This is our third of three “What if” posts discussing the likely outcomes of the Supreme Court hearings on the health care reform law.  Our first two posts are available here and here.

What if the Supreme Court invalidates the Patient Protection and Affordable Care Act (aka health reform)?  To do that, the Court would have to conclude that the individual mandate requiring all U.S. citizens to buy health insurance or pay a penalty was not a permitted exercise of Congress’s power under the Constitution.

A lot of people (including Chris) never thought this would even be a serious debate. However, once Justice Kennedy asked the U.S. Solicitor General if he had a “heavy burden” to demonstrate that the mandate was constitutional, everyone’s thoughts about the possible outcomes changed.

The Court could take any of a variety of routes if it strikes the law down.  The Court could conclude that actions taken to date should not be disturbed, thus preventing a retroactive undoing of the law.  For example, the Court could conclude that because the mandate is not scheduled to be effective until 2014, there is not a need to undo actions taken between 2010 and the issuance of its opinion.  In taking such a position, the Court would be taking a practical approach.

However, the Court could also conclude that the law was essentially void from the start.  What then? Some dependent coverage that was not taxable would become so.  Employers who took advantage of the small business tax credit might need to adjust prior tax returns.  However, because many group health plans and service provider contracts were amended to comply with PPACA, those plan provisions and service provider contracts arguably create rights that could not be undone retroactively.  Thus, any plan changes will likely be prospective only.

Regardless of whether PPACA is struck down prospectively or retroactively, here are a few items to consider:

  • Coverage of children after 19 (23 if not a full-time student) will become taxable.  Employers will technically need to impute income to employees for the cost of the premiums (or charge after-tax premiums) to avoid treating the benefits as taxable.  However, because of the disruption this will cause, we would not be surprised if the IRS issues transition relief through the end of 2012.
  • Employers who have already worked to prepare Summaries of Benefits and Coverage will need to decide whether to proceed with providing them.  In making that decision, employers should be mindful that group health plan benefits do not always fit neatly within the SBC template and the presence of the mandated uniform glossary.
  • Employers consider modifications to their health plans may need to give notice to participants 60 days after the change.  ERISA (even before health reform) requires a notice 60 days after the adoption of any material reduction in covered benefits or services under a group health plan (unless notices are provided at regular intervals every 90 days).
  • Employers who adopted amendments to their health FSAs for the $2,500 limit for 2013 plan years will need to amend to remove that cap (assuming they want to remove it).  Additionally, employers will be able to amend their health FSAs to allow for the reimbursement of over-the-counter drugs without a prescription.
  • Since W-2 reporting of health coverage is no longer required, employers will need to consider whether to continue to report it (for so long as the form has a box for it).
  • The comparative effectiveness fee (discussed here) will no longer be due.
  • Limited benefit, or “mini-med,” plans will continue to be viable and will no longer need to submit information to maintain their waivers from the annual limit requirements.
  • Employers who received Early Retiree Reimbursement Program funds (remember that?) should be on the lookout to see if the government will pursue collection of those funds.  This is not likely to happen, but it is possible.
  • Some insured plans may not be able to completely roll back health reform mandates, to the extent those mandates or ones like them are required by applicable state law.  Even if not required, insurers will be prohibited from changing the terms of policies without making new rate filings with the governing state insurance agencies, which will take time.  Additionally, some insurers have indicated they are willing to keep some of the PPACA provisions.

Even though the list above assumes that all the provisions will be treated as invalid, employers should also bear in mind that the agencies may attempt to find authority in existing law for some PPACA provisions.  To the extent they do, some of these rules may not be going away after all. The bottom line: regardless of how the Court rules, it will be far from the last word on health reform.