On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (the "Act"). The Act fundamentally alters the U.S. health care delivery system through sweeping changes that include reforms to the health insurance market (including the establishment of "exchanges" to facilitate the purchase of insurance), an individual health insurance mandate, and various revenue-raising provisions. The Act also imposes significant new requirements on employers and the group health plans that they sponsor, and these requirements are the focus of this Alert.
Many of the most controversial provisions of the Act -- including the "pay-or-play" rule for employers, automatic enrollment, and voucher requirements -- generally do not take effect until 2014. However, many changes are effective earlier, in some cases as soon as the first plan year beginning on or after September 23, 2010 (i.e., January 1, 2011 for calendar-year plans) or even earlier. In order to assist employers in complying with their new legal obligations, this Alert reviews key provisions, beginning with those that take effect most quickly.
Small Employer Tax Credit Effective January 1, 2010
The Act provides a tax credit of up to 35% of a small employer's health insurance contributions. Small employers generally include employers with fewer than 25 full-time employees with annual wages of less than $40,000 per employee. The amount of the tax credit increases beginning in 2014.
Early Retiree Medical Reinsurance Effective 90 Days After Enactment
The Act directs the Department of Health & Human Services ("HHS") to establish a temporary $5 billion reinsurance program to reimburse employers that provide medical coverage to early retirees (generally retirees who are at least age 55 but not yet eligible for Medicare). The program will reinsure 80% of annual claims between $15,000 and $90,000 (adjusted for inflation) for each eligible retiree. The reinsurance program ends on the earlier of December 31, 2013 or when the $5 billion is expended. It can be expected that many employers will seek to utilize the program, so employers interested in the program should closely monitor when HHS makes it available and comply with all procedures that HHS implements.
Provisions Effective for Plan Years Beginning On or After September 23, 2010
While a number of the Act's provisions take effect for plan years beginning on or after September 23, 2010 (January 1, 2011 for calendar year plans), "grandfathered" plans, which generally include plans in effect on March 23, 2010, are exempt from these requirements (and certain other requirements discussed below) except where specifically noted. The grandfathering generally is tied to whether the "plan" at issue was in effect on that date, and is not limited to individuals who were covered by the plan on that date. Some of the most important provisions of the Act that apply to non-grandfathered group health plans beginning with the first plan year starting on or after September 23, 2010 include:
- Elimination of Annual and Lifetime Limits on Benefits. Plans may not impose lifetime limits, and only restricted annual limits, on the value of "essential" benefits. In addition, for plan years beginning in 2014 and thereafter, no annual limits may apply to essential benefits. Essential benefits are defined by the Act to include, inter alia, emergency services, hospitalization, maternity and newborn care, mental and substance abuse services, and pediatric services. Notably, this rule applies even to grandfathered plans.
- No Rescission of Coverage. Plans may not rescind coverage except when the covered person committed fraud or intentionally misrepresented a material fact. Again, even grandfathered plans are subject to this rule.
- Preventive Care. No deductibles or other cost-sharing may apply to preventive care.
- Adult Children. A plan that provides dependent coverage must allow such coverage to continue until a participant's child (whether married or unmarried) turns 26. This rule applies to grandfathered plans; however, until 2014, it applies only if the adult child is not eligible to enroll in another group health plan.
- Nondiscrimination. Section 105(h) of the Internal Revenue Code has long imposed adverse tax treatment on highly compensated employees who participate in self-insured health plans that discriminate in favor of such employees in plan eligibility or coverage. The Act extends a similar nondiscrimination rule to non-grandfathered insured health plans. However, it is unclear whether the Act totally prohibits new insured plans from discriminating in favor of highly compensated employees, or merely imposes adverse tax treatment on those employees if the plan does discriminate in their favor.
- "Ensuring Quality of Care." Plans must annually report to HHS and to participants and beneficiaries regarding benefits under the plan that improve health, such as case management and wellness activities.
- Uniform Explanation of Coverage to Enrollees. The Act directs HHS to develop standards regarding this requirement, which is in addition to the ERISA-required summary plan description. The plan administrator must prepare and distribute a summary of coverage to all eligible participants, both at the time of initial enrollment and during the annual enrollment process. This rule applies to grandfathered plans.
- Appeal Procedures. The Act imposes detailed additional requirements on internal and external claims procedures. The requirements are substantially more expansive than the 2003 changes to ERISA's claims procedure regulations.
- "Patient Protections." If a plan requires or permits an enrollee to designate a primary care provider, then the plan must permit each enrollee to elect any such provider available under the plan who is willing to accept the enrollee. In addition, various requirements regarding access to emergency treatment are imposed by the Act.
