As the end of 2012 approaches, we consider what a notable year it has been for the future of healthcare reform, starting with the United States Supreme Court’s decision to uphold key provisions of the Patient Protection and Affordable Care Act (“PPACA”), and culminating with the November elections. Since PPACA’s enactment in 2010, employers have seen the roll out of various new requirements and disclosure obligations with respect to the healthcare benefits provided to employees. As we move closer to PPACA’s “individual mandate,” which becomes effective in 2014 and is viewed as the hallmark of the healthcare reform legislation, the following is a summary of certain requirements that employers should be aware of for 2013.
Summary of Benefits and Coverage For Employer-Sponsored Group Health Plans
Effective for open enrollment periods that begin on or after September 23, 2012, the plan administrator of employer-sponsored group health plans must provide each participant with a written summary that describes the plan’s benefits and coverage and that complies with other content-specific requirements. It is important to note that the Summary of Benefits and Coverage (“SBC”) is a separate (and new) disclosure obligation from the existing requirement to provide plan participants with a Summary Plan Description under the Employee Retirement Income Security Act of 1974, as amended.
The SBC must be distributed to participants with initial enrollment materials for a covered plan, and must be re-issued in subsequent years. If enrollment in subsequent years is conducted by an affirmative written election by the enrollee, the SBC must be provided when the enrollment materials are distributed. On the other hand, if re-enrollment in subsequent years is automatic (i.e., absent an enrollee’s affirmative election to change coverage), the SBC must be provided at least 30 days prior to the first day of coverage in the new plan year. In addition to the annual distribution requirement, the SBC must be provided no later than seven business days following a request by any participant.
Among other features, the SBC must contain the following information:
- the principal plan design features, including cost sharing requirements (e.g., deductibles, coinsurance and copayments) for each category of benefit;
- any exceptions, reductions and limitations on coverage;
- applicable renewability and continuation of coverage provisions (e.g., the right to elect COBRA continuation coverage);
- examples that illustrate the benefits that would be provided in certain common scenarios;
- if a provider network or prescription drug formulary is used, an Internet address (or similar contact information) for obtaining a list of network providers or information on prescription drug coverage; and
- uniform definitions of standard insurance and medical terms, along with an Internet address for obtaining a complete “uniform glossary” of key terms.
There are significant penalties for failing to comply with the new SBC rules. A willful failure to furnish a compliant SBC can trigger a $1,000 per day penalty for each affected individual.
Reporting of Employer-Provided Health Coverage
PPACA imposes on employers an obligation to report the cost of employer-provided, group health plan coverage on employees’ Forms W-2, starting with the Forms W-2 issued for calendar year 2012 (which are generally provided to employees on or before January 31, 2013). This information reporting is intended to assist employees in determining whether their employer-provided coverage is sufficient to avoid the taxes imposed for failing to maintain “minimum essential coverage” under PPACA’s individual mandate that will be effective in 2014.
Based on available IRS guidance, employers that filed fewer than 250 Forms W-2 for the 2011 calendar year are currently exempt from having to report the cost of group health plan coverage on the 2012 calendar year Forms W-2 furnished to employees. Thus, until further guidance is issued, employers that file fewer than 250 Forms W-2 for one calendar year will be exempt from this reporting requirement for the next calendar year.
In general, the amount reportable of employer-provided coverage includes amounts paid by both the employer and the employee towards the cost of such coverage. Under interim guidance on which employers can rely, the rules for determining the cost to be reported is similar to those for determining the applicable premiums for purposes of COBRA continuation coverage. For example, this means that for fully-insured plans, employers can report the premiums charged by the carrier for the cost of coverage.
New Healthcare Flexible Spending Account Limit
Employers should be aware that for plan years beginning on or after January 1, 2013, an employee’s salary reduction contributions to a healthcare flexible spending account is limited to $2,500 per year. By way of background, a healthcare flexible spending account is commonly referred to as a medical expense reimbursement account under a Section 125 plan (which, in turn, is referred to as a “cafeteria plan”). Employers should review their cafeteria plan documents to ensure that the healthcare flexible spending account limit does not exceed $2,500 per participant, per plan year. Violating this requirement can jeopardize the favorable tax treatment afforded to contributions made under cafeteria plans, and can result in penalties to an employer for failing to properly report and withhold appropriate taxes from employees’ wages.
