reimbursed for up to 80% of the portion of the cost attributable to a retiree’s covered claims that exceed $15,000 but do not exceed $90,000. Those reimbursement amounts must be applied to lower costs of the plan to enrollees (that means, the employer cannot just pocket the reimbursements in its general assets and apply them for its own use). HHS will conduct annual audits of programs receiving these benefits.
55.If I apply and qualify, will I get the reinsurance reimbursements?
Maybe. An employer who qualifies for the program would appear entitled to the reinsurance benefits so long as the funding does not run out. PPACA appropriated $5 billion for this program, and as soon as that money runs out, the program will be over. That means that you should apply as early as possible if you're interested and think you may qualify. The program will also end at the end of 2013, if not earlier. All of this is subject to change once HHS actually rolls out the program. Given the relatively small amount set aside for this subsidy, we expect that the money could run out as early as this year or in 2011.
Medicare Part D Subsidy
56.How does the new law affect the Medicare Part D subsidy?
Employers that offered retiree prescription drug coverage that was at least equivalent to that offered under Medicare Part D have been eligible to receive a subsidy from the federal government to maintain that retiree prescription drug program. That federal subsidy is 28% of certain charges. Currently, the subsidy amount is exempt from corporate income taxation, and also produces a tax deduction, essentially creating what some have described as a “double dip.” Effective January 1, 2013, PPACA will eliminate the tax deduction for the subsidy amounts. This change has already garnered some attention in the media, as large employers have adjusted earnings projections based on the expected increased benefit liabilities occasioned by these anticipated tax changes.
Excise Tax on Cadillac Plans
57.What are the new rules regarding the excise tax on so-called “Cadillac” plans?
The term “Cadillac” plan refers to plans with total annual costs that exceed certain limits set by the statute. Effective January 1, 2018, Cadillac plans will be subject to an excise tax of 40% of their “excess benefit.” The excess benefit is the amount by which the total cost of coverage (including both employer and employee portions) exceeds an annual limit. The annual limit will begin at $10,200 for individuals and $27,500 for families for 2018 and those amounts are indexed for inflation. For an insured plan, the excise tax falls on the insurer (and would be presumably passed on to the policyholder), and for a self-insured plan, the excise tax falls on the plan sponsor.
Increased Medicare Payroll Tax
58.I’ve heard the new law will increase the Medicare payroll tax. Exactly what does it do?
Starting in 2013, individuals with wages of $200,000 or more and joint filers with wages of $250,000 or more will be subject to an additional 0.9% tax on wages in excess of those thresholds. This increased tax applies only to the employee portion of the tax, not the employer portion. The employee portion of the tax will go from 1.45% to 2.35%. Employers will collect and submit this additional tax.
59.Has the Medicare tax been expanded beyond payroll items?
Yes. In an unprecedented move, PPACA will expand the Medicare tax to apply to unearned income on investments for high wage earners. Historically, the Medicare tax has been solely a payroll tax. Under PPACA, the tax is being expanded to earnings that are unrelated to employment or wages. The new tax will be 3.8% of investment income and earnings and will apply to the extent a participant’s annual income exceeds $250,000. This tax will also apply to trusts and estates (but it won't apply to distributions from tax-qualified retirement plans).
Increased Penalty for Non-Qualifying Health Savings Account Distributions
60.What are the new rules regarding health savings accounts non-qualifying distributions?
If an individual makes a non-qualifying distribution from a health savings account, the penalty tax will be increased from 10% to 20%. This change is effective January 1, 2011. These distributions also are, and will continue to be, subject to regular income tax.
61.Will PPACA affect health flexible spending accounts (FSAs) offered under a cafeteria plan?
Yes. PPACA adds two new limits affecting health FSAs, one of which becomes effective soon. Specifically, for tax years beginning after December 31, 2010, health FSAs will no longer be able to reimburse the costs of over-the-counter medicines or drugs (other than insulin) that can be obtained without a doctor’s prescription. In addition, for tax years beginning after December 31, 2012, PPACA imposes a $2,500 cap on contributions (salary reduction contributions, as well as other employer contributions) to a health FSA offered through a cafeteria plan.
62.Where can I get additional information on these new changes?
We will post information on further PPACA developments as they are announced by HHS, DOL and the IRS, and plan to host educational opportunities to learn more about the new law. To keep our clients and friends informed of all articles, webinars and additional resources related to health reform, Baker & Daniels LLP and B&D Consulting are creating a Health Reform Resource Center to be housed on our Web site. The DOL also has a Web site for information, which is at www.dol.gov/ebsa/healthreform.