On June 28, 2012, the United States Supreme Court issued its much-anticipated decision on the Affordable Care Act (ACA). The Court upheld the ACA’s individual health care coverage mandate, along with all other provisions of the law that directly affect employers. The case, National Federation of Independent Businesses v. Kathleen Sibelius, is considered by many the most significant Supreme Court decision of this term, and is arguably one of Court’s most important decisions in decades.
Although Chief Justice Roberts, writing for the majority, found that the ACA was unconstitutional under both the Commerce Clause and the Necessary and Proper Clause of the Constitution, he concluded that the penalty for not having insurance was, in effect, a tax, and therefore was constitutional under the taxing power. The decision also struck down that portion of the ACA that required states to participate in Medicaid expansion or risk losing all of their Medicaid funding. In so doing, the decision allows states to opt-out of the Medicaid expansions and continue with their current Medicaid coverage.
For employers, the impact of this decision will be significant. Whether your business is small, large, or somewhere in between, the ACA has provisions that apply to you. If you are one of the many employers that was sitting back and waiting for the Court’s decision before thinking seriously about how the ACA will impact your business, the time has come to prepare for the implementation of this law.
2012 and 2013 – What You Need to Know (and Do) Now
A number of the ACA’s provisions have already gone into effect, and these provisions will stay in effect as a result of the Supreme Court’s decision. For example, the law already required that plans offer extended coverage for adult children up to age 26; prohibited pre-existing condition limitations on coverage for plan participants under the age of 19; and prohibited retroactive rescission of coverage and lifetime dollar limits for essential health benefits.
Those provisions, while significant, were just the tip of the iceberg. Many additional rules and requirements are scheduled to go into effect over the course of the next few years. Below is a list of some key provisions of the ACA that go into effect in 2012 and 2013, and that require prompt planning and action on the part of employers nationwide in order to ensure compliance with the law.
- W-2 Reporting
- The Rule: Starting with the 2012 tax year, most employers with more than 250 employees must report the cost of each employee’s health care coverage on the employee’s W-2 Form. Employers with fewer than 250 employees must report the cost of health coverage on W-2 Forms starting with the 2013 tax year.
- The Action Plan: If your company has 250 or more employees, planning for compliance with this requirement should be very high on your priority list. With 2012 W-2s due to be issued in January 2013, the last thing you want is for your payroll and human resources departments to be scrambling around trying to collect and co-ordinate all the necessary information at the last minute. Act now to identify and value any health care plans subject to the W-2 reporting requirement, and coordinate with payroll and human resources administrators to ensure that their systems are updated in preparation for the new requirements.
- Flexible Spending Account Limits
- The Rule: Starting January 1, 2013, employees will only be able to contribute a maximum of $2500 to health care Flexible Spending Accounts.
- The Action Plan: If your current plan allows employees to contribute more than $2500 to their FSAs, you only have a few months to amend or update those plans to reflect the new dollar limit. Contact employment counsel for assistance with plan documents and any questions about compliance.
- Increased Medicare Tax Withholding for Employees Earning Over $200,000
- The Rule: Starting on January 1, 2013, employers must withhold an additional 0.9% of the wages of individuals who earn more than $200,000 per year. This will increase the total Medicare tax withholding for those employees from 1.45% to 2.35%.
- The Action Plan: Employers should promptly inform payroll staff about the upcoming changes, and coordinate with any third-party payroll processors, to ensure that withholding is properly adjusted for affected employees starting on January 1, 2013.
- New Summary of Benefits and Coverage.
- The Rule: Employers with 50 or more full-time employees, or the part-time equivalent, must issue a uniform Summary of Benefits and Coverage (SBC) for group health plans. The SBCs must be distributed to employees at the first open enrollment period that occurs on or after September 23, 2012.
- The Action Plan: Open enrollment periods for 2013 are fast approaching, so employers need to make this an immediate priority. Employers should contact their insurance carrier or third-party administrator to help arrange for the timely preparation and distribution of the SBCs.
- New Tax on Self-Sponsored Health Plans
- The Rule: The ACA established a non-profit organization called the Patient-Centered Outcomes Research Institute. The organization’s purpose is to perform clinical effectiveness research that will help patients, clinicians, policy-makers, and purchasers make informed health decisions. Employer sponsors of self-insured plans must make annual contributions to fund the Institute’s research. The amount to be contributed is $1.00 per average number of lives covered under the employer’s plan for the first year, $2.00 per covered life in the succeeding year, with further annual increases tied to inflation. The tax applies to plan years ending after September 30, 2012.
