On March 23, 2010, President Obama signed into law H.R. 3590, the Patient Protection and Affordable Care Act, and one week later, on March 30, 2010, the President signed into law H.R. 4872, the Health Care and Education Affordability Reconciliation Act of 2010, which made numerous changes to H.R. 3590 (collectively called the “Acts”). These Acts combine to reform the landscape of health care, including market coverage, individual health mandates and various tax and disclosure provisions. Many different changes will occur over the next eight years, but the more immediate requirements that companies need to consider in the next two years could significantly impact costs and reporting.
This article focuses on the top 10 things employers need to consider before 2012.
1. “Grandfathered” Plan Status:
How will the Acts affect your company, what changes are acceptable to retain “grandfathered” status, and what changes will negate the status?
Any group or individual health care plan currently in effect as of March 23, 2010, is considered “grandfathered” until changes are made to it (excluding plans established pursuant to collective bargaining agreements that will lose their “grandfathered” status when the collective agreements end).
The following mandates will not apply to “grandfathered” plans:
- Nondiscrimination testing under Internal Revenue Code Section 105(h) that is currently imposed on self-insured group health care plans will be expanded to include all fully insured health care plans;
- New expanded claims appeals process that will incorporate both internal (following existing claims regulations under the Employment Retirement Income Security Act — ERISA) and external processes (to be established by the U.S. Department of Health and Human Services — HHS);
- Preventative care coverage that would require no cost-sharing requirements for certain preventative health services including immunizations, child health screenings and breast cancer screenings; and
- Requirement to allow women to select an obstetrics and gynecology specialist of their choice.
Other health care coverage mandates will apply to all health care plans regardless of “grandfathered” status.
Further guidance was just issued in June 2010 to clarify the actions that will cause a plan to lose “grandfathered” status (Interim Treasury Regulation Section 54.9815-1251T issued on June 14, 2010). These actions are:
- Entering into a new policy, certificate or contract of insurance with the plan’s insurer;
- Changing the insurance carrier of the group health plan;
- Eliminating all or substantially all benefits to diagnose or treat a particular condition;
- Increasing any percentage of employees’ share of coinsurance;
- Increasing the deductible or out-of-pocket limit, if the total percentage increase in the cost-sharing requirement exceeds the “maximum percentage increase” (overall medical care component of the Consumer Price Index for All Urban Consumers plus 15 percent);
- Increasing any copayment to exceed the greater of $5 increased by medical inflations or a total percentage of medical inflation plus 15 percent, both measured from the “grandfathered” date;
- Decreasing the employer contribution rates toward the cost of any tier of coverage for any class of similarly situated individuals by more than 5 percent; and/or
- Decreasing or imposing a new annual limit on the dollar value of benefits under a plan.
Actions that will not endanger “grandfathered” status are:
- Enrolling new employees and their families in the group health plan;
- Adding family members of enrolled employees;
- Making changes to voluntarily comply with the health care reform mandates;
- Making changes to comply with federal or state law;
- Increasing benefits;
- Changing the amount of premiums; and/or
- Changing third-party plan administrators.
Now that further guidance has been issued, companies need to prepare to comply with the Acts by:
- Preparing a list of each health care plan maintained that qualifies for “grandfathered” status to be used with services providers, benefits staff and others;
- Identifying amendments that must be made for compliance with federal and state laws or the Acts prior to the end of the year;
- Issuing instructions to relevant parties (benefits, human resources and legal staff as well as applicable administrative committees) stating that any changes to the plan must be approved by a designated officer or staff member with legal review required. This includes adding new programs, changing vendors and negotiating contracts with service providers; and
- Reserving the right to further review and revise plans regarding “grandfathered” status to determine if it will benefit the company.
2. Retiree Medical Reinsurance:
Why should companies that currently provide retiree medical coverage apply for reimbursements under the reinsurance fund now?
The government established a $5 billion fund as of July 26, 2010, which will cease on December 31, 2013. The fund’s purpose is to provide subsidies for companies that currently provide retiree medical coverage. Employers will be able to obtain reimbursement for retiree medical claims for individuals ages 55 to 64. Reimbursements will cover costs, premiums or cost-sharing for 80 percent of the costs between $15,000 and $90,000. Companies should apply as soon as possible to receive reimbursements until the funds are depleted because the fund is a temporary bridge to health insurance exchanges that will be implemented on January 1, 2014 as part of the Acts. It is also unclear if additional dollars will be allocated to this fund when its current funding is used.
3. Health Care Coverage Mandates:
What coverage mandates will apply to a company’s health care plan regardless if it is “grandfathered” or not?
The Acts mandate that effective September 23, 2010:
- Dependent coverage that is provided under a group health plan must continue until age 26;
- No annual and lifetime dollar limits can be imposed on “essential health benefits” as established by HHS; however, plans may place lifetime or annual limits on non-essential health benefits, and until 2014, restricted annual limits (not lifetime limits) are permissible on “essential health benefits” as determined by HHS;
- Pre-existing conditions cannot limit or exclude coverage for children under 19 (and starting in 2014 for all individuals regardless of age); and
- Group health plans will be prohibited from rescinding an individual’s coverage if already covered under the plan (except for acts of fraud or intentional misrepresentation).