Employers have through the end of calendar year 2014 to adopt plan amendments to reflect the $2,500 limit, although operational compliance is required for plan years beginning on or after January 1, 2013.
Increase of Medicare Payroll Tax on Higher-Income Employees – Employer Withholding Obligation
Beginning January 1, 2013, PPACA imposes an increase to the Medicare hospital insurance tax rate on wages paid to higher-income employees by 0.9% (from 1.45% to 2.35%). Individuals are subject to the additional Medicare tax if the individual’s wages, other compensation or self-employment income (together with that of his or her spouse if filing a joint return) exceed the applicable threshold amount for the individual’s filing status as follows:
Click here to view table.
Employers are required to withhold the additional Medicare tax on wages paid to an employee in excess of $200,000 in a calendar year. Withholding by the employer is required even though an employee may not ultimately be liable for the additional Medicare tax, such as, for example, in the case where the employee’s wages when combined with that of his or her spouse (when filing jointly) does not exceed the $250,000 threshold for married taxpayers filing jointly. Moreover, employers are not required to notify their employees when the employers begin withholding the additional Medicare tax.
Despite the additional withholding obligation from employees’ wages, the good news for employers is that employers are not required to match the additional Medicare tax, which means that the employer-paid portion of the Medicare tax remains at 1.45% of employees’ wages.
Notification to Employees Regarding State Insurance Exchanges
As a backstop to PPACA’s individual mandate, states are expected to have health insurance exchanges that are operational on January 1, 2014, where it is expected that individuals can obtain affordable coverage provided that they are not able to obtain such coverage through an employer’s group health plan or in the individual insurance market.
On March 1, 2013 (or such later date as provided in forthcoming Department of Labor guidance), employers will be required to distribute a notice to current employees and new employees informing them of the state insurance exchanges. Employees hired on or after that date must be provided the notice of exchange at the time of hiring, whereas employees already employed on that date, should be furnished the notice no later than that date. It is anticipated that the forthcoming Department of Labor guidance will contain a model notice that employers can use to satisfy the notice of exchange requirement. The notice requirement applies to all employers who are subject to the Fair Labor Standards Act.
The content of the notice of exchange will include, among other things, (i) a description of the services provided by the state insurance exchanges, (ii) how an employee may be eligible for a premium tax credit or a cost-sharing reduction if his or her employer’s group health plan does not meet certain requirements, (iii) the tax and financial consequences that an employee may experience if he or she purchases a qualified health plan through the exchange, and (iv) the contact information for customer service resources within the exchange.
Planning for the Employer Mandate Effective in 2014
Effective in 2014, under PPACA’s employer-shared responsibility provision, which is commonly referred to as the “employer mandate” or the “play or pay mandate,” employers with at least 50 full-time equivalent employees are required to offer minimum essential coverage to their employees or face certain penalties. The Departments of Treasury, Labor, and Health and Human Services have all issued parallel guidance to assist employers with establishing procedures to determine which employees are full-time employees in order to avoid the penalties under the employer mandate.
The available guidance provides a safe harbor method of assessing whether or not an employee is deemed a full-time employee. Full-time employees are defined as employees who work, on average, at least 30 hours per week, or 130 hours per month. Under the safe harbor method, an employer is permitted to analyze hours worked during a look-back period chosen by the employer, which must be at least 3 months but no more than 12 months, in order to determine an employee’s status as a full-time employee. The employer is then permitted to treat full-time employees determined during the look-back period, as full-time employees for a forward-looking stability period that is no shorter in duration than the look-back period. Special rules apply under when analyzing seasonal and variable hour employees, and there are notable differences when applying the safe harbor method to on-going employees as compared to newly-hired employees. Despite the recent guidance in this area, there continue to be many unanswered questions as to how employers are expected to comply with the employer mandate, which we anticipate that the Departments will attempt to clarify in forthcoming regulations.
Employers should be aware of the action items that need to be taken with respect to PPACA’s provisions that become effective in calendar year 2013 and beyond. We are available to assist employers with navigating through the existing, and often complex, PPACA guidance, as well as with additional guidance and regulations that are anticipated in 2013.