The following is the first in a series of WorkCite articles concerning the recently enacted Patient Protection and Affordable Care Act and its companion bill, the Health Care and Education Reconciliation Act of 2010. This series is designed to help large employers (generally defined as those with more than 100 employees) understand and address the most significant issues and areas of concern presented under the new healthcare reforms.
In this initial installment, we provide a timeline, by year, of when key provisions of the new law take effect. Descriptions in the timeline of the new provisions are not intended to be comprehensive. The actual provisions of the new legislation, and future regulatory guidance, should be carefully reviewed before taking actions designed to bring an employer’s health plans, other employee benefit plans, and business operations into compliance with requirements of the new law.
In addition, employers should be aware of the following issues that may affect when and to what extent the new rules will apply to their health plans:
- Grandfathered Plan Status. A key consideration under the new rules is determining whether an employer’s health plan is a “grandfathered plan.” The effective dates for certain provisions are delayed for grandfathered plans, and in some cases grandfathered plans are exempt from requirements that otherwise apply to health plans that are not grandfathered. As a general matter, a “grandfathered plan” is a group health plan in which an individual was enrolled on March 23, 2010. The exemption is intended to include new enrollees in a grandfathered plan. However, it is not clear under what circumstances an existing plan may cease to be a grandfathered plan. The next installment in our Healthcare Reform Guide will address grandfathered plan issues in greater detail. We note in the timeline below which provisions have delayed effectiveness or which do not apply to grandfathered plans.
- Plans with Fewer Than Two Current Employees. The “market reform” provisions of the new legislation (including lifetime and annual benefit limit prohibitions, required coverage of children up to age 26, and other new requirements) have been incorporated into the portion of ERISA which contains the HIPAA exclusion for group health plans with fewer than two current employees. Although not clear, this may exclude ERISA-covered retiree-only health plans from coverage from the market reform requirements. This topic is likely to be the subject of future regulatory guidance.
- Some Effective Dates Linked to Plan Years. Some of the new requirements, particularly the new coverage mandates, become effective as of the first day of a specific plan year. For example, the early “market reforms” take effect for plans years beginning six months after the date the new law was enacted (March 23, 2010). As a result, employers with plans that have non-calendar year plan years which begin in the fourth quarter will need to comply with certain requirements starting this year.
- Provisions with Unclear Effective Dates. The effective dates for certain provisions are not clear under the new legislation, and will likely need to be addressed in future regulatory guidance. We note in the timeline below certain provisions with unclear effective dates. A prominent example of this is the new requirement under the Fair Labor Standards Act that large employers must automatically enroll new employees into their health plans, unless employees affirmatively opt out of coverage. Presently, it appears that this auto-enrollment requirement will not be effective until the Secretary of Labor issues regulations.
- Collectively Bargained Plans May Have an Extended Effective Date. The legislation states:
“[i]n the case of health insurance coverage maintained pursuant to one or more collective bargaining agreements . . . that was ratified before the date of enactment of this Act, the [“market reform” provisions including lifetime benefit limit prohibitions, required coverage of children up to age 26, and other new requirements] shall not apply until the date on which the last of the collective bargaining agreements relating to the coverage terminates.”
This appears to postpone the effective date for the market reform requirements for collectively bargained plans (at least those with “health insurance coverage”) in effect on March 23, 2010 to the date of termination of the collective bargaining agreement, at which time such plans would become subject to the requirements for grandfathered plans. The failure to specifically refer to collectively bargained self-funded coverage may have been a drafting oversight, and future regulations may clarify effective date issues for collectively bargained plans.
2010 PROVISIONS
Retiree Health Benefit Subsidy. A temporary program will be established to help reduce the costs of healthcare coverage of certain early retirees. The program will reimburse participating employers for 80% of claims between $15,000 and $90,000 (as indexed) under a health plan for retirees who are 55 or older, but not yet eligible for Medicare. The Obama administration has announced that the program will take effect on June 23, 2010. The program is required to terminate in 2014, unless the $5 billion appropriated for the program is exhausted before that time.
Tax Exclusion for Coverage of Adult Children. The income tax exclusion for employer-provided medical care is extended to apply to coverage of an employee’s child who has not yet reached age 27, even if that child is married. This exclusion applies up to the end of the tax year immediately prior to the tax year in which the child attains age 27.
