On March 23, 2010, the Patient Protection and Affordable Care Act was signed into law. The law was amended on March 30, 2010 by the Health Care and Education Reconciliation Act of 2010 (the “Act”). This new law seeks to reform the health care system by providing health insurance coverage to millions of Americans. These changes will have broad implications for employers and their benefit plans. While additional guidance in the form of regulations will likely be provided in the future, below is a brief overview of key provisions of the Act.

Provisions Effective on the Date of Enactment (March 23, 2010) or with No Specified Enactment Date

Grandfathered Health Plans

Employer health plans that were in effect before March 23, 2010 are indefinitely exempt from some, but not all, of the new insurance requirements. These plans will remain exempt even if new employees and family members are enrolled. The Act is silent, however, on what changes to a plan will invalidate its exempt status. Thus, employers should refrain from changing their health plans until further guidance is available.

Small Employer Tax Implications

Employers with no more than 25 full-time employees and annual average wages of less than $50,000 per employee can receive a tax credit for purchasing health insurance for their employees. To receive this credit, the employer must pay at least 50% of the total premium cost. The employer will receive a credit of up to 35% of contributions paid during the first three years, and up to 50% starting in the 2014 tax year.

Large Employer Automatic Enrollment

Employers with more than 200 full-time employees that provide health care coverage must automatically enroll employees in the plan. Employees may opt out of coverage.

Break Time and Space for Nursing Mothers

The Act requires employers to provide reasonable time and space for nursing mothers to use. The space may not be a bathroom, and must be shielded from view and from intrusion. Employers with fewer than 50 employees are not required to comply with this requirement if to do so would impose significant difficulty or expense. While employers must provide reasonable break time for nursing mothers, employers are not required to compensate employees for such break time.

Employee Protections

The Act protects employees by establishing whistleblower protection for employees who report problems or violations. Employers are prohibited from discharging or discriminating against an employee because the employee reports a violation or participates in a proceeding related to an alleged violation.

Provisions Effective 90 Days After Enactment (June 23, 2010)

Retiree Reinsurance

A federal reimbursement program was be established in June of 2010 to reimburse employers who provide health benefits to retirees age 55 or older who are not eligible for Medicare. Detailed conditions apply to this provision and employers who (cont. page 2) wish to participate should closely review the Act. Employers should also act quickly, as the government has designated only $5 billion in funds for the program. The funds will only be available until 2014, or until the funds are depleted, whichever occurs first.

Plan Year Beginning On or After September 23, 2010 (or January 1, 2011 for Calendar Year Plans)

Reforms that Apply to New and Grandfathered Plans

Prohibitions on Pre-Existing Condition Exclusions

Group health plans and insurers are prohibited from imposing pre-existing condition exclusions for individuals under age 19.

Dependent Coverage Extended to Age 26

Plans that offer dependent coverage must extend this coverage until the dependent reaches age 26. Before 2014, it is not mandatory for plans to make coverage available to children who are eligible for other employer-sponsored coverage. Plans are not required to offer coverage to children of those receiving dependent coverage.

Prohibitions on Lifetime or Annual Benefit Limitations

Plans are prohibited from imposing lifetime or annual dollar limits on essential health benefits. Through 2014, plans may only apply “restricted” annual limitations on the value of essential health benefits. Beginning in 2014, annual dollar limits are prohibited for essential health benefits. The Act defines essential health benefits to include at least the following general categories: ambulatory patient services, emergency services, hospitalization, maternity and newborn care, mental health and substance use disorder services, prescription drugs, rehabilitative and habilitative services and devices, laboratory services, preventative and wellness services and chronic disease management, and pediatric services.

Prohibitions on Rescissions or Cancellations:

A plan may not be rescinded or canceled unless the enrollee commits fraud or makes an intentional misrepresentation of material fact. In such cases, coverage may not be rescinded without prior notice, and any cancellation must comply with other requirements specified in the Act.

Reforms that Apply to New Plans, but Do Not Apply to Grandfathered Plans

Preventative Care

Plans must provide coverage for certain preventative care services without cost-sharing. These services include immunizations and preventative screenings for infants, children and adolescents.

Appeals Process

Group health plans are required to institute an appeals process that includes both internal and external reviews.

Non-Discrimination Provision

Plans must comply with the nondiscrimination provision of Internal Revenue Code Section 105(h), which states that plans may not discriminate on the basis of health status or salary. This provision previously applied only to self-insured plans.

Emergency Services

Plans that provide benefits for emergency services must provide such services without pre-authorization requirements and without imposing cost-sharing amounts for out-of-network emergency services providers.

Over-the-Counter Drugs

Beneficial tax treatment will no longer be given for over the counter drugs under flexible spending accounts, health reimbursement accounts, health savings accounts, and Archer medical accounts. Beneficial tax treatment will only be given for insulin and prescription drugs.

Provisions with Later Effective Dates

Employer Tax Reporting

Employers are required to report the cost of employer-sponsored health care plans on each employee’s IRS Form W-2 for the 2011 tax year. This amount does not include salary reduction contributions.

Employer Penalty

  • Beginning in 2013, employers with an average of at least 50 full-time employees will face a penalty if they do not provide health insurance coverage to their employees. Employers do not incur a fine for the first 30 employees, but incur a $2000 fine per employee starting with employee number 31.
  • Employers that offer health insurance coverage could still incur a penalty if they do not pay for at least 60% of the actuarial value of the benefits the plan provides, or if the cost of coverage is more than 9.5% of an employee’s household income. In this situation, an employee may be eligible to receive government-subsidized coverage. As a result of an employee receiving this coverage, an employer would pay a penalty of $3000 per full-time employee, up to a limit.

Pre-existing Conditions

Beginning in 2013, exclusions for pre-existing conditions will be prohibited.

Health Insurance Exchange

No later than January 1, 2014, states must establish and begin to operate health insurance exchanges. These will be operated by a government agency or nonprofit entity that will provide a marketplace to allow individuals and eligible employers to purchase affordable health insurance plans. Prior to 2016, states can limit eligibility to businesses with 50 or fewer employees. The exchanges may be open to larger employers after 2017.

Employer Notice Requirements

Beginning on March 1, 2013, employers must provide employees with written notice: (1) of the existence of the health insurance exchange; (2) of potential eligibility for federal assistance if the employee finds that the employer’s health plan is unaffordable; and (3) that the employee may lose the employer’s contribution to health coverage if the employee enrolls in the health insurance exchange.