Now that the political firestorm over the health care reform law has subsided, and the approximately 2,000 pages of legislation have been published, employers are increasingly asking how the law will affect their businesses and employees in both the short term and the long term. This Calfee First Alert highlights those provisions of the law that directly impact employers and employees now and in the coming months. A discussion of longer term impacts will appear in subsequent First Alerts.
Coverage Mandates and Administrative Requirements Effective for plan years beginning on or after September 23, 2010 (e.g., January 1, 2011 for calendar year plans), all group health plans must meet certain coverage mandates. These mandates will require revisions of summary plan descriptions and other plan communication pieces regarding annual enrollment. Self-insured plans should confirm coverage under any stop-loss contracts. Grandfathered plans (generally, plans in effect on March 23, 2010) are exempted from certain coverage requirements at least in the near term. The following mandates apply to all plans (including grandfathered plans):
- Lifetime and Annual Limits Lifetime limits cannot be imposed. Annual limits on the dollar value of essential benefits are permissible only to the extent provided under guidance which has yet to be issued. Beginning in 2014, a plan cannot establish any annual limits on the dollar value of essential benefits.
- Pre-Existing Condition Exclusions A plan cannot impose pre-existing condition exclusions on enrollees under age 19. This requirement applies to all other participants in 2014.
- Dependent Coverage A plan offering dependent child coverage must cover those children (even if married or not students) up to age 26. Until 2014, a grandfathered plan is subject to this requirement only if the adult child is not eligible to enroll in other employer-sponsored coverage. An amendment to the Internal Revenue Code extends income tax exclusion for coverage of adult children and may eliminate imputed income concerns which arise when state insurance mandates require coverage for children longer than they can be treated as tax dependents.
Non-grandfathered plans are immediately subject to these additional requirements:
- Full Coverage of Preventive Care A plan must provide full coverage for preventive care without cost sharing.
- Reimbursement of Expenses for Emergency Services A plan must reimburse expenses for emergency services as in-network even if an out-of-network provider is used.
- Choice of Primary Care Providers A plan must allow participants to designate their primary care providers. OB/GYNs and pediatricians must be eligible for these designations.
- External Claims Review Process A plan must establish an external claims review process. This is in addition to the "internal" claims review process mandated by ERISA.
- Nondiscrimination Rules for Insured Plans Nondiscrimination rules under Section 105(h) of the Internal Revenue Code apply to insured plans.
As a result, critical questions that must be answered are whether a plan is "grandfathered" and whether and when does a plan lose this status. The new law provides little guidance. It is not yet clear whether and to what extent plan design changes will result in loss of grandfather status. In addition, special rules apply to collectively bargained plans and may apply to retiree-only plans. HFSAs, HSAs & HRAs
For tax years beginning on and after January 1, 2011, the law restricts health flexible spending accounts, health savings accounts and health reimbursement accounts:
- Reimbursements for Over-the-Counter Drug Expenses Over-the-counter drug expenses are no longer eligible for reimbursement (except insulin and those prescribed by physicians).
- Increased Penalty for Nonqualified Withdrawals from HSAs Amounts withdrawn from health savings accounts that are not used for qualified medical expenses are subject to a 20% penalty tax (increased from 10%).
In addition to the coverage mandates and requirements, and restrictions on spending accounts, the new law provides some opportunities for employers to receive subsidies and credits in the near term:
- Reinsurance Program for Early Retiree Medical Coverage The law provides for a governmental reinsurance program for insured and self-insured plans providing early retiree medical coverage. The reinsurance program will reimburse 80% of the portion of costs attributable to qualified claims (ranging from $15,000 to $90,000) that exceed $15,000. Reimbursements must be used to lower costs for the plan or out-of-pocket costs for plan participants and cannot be used as general assets of the plan sponsors. There is some early indication that reimbursements cannot even be used to reduce plan sponsors' plan-related expenses (e.g., premium costs). We will continue to closely watch developments in this regard.
Note that the program ends on December 31, 2013, or the date that the earmarked funds are exhausted, if earlier. So employers interested in this program must apply quickly once the government begins accepting applications (which is expected to be mid- to late-June 2010).
- Small Business Tax Credit For tax years 2010 through 2013, the law provides a small business tax credit to small employers (with up to 25 employees with average annual wages of less than $50,000) that provide health insurance coverage to employees and generally pay at least half of the total cost. The tax credit ranges from 10% to 35% of the cost of coverage depending principally on the number of employees and the amount of their average annual wages. The IRS has issued a set of FAQs about the tax credit, including transition rules for 2010. This tax credit is a substantial incentive for small employers to offer health insurance coverage to their employees.
- Wellness Program Grants Employers with fewer than 100 employees that did not have a wellness program in place on March 23, 2010, are eligible to apply for grants to provide employees with workplace wellness programs. Employers must submit an application that includes a proposal for the wellness program.
Other Noteworthy Items
- Accounting Charge for Elimination of Retiree Prescription Drug Subsidy Tax Deduction For tax years beginning after 2012, the federal subsidy available to employers providing retiree prescription drug coverage may no longer be deducted from income. The effect of the loss of the deduction must be reflected in financial statements for this year and may result in charges to earnings for many employers.
- Automatic Enrollment Employers with 200 or more employees must automatically enroll new full-time employees for medical coverage, subject to an opt-out right. The effective date of this requirement is not clear. We expect this will be resolved by future regulations. Employers maintaining a cafeteria plan will need to coordinate this requirement with the provisions of the cafeteria plan.
- Simple Cafeteria Plans Effective January 1, 2011, employers which average fewer than 100 employees in the prior two years may establish a simple cafeteria plan. This type of plan is deemed to meet nondiscrimination requirements.