Tax Exclusion for Adoption Assistance. Maximum annual limit on nontaxable benefits under an employer-provided adoption assistance plan increases to $13,170 from $10,000.
Automatic Enrollment. Employers with 200 or more employees that offer a health plan must automatically enroll new full-time employees in the plan, with an option for such employees to opt out of coverage. As noted above, no effective date is given for this provision in the new legislation. However, because the Department of Labor must issue regulations for implementing this requirement, it will likely not take effect until some time after regulations are issued.
2011 PROVISIONS
Lifetime and Annual Benefit Limits*. Any lifetime limit in a health plan on the value of “essential benefits” is prohibited. Any annual limit on the dollar value of essential benefits is permitted only if it qualifies as a “restricted annual limit.” The U.S. Department of Health and Human Services (HHS) is to define “essential benefits” and “restricted annual limits.” Annual limits will be prohibited entirely beginning in 2014. These limits apply to both grandfathered and nongrandfathered plans.
Coverage of Adult Children*. A plan that provides dependent coverage of children must continue to offer coverage to an enrollee’s child until the child reaches age 26. This includes married children, but does not include the children of covered children. Until 2014, grandfathered plans may exclude such children from coverage if they are eligible for coverage under another employersponsored group health plan. No exclusion can be applied beginning in 2014.
Ban on Pre-Existing Conditions for Children*. Plans may no longer impose pre-existing condition exclusions on children under age 19. This rule applies to both grandfathered and nongrandfathered plans.
Restrictions on Rescissions*. Plans may not rescind coverage for enrollees except in the case of fraud or misrepresentation, as provided for in the terms of the plan. How this rule will apply to employer self-funded plans may need to be clarified by HHS. This rule applies to both grandfathered and non-grandfathered plans.
Preventative Care Coverage*. Plans must provide first dollar coverage for certain types of preventative care immunizations (i.e., without enrollee cost sharing). This rule does not apply to grandfathered plans.
Claims and External Review Processes*. Plans must have an internal claims appeal process that meets certain standards and an external review procedure. The claims appeal process must allow for appeals of coverage determinations and claims. The external review procedure must comply with applicable state minimum standards, and in the absence of such standards, regulatory guidance issued by HHS. This rule does not apply to grandfathered plans.
“Highly Compensated” Nondiscrimination Rules Apply to Insured Plans*. Tax Code Section 105(h) nondiscrimination requirements with respect to highly compensated individuals that previously applied only to employer self-funded plans now apply to all employer-provided health insurance programs (including fully insured arrangements). This rule does not apply to grandfathered plans.
Patient Protections*. Plans must permit participants to select a provider of their choice as a primary care provider, and must provide similar rights to select a pediatrician as the primary care physician for children and or select an OB/GYN specialist as the primary care provider for female participants. In addition, emergency services must be covered without prior authorization and must be subject to the same cost sharing structure as for non-emergency care. This rule does not apply to grandfathered plans.
| *Provisions with Potential Earlier Effective Dates – these provisions apply for plan years beginning on or after September 23, 2010. Generally, plans whose plan years commence after September 23, 2010 but before January 1, 2011 must comply with these provisions in 2010. |
New Form W-2 Reporting Requirements. Employers must include the aggregate value of employersponsored health coverage on an employee’s annual Form W-2. The reported amount will not include pre-tax salary reduction contributions to medical flexible spending accounts (FSAs) or employer contributions to health savings accounts (HSAs) and Archer medical savings accounts (MSAs).
Changes to FSAs, HSAs and HRAs. Over-the-counter medications cease to be reimbursable under medical FSAs, HSAs, or Health Reimbursement Accounts (HRAs), unless prescribed by a doctor. The additional tax on HSA distributions not used for qualified medical expenses increases from 10% to 20%.
National Long-Term Care Benefit Program. The Community Living Assistance Services and Supports Act (CLASS) program begins. This program will provide employees with access to long-term care benefits through a national insurance program with an automatic enrollment feature. It appears that employer participation in the program is voluntary.
2012 PROVISIONS
Uniform Coverage Explanations. Employers sponsoring self-funded health plans must provide summaries of benefits under their plans to employees when they enroll in the plan. These summaries must meet specific standards developed by HHS, including a requirement that they not be more than 4 pages in length. This explanation will be required to be provided in addition to the plan’s ERISA-required summary plan description. The requirement takes effect on March 23, 2012. It applies to both grandfathered and non-grandfathered plans.
