On December 24, the Senate adopted H.R. 3590, the Patient Protection and Affordable Care Act of 2009 (PPACA or the Act), as amended by Senate Amendment No. 2786. Final adoption of the PPACA will require sending H.R. 3590 to a Conference Committee to resolve differences between the House and Senate versions of the legislation, and the conference process cannot begin until after the New Year. However, many sources doubt that the House conferees will have much influence on the final language of the bill before it is adopted by both Houses and presented to President Obama for signature. While we have no prediction of our own in this regard, because H.R. 3590 is the Senate’s final version of legislative language on health care reform, its major provisions warrant the attention of our clients and friends.

The Act’s 2,450+ pages cover a wide array of subjects, but employers will be affected most directly by the health coverage provisions of Titles I and IX of the Act. Those provisions will transform the current model for employer-sponsored health coverage, under which an employer generally can choose whether, to what extent, and on what terms it will provide health coverage for some or all of its employees. In place of the current model, the Act places an obligation on most individuals to obtain coverage for themselves and their dependents, and provides that an employer has a financial responsibility to subsidize the coverage selected by most of its employees.

The Individual Mandate

The Act will add a new provision to the Internal Revenue Code that imposes a penalty tax on an “applicable individual” who does not maintain “minimum essential coverage” for himself or herself and for any dependent who is an “applicable individual” during any month after 2013. The amount of the penalty is determined by a complex formula that takes into account factors such as household income and the national average premium for coverage under “bronze plans” offered by state or regional insurance Exchanges. The maximum penalty tax will be phased in over three years, reaching $2,250 in 2016, and it will be indexed thereafter. Certain “applicable individuals” are exempt from the penalty tax, including (a) individuals whose household income falls below the federal poverty line; and (b) individuals whose share of premiums or employee contributions would exceed eight percent of their household income. These exemptions apply only after taking into account a means-based tax credit that will be available under the Act.

The Employer Mandate

The Act also adds a provision to the Internal Revenue Code that imposes a monthly assessment on certain employers that do not offer to their full-time employees an employer-sponsored health plan that meets federally-determined standards for health coverage, or that offer such coverage but whose plans have a waiting period of 60 or more days. The penalty for an extended waiting period is $600 per full-time employee to whom the waiting period applies. The penalty for not offering all full-time employees an opportunity to enroll in “minimum essential coverage” under an eligible employer-sponsored plan can be far greater. If even one full-time employee obtains such coverage elsewhere and is eligible for a tax credit or cost-sharing reduction, the monthly assessment on the employer is a multiple of all the employer’s full-time employees during the month. Finally, an assessment also applies if an employer subject to the mandate fails to subsidize a sufficient portion of the employee’s cost for “minimum essential coverage” to prevent the employee from qualifying for a tax credit or cost-sharing reduction. This “under-subsidization” tax also is based on the employer’s total number of full-time employees, even if only one full-time employee qualified for the tax credit or cost-sharing.

The mandate applies only to an “applicable large employer,” which generally means an employer that employed an average of at least 50 full-time employees on business days during the preceding calendar year. However, beginning in 2013, employers with as few as five full-time employees can be subject to the employer mandate if substantially all their revenue is derived from the construction industry and their annual gross receipts exceed $250,000. A series of complex rules governs the calculation of an employer’s average number of full-time employees. Also, the term “full-time employee” is defined as an employee employed on average at least 30 “hours of service” per week, using a new definition of “hour of service” (to be promulgated by the Secretaries of the Departments of Labor and Health and Human Services (HHS)), which may not precisely match the definition of an “hour of service” for qualified retirement plan purposes.

Health Care Exchanges

The most fundamental changes caused by the Act will result from the creation of 50 or more geographically-based marketplaces, referred to as “Exchanges,” where standardized insurance packages can be purchased on what are expected to be favorable terms. The territory of many Exchanges will coincide with state or municipal boundaries, although multiple states can operate a single Exchange. In addition, the Act provides for multi-state health plans to be offered by these Exchanges. The multi-state plans will be established by the Director of the Office of Personnel Management by contracts with for-profit and not-for-profit insurers.

The Act creates incentives for employers and individual consumers to prefer Exchange-provided coverage to other coverage alternatives. The Act also bars an insurer from offering coverage on an Exchange unless the insurer’s policies adhere to standards established under the Act or in regulations that will be adopted by HHS under the Act. In addition, insurers will be required to make periodic disclosures relating to rating, claims processing, and other matters. Each Exchange will have additional protections from competition that could allow it to become virtually the only viable marketplace for health care coverage within its territory.

General Effective Dates

Most of the changes brought about by these provisions of the Act will not become effective until after 2013, but given the fundamental changes embodied in the Act, the process of planning for compliance must begin much earlier. Ogletree Deakins plans to publish several in-depth analyses of particular provisions of the Act, as well as a series of updates regarding regulations under the Act as they are proposed and finalized.