- No Use of Health FSAs for Over-the Counter Drugs. Health flexible spending accounts ("FSAs") generally allow employees to use pre-tax money to pay health-related expenses. Beginning in 2011, FSA monies cannot be used for reimbursement of over-the-counter drugs other than insulin (this limitation also applies to health savings accounts and health reimbursement accounts). The grandfathering exception does not apply to this new requirement.
Changes Effective in 2013
One key change that has already generated controversy (due to earnings restatements by AT&T, Verizon, and a number of other large companies) is a change to the Medicare Part D subsidy. When Medicare Part D (prescription drug coverage) was enacted, a 28% employer tax credit was included in order to incentivize employers to continue providing retiree prescription drug coverage. The Act eliminates the deduction for amounts allocable to this subsidy, effective for tax years beginning on or after January 1, 2013, thereby indirectly reducing the value of the subsidy to affected employers.
In addition, two other changes made by the Act that impact employers and their health plans generally are effective beginning in 2013:
- Limitations on Health FSAs. Employer contributions to a health FSA will no longer count as "qualified benefits" that are not taxable to the employee unless the plan limits employees' annual health FSA salary reduction contributions to $2,500, indexed for inflation (currently there is no limit).
- Increase in Medicare Tax. Beginning in 2013, individuals with wages above $200,000 for a single return and $250,000 for a joint return will be subject to an additional 0.9% tax on wages in excess of these thresholds. The increase will apply to only the "employee" portion of the Medicare tax and not to the "employer" portion. The employer is still required to withhold the employees' taxes, including this increase.
Changes Effective in 2014
As noted above, many of the Act's provisions generally become effective in 2014. With one exception, each of the most significant changes for employers noted below applies even to grandfathered plans:
- Automatic Enrollment. Employers with 200 or more full-time employees that offer one or more health benefit plans must automatically enroll new full-time employees in the plan. The employer must notify the employees about the automatic enrollment program and provide an opportunity to opt out of plan coverage.
- "Pay or Play." This is commonly referred to as the employer mandate. Employers with 50 or more full-time employees must either provide specified minimum levels of coverage to their employees or pay an excise tax. If an employer does not offer health coverage and at least one employee enrolls in a state insurance exchange and receives a subsidy from the federal government, the excise tax for each month that such minimum essential coverage was not provided is $167 for each full-time employee (whether or not a particular employee received a subsidy), excluding the first 30 employees. If the employer does offer the required minimum level of coverage but an employee nevertheless enrolls in a state insurance exchange and qualifies for the subsidy (generally because the employee's cost for insurance under the employer's plan exceeded 9.5% of such employee's household income), the employer will be assessed a monthly penalty of $250 for each such employee. Minimum essential coverage generally includes the "essential" benefits noted above, and consists of emergency services, hospitalization, maternity and newborn care, and various other services.
- "Free Choice" Vouchers. Employers that offer coverage will be required to provide any employee whose income is less than 400% of the poverty level a "free-choice voucher" if the employee's cost of coverage is more than 8%, but less than 9.8%, of household income. This voucher must be in an amount equal to what the employer would have contributed toward the employee's health coverage and can be used by the employee to pay the premium for a plan purchased through a state-sponsored insurance exchange. These vouchers are excludible from employees' taxable incomes and are deductible by the employer. Voucher recipients are not eligible for subsidies through the insurance exchanges.
- Notice Requirements. Employers must satisfy various notice requirements, including providing employees with a description of the applicable insurance exchange and a description of the subsidy provided by the Act.
- Maximum Waiting Period. The maximum employment-based waiting period for health plan coverage is 90 days.
- Prohibition on Preexisting Exclusion Limitations. No such limitations are permitted (a more limited version of this rule applies beginning 90 days after the President signed the Act). Grandfathered plans are subject to this rule.
- Prohibition on Discrimination Based on Health Status. Plan eligibility rules may not take into account health status-related factors, including medical condition, claims history, and certain other factors.
- Cost-Sharing Limitations. Health plans may not impose cost-sharing amounts greater than the dollar amounts in effect under section 223(c)(2)(A)(ii) of the Internal Revenue Code applicable to high-deductible health plans (currently $5,000 for individual coverage, $10,000 for family coverage). The threshold is adjusted upward beginning in 2015. Grandfathered plans are exempt from this requirement.
Many provisions of the Act impact employers and their group health plans, in some cases beginning as early as September 23, 2010. This Alert presents a high-level overview of some key provisions, but it obviously cannot cover all provisions of the Act that will impact employers.