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Congress Passes Health Care Reform Legislation-How Employers Are Affected  

New Law. Its a done deal! Congress has passed health care reform legislation, which contains comprehensive, sweeping and complex changes and additions to health care law, including the tax and ERISA rules pertaining to employer-sponsored health care plans. For political and technical reasons, the legislation consists of two acts: the Patient Protection and Affordable Care Act (the “PPACA”), which the President signed into law on March 23, 2010 (the “PPACA Enactment Date”), and the Health Care and Education Reconciliation Act of 2010 (the “Reconciliation Bill”), which amends the PPACA, and which the President signed into law on March 30, 2010.
Impact on Employers/Plans. The new legislation will have a huge impact on employers, their health care plans and their other compensation/benefits arrangements. Employers will have to amend their health care plans, and maybe some of their other pay and employee benefit arrangements, prepare and distribute new notices to employees, file new reports with the government and adjust their tax reporting and wage withholding systems. Much of the new law-primarily the health insurance exchanges and the mandates on employers and individuals to provide and obtain health care coverage-goes into effect after 2013 or when applicable regulations are issued, so there is plenty of time to talk about those rules. Here-in calendar form-are the provisions and requirements with a more immediate impact:

Starting No Later Than 90 days After The PPACA Enactment Date:
A temporary federal program will reimburse employer health care plans (tax-free) for 80% of the cost of benefits provided to retirees age 55 to 64 in excess of $15,000 and below $90,000 (as indexed). An employer must file a claim with the Department of Health and Human Services (the “HHS”) to obtain the reimbursement. This program will end by the earlier of 2014 or when the $5 billion funding for the program is exhausted.

For The 2010 Tax Year:
A small business (less than 26 employees who have average annual wages of less than $50,000, when the employer pays at least half of the health coverage premiums or costs) may take a tax credit of up to 35% of the health care premiums it pays.

For Plan Years Starting At Least Six Months after the PPACA Enactment Date:
A group health plan must meet the following rules and requirements:
  • if the plan offers dependent coverage, tax-free coverage must be extended to an employee’s adult child up to age 26, provided that the adult is unable to enroll in another group health plan (the proviso does not apply to new plans (defined below) and ends for all plans for plan years starting after 2013);
  • lifetime benefit dollar limits, and restrictive annual benefit dollar limits (as determined by the HHS), on essential health benefits (such as medical, hospitalization and prescription drugs) cannot be imposed (no annual limits are allowed at all on these benefits for plan years starting after 2013);
  • preexisting condition exclusions on children under age 19 cannot be imposed (no preexisting conditions are permitted at all for plan years starting after 2013);
  • (by no later than the plan year starting after 2013) waiting periods to participate exceeding 90 days are not permitted;
  • rescissions of an employee’s coverage is not permitted (unless there has been fraud/intentional misrepresentation); and
  • for new plans only (those established after the PPACA Enactment Date), discrimination in eligibility or continued coverage in favor of highly-paid employees is not permitted (even if the plan is insured), no deductibles, co-payments or other cost sharing may be imposed for preventive services or immunizations, in- network coverage must let the participant or beneficiary select his/her primary care provider, no authorization or participating providers may be required for coverage for emergency services, an appeals process must be available (generally expanding the requirements under Department of Labor Regulations), and certain plan data and information must be reported to the government and made available to the public.

Employer Action Suggested: The foregoing rules require that health care plans be amended, and are likely to cause health insurance premiums and costs to increase. An employer might consider talking to its insurer or consultants now about amending its plan to comply with the new law and mitigating any premium or cost increases. The new rules suggest alternative plan design, such as whether to eliminate dependent coverage altogether (probably not) or extend it to age 26, and, if the later, whether the additional cost to the plan will be passed on to the all participants, to all participants with dependents or only to participants with dependents benefiting from the extension. Along with the plan amendments, employers will have to prepare/revise enrollment forms, communications to employees about the plan-and summary plan descriptions.

Planning Point: The nondiscrimination requirements for new health care plans might affect such plans which cover only executive/highly paid employees. The employer should keep these requirements in mind when designing such plans.

For Tax Years Starting After 2010:
  • An employer must report on Form W-2 the cost of the employee’s health care coverage.
  • The cost of a (nonprescription) over-the-counter-medicine cannot be reimbursed by a flexible spending account (an “FSA”), a health reimbursement arrangement (an “HRA”) or a health savings account (an “HSA”).
  • The tax penalty on withdrawals from HSAs other than to pay medical expenses doubles to 20%.
  • If the employer has 100 or fewer employees, a cafeteria plan need not meet the Internal Revenue Code’s nondiscrimination requirements, if certain contribution, eligibility and participation requirements are met.

No Later Than 2 Years From The PPACA Enactment Date:
  • Employees must be given a summary of the health care benefits they are receiving. HHS will issue model summaries. The summary must be modified at least 60 days in advance of any material changes in coverage. Also, by March 1, 2013, employees must be given a notice about the health insurance exchanges and related rules.
  • Caution: The effective date of the rule requiring 60 day’s advance notice of a change in coverage is not clear. An employer might consider providing this notice at least 60 days prior to any future material change in coverage.

Tax Years Ending After September 30, 2012:
A fee ($1 to $2 per covered person) is imposed on employers maintaining a self-insured health plan (insurer pays for insured health plan).

For Tax Years Starting After 2012:
A $2,500 (indexed) cap is imposed on annual FSA salary reduction contributions.
In effect, employers will no longer be entitled to a tax exclusion for the federal subsidy they receive for the cost of retiree prescription drugs. This subsidy is 28% of those costs. Note: This rule may impact on an employer’s financial statements for 2010.

For Pay Received In Tax Years Starting After 2012:
An additional .9% FICA (and SECA) payroll tax (increasing the Medicare hospital insurance tax rate (employee’s share only) from (1.45% to 2.35%) will be imposed on pay exceeding $200,000 ($250,000 for joint filers and $125,000 for married filing separately).

Planning Point: An employer might begin to think about structuring executive/highly paid employee compensation now to reduce the impact of the increase in the FICA payroll tax described above.



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