On Friday, August 12, several important developments occurred for employers as they continue to implement the health care reform requirements found in the Patient Protection and Affordable Care Act (“ACA”). First, an Atlanta-based appeals court became the first appeals court to strike down a portion of the ACA. While important, the impact on employers seems modest, as the court allowed the remainder of the law to stand.
Second, the Internal Revenue Service (“IRS”) released proposed regulations on premium tax credits that will be available to individuals in the “exchanges” which will begin generally in 2014. These regulations will impact employers because they provide details on how to determine whether an employer is providing an “affordable” health plan to full-time employees — a requirement if the employer wants to avoid the “pay or play” penalties under the ACA.
Finally, the U.S. Department of Health and Human Services (“HHS”) issued regulations on how exchanges will determine an individual’s eligibility for exchange coverage. The regulations also provide guidance on how employers must provide certain information to exchanges and to employees.
- Appeals Court Strikes Down Individual Mandate. About two dozen lawsuits are challenging various pieces of the ACA, all in an effort to have the ACA be declared unconstitutional and void. The cases have been heard by several lower courts, some of which reached different opinions (both that the law is acceptable and that the law is unconstitutional).
Many of the cases allege that Congress does not have power under the U.S. Constitution to require individuals to purchase health plan coverage. One higher-level appeals court had rejected this claim and upheld the constitutionality of the ACA. On Friday, a second appeals court reached the opposite position. The court concluded that Congress did not have the power to require U.S. citizens to purchase health plan coverage. However, in a key development, the appeals court ruled that the ACA should not be voided in its entirety. Rather, only the individual mandate section of the ACA should be stricken. From an employer perspective, this means that the overwhelming majority of the ACA requirements, such as coverage of children until age 26, no annual or lifetime limits and coverage of preventive health services, all remain in effect and continue to apply to employers and their health plans.
The split between the two appeals courts makes it more likely that the U.S. Supreme Court will decide the issue — perhaps in the upcoming 2011–2012 term.
- Premium Tax Credits. In order to help individuals obtain health plan coverage through an exchange, the ACA provides that many individuals will be able to receive premium tax credits. These premium tax credits would be used by individuals to help pay the cost of health plan coverage through an exchange. These credits are generally available to individuals whose income is between 100 percent and 400 percent of the federal poverty level (“FPL”).
No Credit if Eligible for Minimum Essential Coverage. An individual cannot receive a premium tax credit if, for a month, the individual is eligible for “minimum essential coverage.” Employer-provided health plans generally will be “minimum essential coverage” if the employer coverage provides “minimum value” and the employee’s share of the premiums is “affordable.”
Whether an Employer Plan Provides “Minimum Value.” In general, a plan provides “minimum value” if the “total allowed cost of benefits” under the plan is at least 60 percent. Future regulations will clarify the exact meaning of these terms. These regulations are expected later this year.
Whether an Employer Plan is “Affordable.” Last week's regulations provide some important guidance on how to calculate whether an employee’s share of premiums is “affordable.” The ACA provides that coverage is affordable if the employee’s required contribution is less than or equal to 9.5 percent of the employee’s “household income.” The regulations clarify that the 9.5 percent test is based on the cost of “self-only” coverage and not the cost of family coverage. Thus, an individual could be forced to pay, for example, 10 percent of household income for family coverage. However, that coverage could still be “affordable” (assuming it was less than or equal to 9.5 percent of household income for self-only coverage). This had not been clear prior to these new regulations.
Proposed Safe Harbor of “Household Income” a Welcome Relief. A major concern for employers has been how to determine “household income.” Most employers do not gather information about the income of spouses and dependents (who would likely be part of the employee’s “household”). The regulations note that future regulations are expected to provide a “safe harbor” for employers. This safe harbor would allow an employer to avoid the “pay or play” penalty if the employee portion of the self-only premium for the employer’s lowest cost plan does not exceed 9.5 percent of the employee’s current W-2 wages from the employer. This could be enormously helpful to employers, who should know with relative certainty an employee’s current W-2 wages.
Details on How Individuals Obtain Premium Credit. The regulations provide significant details on how individuals can obtain premium credits. There can be tricky nuances to the rules. For example, an individual’s eligibility for a premium credit is usually based on current income and family size. However, both of those can change during the year (e.g., the employee could receive a bonus or pay raise; the employee could divorce or marry). The regulations provide detailed rules addressing these situations.
- Exchange Eligibility Standards. As noted above, the ACA creates “exchanges.” These marketplaces usually will be controlled by a state or nonprofit entity and will allow individuals and, initially, small employers to purchase health insurance policies.
Last week’s proposed regulations begin to fill in some — but far from all — of the details. Most of the regulations discuss how an exchange should determine whether an individual is eligible for premium tax credits or cost-sharing reductions. The regulations also discuss how an exchange should classify individuals as eligible for Medicaid, CHIP or other state-based, low-income coverage.
Effect on Employers. The new regulations will have some impact on employers. An exchange will need to “interact” with employers to determine whether an individual seeking exchange coverage receives, or could have received, coverage through an employer-sponsored health plan (and whether that plan provided “minimum essential coverage,” as noted above). HHS solicits comments on how, exactly, it should verify this coverage with an employer. The regulations also note that employers will be required to provide much of this information pursuant to other ACA requirements. The new regulations do not address these other ACA requirements.
Employers Go SHOP-ping for Coverage. The new regulations contain some additional details on the Small Business Health Options Program (“SHOP”). By 2014, the SHOP will allow small employers (initially; large employers generally may participate in 2017) to purchase exchange coverage for employees. The regulations provide that employers who are seeking SHOP coverage must provide various information to employees about “qualified health plans” (“QHPs”) available through the SHOP. This information includes the timeframe for enrollment, instructions for how to access the SHOP website, the SHOP toll-free telephone number and other tools to compare QHPs in the SHOP. These disclosure requirements will apply to existing employees and newly hired employees (although the exact method and times for distributing the information are not specified by the new regulations).
Effective Date of Regulations. The regulations are only proposed, not final. Both the IRS and HHS invite comments on the proposed regulations. Employers should expect that final regulations will be issued, likely in 2012.
Links to Further Guidance. The Eleventh Circuit Court of Appeals decision can be found here: http://www.uscourts.gov/uscourts/courts/ca11/201111021.pdf.
The advance copy of the premium tax credit regulation can be found here: http://www.ofr.gov/OFRUpload/OFRData/2011-20728_PI.pdf.
The advance copy of the exchange eligibility regulation can be found here: http://www.ofr.gov/OFRUpload/OFRData/2011-20776_PI.pdf.