- The Action Plan: Employers that sponsor self-insured health plans need to make sure they understand and plan for paying this new tax. The IRS has issued a Notice of Proposed Rulemaking, which includes three different methods by which an employer may calculate the number of covered lives for purposes of the tax. A hearing on the IRS’ Notice of Proposed Rulemaking is scheduled for August 8, 2012.
- Medical Loss Ratios (MLR) rebates
- The Rule: Under the ACA, health insurers must spend a minimum percentage of their insurance premium dollars on medical claims and quality improvement. If an insurer fails to meet the minimum percentage, it must issue a rebate to policyholders – called a Medical Loss Ratio rebate. Insurers must begin issuing these MLR rebates in August 2012.
- The Action Plan: Employers who sponsor health insurance plans must determine how to handle any MLR rebates they might receive. ERISA rules and tax implications must be considered, along with other issues. This should be an immediate priority, since the first issuance of MLR rebates from insurers is scheduled to occur this month. Contact your employment or benefits counsel for assistance, or if you have questions about compliance.
- Women’s Preventive Services
- The Rule: Effective August 1, 2012, all new plans must cover certain preventive services such as mammograms and colonoscopies without charging a deductible, co-pay or coinsurance. Women’s preventive services – including well-woman visits, support for breastfeeding equipment, contraception and domestic violence screening – will be covered without cost sharing. This is also known as the contraceptive mandate. For existing plans, this change is effective for the first plan year beginning after August 1, 2012; therefore, calendar year plans must comply for the 2013 plan year.
- The Action Plan: Employers should contact their carriers regarding the implementation of this change and prepare to amend health plan documents accordingly.
2014: Even Bigger Changes on the Horizon
In 2014 -- less than 18 months from now -- some of the most significant new ACA provisions are scheduled to go into effect. Planning ahead for these changes does pose some challenges, since there is currently a lack of regulatory guidance on a number of the new rules. Nevertheless, employers should not delay in developing a strategy to address the ACA’s new requirements.
Pay or Play:
The New Individual Mandate Tax Penalty Coming in 2014
Starting in 2014, the ACA’s so-called “individual mandate” requires most people to have individual health care coverage, or else pay a penalty in the form of a tax. Also starting in 2014, a tax will be imposed on employers for any month in which employees are not provided with employer-sponsored health care coverage, or in which the coverage provided is inadequate or unaffordable (as defined by the federal government). To start, the tax will be $2000 per employee per year beyond the first 30 employees. The tax applies to employers with 50 or more full-time employees, or the part-time equivalent.
As of January 1, 2014, state-based health insurance exchanges must be certified and operational. These exchanges are state-regulated, standardized health care plans from which individuals may purchase health insurance. Thus, starting in 2014, workers who do not obtain health insurance coverage through an employer can obtain coverage by purchasing insurance through a state health insurance exchange.
This is where the “pay or play” mandate for employers comes in. Employers will be required to choose whether to provide employees with adequate health insurance coverage, or whether to pay the statutory fines for failing to do so. Some employers may decide to offer, or continue offering, employer-sponsored health care plans to their workers. Others may decide that it makes more financial sense to send employees to the state health insurance exchange to buy private insurance and pay the statutory fines instead.
This is arguably the most significant new requirement of the ACA, and compliance will be a significant burden for many employers. With the January 1, 2014 deadline less than 18 months away, smart employers will start planning now, by analyzing how the pay or play mandate will impact their budgets and bottom line, and by evaluating the strategic, financial, and operational implications of choosing to pay or to play.
Under the ACA, employer health care plans may not discriminate in favor of highly-compensated employees. This means that if your company offers different health insurance plans, premium subsidies, or benefits to high-earners, you will need to review your plans and make any necessary changes to eliminate those discriminatory features. The implementation of this requirement has been delayed so that regulators have time to issue more specific guidance on the nondiscrimination rules. It is expected that the requirement will go into effect in 2014, or soon thereafter.
Increased Tax Benefits for Small Employers
For small employers with 25 or fewer employees, 2014 brings a welcome benefit. Right now, small employers who pay at least half of the health care insurance premium for employees, and whose employees earn an average of less than $50,000 per year, are eligible for a tax credit of up to 35% of the workers’ insurance premium. Starting in 2014, the tax credit rate will increase from 35% to 50%.
Given the current political environment and the level of public opposition to the ACA as it currently exists, additional legislative changes regarding health care law certainly are possible. Notwithstanding possible future legislative changes, employers do not have the luxury to sit back and wait. To the contrary, it is critical that employers address compliance issues related to the ACA now. If your business does not already have a strategic plan, you need one.