Other mandates such as no waiting periods over 90 days for coverage and no discrimination for health status will go into effect in 2014 (regardless of “grandfathered” status) when health insurance exchanges are established.
4. Material Modifications:
What actions do employers need to take regarding material plan modifications?
Effective on September 23, 2010, if an employer acting as a plan administrator or an insurer makes any material modification to the terms of the plan or coverage that is not reflected in the most recent standard summary, a notice of material modification must be provided to participants at least 60 days in advance of the change. Many companies tend to make material plan changes during open enrollment for a new health care plan year. This law may compel companies to start their open enrollment process earlier to incorporate any material modifications made to the plan for the upcoming year.
5. Expanded Claims Appeals Process:
How will the expanded claims appeals process affect employers?
Effective September 23, 2010, all plans except those with “grandfathered” status must establish internal and external claims appeals processes. The internal process can follow existing ERISA claims regulations and should be updated as new standards are issued. The external process should meet state guidelines for insured plans and standards to be established by the HHS for self-funded plans. Participants using the expanded claims appeals processes must be allowed to:
- Review their files;
- Present evidence and/or testimony;
- Receive notice of both appeals processes and the availability of any stated customer assistance; and
- Receive guaranteed coverage during the appeals process.
6. Expanded Nondiscrimination Requirements:
How will this affect companies’ current health care plans?
Effective September 23, 2010, insured group health care plans that are not “grandfathered” will be required to satisfy the nondiscrimination requirements that currently only apply to self-insured health care plans under Internal Revenue Code Section 105(h). Penalties for non-compliance are $100 per day per affected participant. Companies will need to understand how to test their plans. If a company’s plan does not retain its “grandfathered” status, the company will need to test its health care plan annually. This requirement could have implications that extend to change in control and severance agreements that offer post-employment medical coverage, as well as potential consequences associated with IRC Section 409A.
7. Qualified Expenses under HSAs, FSAs and HRAs:
What medicines and other expenses are eligible for reimbursement under these accounts?
Starting in 2011, only prescription drugs and other qualified medical expenses will be permitted for reimbursement. Over-the-cover medicines like allergy and heartburn medicines (excluding insulin and other doctor-prescribed medicines) that are currently eligible for reimbursement under health savings accounts (HSAs), flexible spending arrangements (FSAs) and health reimbursement accounts (HRAs) will no longer be permitted. It will be important for companies to update their list of covered expenses for these plans as soon as guidance is issued.
8. Form W-2 Reporting for Benefits:
What will companies need to do to report the “aggregate” cost of employer-sponsored health insurance coverage on each employee’s Form W-2?
Effective for the 2011 tax year, employers will need to work with their health care and payroll vendors to ensure they can accurately disclose the aggregate cost of employer-sponsored health insurance coverage for each employee. The amount will be computed using rules similar to those determining the applicable premium for continuation coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA). Any contributions to FSAs, HSAs or Archer medical savings accounts (MSAs) are excluded from this calculation.
9. Form 1099 Reporting:
What does this mean for companies of all sizes?
Effective on January 1, 2012, Form 1099s must be issued to individuals and corporations, not just contract workers, which receive payments of $600 or more in services and/or property. Currently, Form 1099s are used to document income for independent contractors and freelancers from their clients. However, under the new rules, if a freelancer purchases a computer over $600 from a vendor, the freelancer will need to issue a Form 1099 to the vendor. This requirement expands Form 1099 reporting in two distinct ways. First, it uses Form 1099s to report payments for services and now tangible goods; and second, it expands their issuing to corporations, not just individuals. Companies will need to make sure they are collecting applicable tax information from vendors, individuals and corporations in order to issue Form 1099s as well as assess their ability to incorporate this requirement into their financial and other reporting systems.
10. Limitation of Compensation Deduction for Health Insurance Providers:
How will this affect companies that receive revenues from providing health insurance?
Effective on March 23, 2010, insurance providers that derive at least 25 percent of their gross premium income from the health insurance business will have a reduction in the deductibility of executive compensation under IRC Section 162(m) from $1,000,000 to $500,000. Employers should start to analyze what this might mean for them in tax year 2010.
These 10 provisions apply to most companies in one form or another.
One additional provision of the Acts that is effective in 2011 applies only to small employers (those with no more than 25 full-time equivalent employees and average wages of no more than $50,000). These small employers will be eligible to receive certain tax credits for non-elective contributions that are used to purchase health insurance for employees. The tax credit will be equal to 35 to 50 percent of the premium costs.
Alvarez & Marsal Taxand Says:
Many other requirements outlined in the Acts will be effective after January 2012 through December 2018. If the composition of the U.S. Congress changes after the next election, it will be interesting to see if other laws are passed that will either repeal or amend the future requirements outlined in the Acts, or if the Acts will remain as enacted in 2010. We believe there are limited possibilities to change the laws and requirements that will go into effect this year through 2012, and think companies should prepare for these imminent changes to health care and related tax and reporting provisions through the suggestions made in this article.
We eagerly await additional guidance that will further clarify the provisions discussed in this article, and we will provide updates in the future. For a more detailed account of the laws, please refer to .
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