Annual Per-Participant Fee. Health insurers and employers sponsoring self-funded plans must pay an annual fee for each participant covered under their plans. This fee must be paid for policy years or plan years (as applicable) ending after September 30, 2012. The tax sunsets with policy years or plan years that end after September 30, 2019. The fee is $2 per participant ($1 for plan years ending during fiscal 2013), and is imposed under federal tax law. Plans providing only certain types of benefits are exempt (such as dental, disability, etc.).
Advance Notice of Material Modifications to a Plan. Plan participants must receive advance notice of any “material modification” in coverage under the plan. The notice must be provided no less than 60 days before the modification is to take effect. This requirement is in addition to ERISA’s requirement to provide a summary of material modifications following a plan modification.
Quality of Care Reporting. Plans must report annually to HHS on plan benefits and reimbursement structures that provide certain incentives to implement initiatives related to disease prevention, case and disease management, care coordination, and hospital readmission prevention. The report must also be provided to plan participants during open enrollment.
Administrative Simplification. HHS is to develop standards for electronic healthcare transactions. Plans must annually certify to HHS that they are in compliance with such standards.
2013 PROVISIONS
Notice to Employees of Health Exchange Availability (“Exchanges”). Employees must be provided a notice explaining the availability of health Exchanges (note that these Exchanges will not become available until 2014 – see description of Exchanges under 2014 Provisions). The notice must also explain the availability of a tax credit for the premium the employee pays for coverage under Exchange and a cost sharing credit (if certain conditions are met), and that the employee will lose the employer’s health plan contribution if he or she enrolls in an Exchange. The notice must be provided on March 1, 2013 to current employees and to new employees when they are hired.
Limit on FSA Contributions. Contributions to FSAs become subject to a $2,500 annual limit (to be indexed for inflation in future years).
Increase in Medicare Tax Rate. The Medicare Part A Hospital Insurance (HI) tax rate increases from 1.45% to 2.35% on wages in excess of $200,000 (for a taxpayer filing an individual tax return) or $250,000 (for taxpayers filing a joint return). The thresholds for additional HI tax are not indexed for inflation, as is the case with the wage base for other Social Security taxes. The employer’s withholding obligation is based on the employee’s wages only (without regard to the employee’s filing status or spousal wages), and the employer is not required to pay tax at the new higher rate on its portion of the tax.
Unearned Income Medicare Contribution Tax. A 3.8% Medicare contribution tax on unearned income for higher income taxpayers takes effect. The tax will be imposed on income from interest, dividends, capital gains, annuities, royalties, rents or taxable net capital gains, as well as income from estates and trusts. This tax does not apply to distributions from tax-qualified retirement plans, 403(b) plans, or Section 457(b) plans. Although employers do not have a withholding obligation with respect to this new tax, there are interpretive questions relating to the potential application of this tax to other types of employer-provided compensation or benefits, such as distributions from deferred compensation plans and dividends or dividend equivalents paid under stock-based awards.
Deduction for Medicare Part D Subsidy Eliminated. An employer may no longer deduct prescription drug expenses paid for Medicare retirees to the extent the employer receives the subsidy provided under Part D of Medicare.
Compensation Deduction Limit for Certain Insurers. Health insurance providers will not be able to deduct annual compensation in excess of $500,000 paid to any officer, director, employee or persons who provide services for or on behalf of the insurer. Applies to compensation paid after 2012 with respect to services performed by such individuals after 2009. While similar in some respects to the compensation deduction limit in effect for public companies, this limit applies to a broader array of compensatory arrangements and to a broader group of service providers.
2014 PROVISIONS
Health Insurance Exchanges. States must establish Exchanges that meet certain federal standards. These Exchanges will facilitate the purchase of qualified health plans by individuals and small groups.
“Free Choice” Vouchers. Employers that provide coverage under a plan and pay any part of the cost of that coverage must also provide “free choice” vouchers to “qualified employees.” These are generally employees whose required contribution for coverage under the plan is between 8% and 9.8% of the employee’s income and whose household income does not exceed 400% of the Federal Poverty Line. The amount of the voucher is the value of the employer’s contribution to the plan (or the plan with the highest portion of employer-paid cost if the employer maintains multiple plans). Employees receiving these vouchers may use them as a credit against the premium for coverage under an Exchange. Employers are required to pay the voucher amount to the Exchange. The employee is paid in cash the excess value of the voucher over the cost of the Exchange premium. Only the excess value of the voucher is included in the employee’s income. This rule applies to both grandfathered and non-grandfathered plans.
Ban on Pre-Existing Conditions for All Enrollees. Plans may not impose pre-existing condition exclusions for any enrollee, expanding restriction on limits for children under age 19. This ban applies to both grandfathered and non-grandfathered plans.
Limits on Waiting Periods. Plans cannot have waiting periods that exceed 90 days. This limit applies to both grandfathered and non-grandfathered plans.
Ban on Discrimination against Providers. Plans cannot discriminate as to coverage or participation against a healthcare provider. This does not require plans to offer the services of any willing provider. This rule does not apply to grandfathered plans.
Cost Sharing. A plan’s cost sharing provisions cannot exceed specified dollar limits (which are subject to indexing in later years). Plans providing dental-only coverage are exempt from this rule. This rule does not apply to grandfathered plans.
Clinical Trial Coverage. Plans are generally required to permit participation in clinical trials, cannot deny coverage for routine costs of care provided under clinical trials, and may not discriminate based on participation in a clinical trial. This rule does not apply to grandfathered plans.
Wellness Plans Changes. If a wellness plan links a discount rebate to a health status factor, current law limits the value of such rebate to 20% of the cost of employee-only coverage under the employer’s health plan. The new law increases this limit to 30% of the cost of employee-only coverage, and authorizes HHS to increase this limit to up to 50% of the cost of such coverage.
“Free Rider” Excise Tax. If an employer chooses not to offer coverage, or offers unaffordable coverage (as to be defined in regulations), the employer is subject to the following penalties:
- No Coverage Offered: If no coverage is offered, a penalty equal to $2,000 per full-time employee will be assessed, if at least one full-time employee obtains premium tax credit toward the purchase of insurance in an Exchange (see 2014 Provisions section).
- Coverage Offered, but Unaffordable: If the employer offers coverage, but at least one fulltime employee obtains a premium tax credit toward the purchase of insurance in an Exchange, the employer would be assessed a penalty equal to the lesser of $3,000 per employee who receives a premium tax credit or $2,000 per full-time employee employed by the employer.
A full-time employee is defined as an employee who is employed on average at least 30 hours of service per week. For purposes of calculating the penalty amount, the first 30 employees employed by an employer are disregarded (thus causing the penalty to be computed based on the number of employees in excess of 30). While the penalty is only assessed on full-time employees, part-time employees are considered for purposes of determining whether or not an employer has greater than 50 employees. The penalties apply pro rata on a monthly basis, and will be collected by the IRS.
Information Reporting for Plans Providing Minimum Essential Coverage. Employers that provide “minimum essential coverage” under their plans must report certain information annually to the Secretary of the Treasury and to covered individuals. This includes identification of the participants and dependents covered under the plan, their dates of coverage, certain information about the coverage provided under the plan and such other information as the Secretary may require through regulations.
Additional Employer Reporting Requirements. Employers are required to annually certify whether they offer their full-time employees the opportunity to enroll in a plan providing minimum essential coverage and, if they do offer such coverage, the length of waiting period imposed under the plan, how many months during the year coverage was offered and certain other information concerning the plan, as well as information concerning the employer’s full-time employees.
2017 PROVISIONS
Availability of Health Insurance Exchanges to Large Employers. States may permit large employers to purchase coverage through Exchanges if the employers make all of their full-time employees eligible for such coverage.
2018 PROVISIONS
Excise Tax on “Cadillac” Health Plans. A 40% nondeductible excise tax will apply where employment-based health coverage has an aggregate value exceeding $10,200 for individual coverage or $27,500 for family coverage. The excise tax applies to all healthcare provided by an employer, including coverage provided by direct employer subsidy and through pre-tax employee contributions under a cafeteria plan (and potentially other types of employee contributions). Standalone dental and vision coverage is excepted, as well as certain other of limited types of coverage. The dollar thresholds are increased for retirees and individuals in “high-risk” occupations. The plan administrator must pay the tax in the case of a self-funded health plan, an FSA or an HRA. The employer must pay the excise tax with respect to employer contributions to an HSA or MSA. The insurance company must pay the tax for a fully insured plan.
Visit the Healthcare Reform section for additional updates and resources.