Health Reform Act overview and implementation

Health Reform Act

The work of Flanagan, Miller, Pagano, and Wood (2010) entitled "Employee Benefit Plan Review -- Meyerowitz, Health care Reform Is Here -- Now What?" states that health care reform laws are expected to have an impact that is significant in nature and this is on the health insurance industry as well as on employee benefit issues as well. The Patient Protection and Affordable Care Act (PPACA), which was then supplemented and modified, less than one week later, by the Health Care and Education Tax Credit Reconciliation Act (HCERA)." (Flanagan, Miller, Pagano, and Wood, 2010) Those two laws are referred to as "Health Care Reform" or "Health Reform Laws." (Flanagan, Miller, Pagano, and Wood, 2010) The Health Reform Laws are reported, while being extremely lengthy and in depth and very detailed to "leave open a host of issues that will have to be resolved either through agency regulations or further action by Congress" and this is stated to include potential technical and conformance of amendments to the Health Reform Laws. Because of this guidance that is definite in nature is not possible in many of the provisional areas of Health Care Reform while simultaneously it is necessary that employers, plan sponsors and employee benefits plans start examining the specifics of Health Care Reform in order to be better prepared for the health care changes that are quite numerous and which are approaching rapidly for implementation. It is important to remember that the Health Reform Laws take effect with the first plan year's beginning following September 23, 2010, however, none of the new coverage mandates is applicable prior to January 1, 2011.

I. Impacts of Health Care Reform on Employers

There are specific impacts that Health Care Reform will have on employers including the aspect of 'Automatic Enrollment' and specifically it is reported that PPACA amended the FLSA to require than an employer of more than 200 employees that are full-time are required to:

(1) enroll new full time employees automatically however, subject to permitted waiting period and must reenroll current employees;

(2) must provide new employees with a notice of such automatic enrollment; and (3) must provide new employees with an opportunity to opt-out of automatic enrollment. In addition, PPACA makes provisions for state payroll laws being preempted as needed to permit such automatic enrollment. However, the date of effectiveness of its provision is unknown since PPACA states only that it is effective "in accordance with regulations" but does not state a specific date for regulations to be issued. (Flanagan, Miller, Pagano, and Wood, 2010

'Mandated Coverage' is also an aspect of importance to the employer in that the Health Reform Laws state the provision that employers who employ at least 50 full time employees are required to offer minimum essential plan coverage or pay a penalty ($2,000 or $3,000 per participant) The penalty amount (not deductible) is reported to be "indexed to the rate of premium growth after 2014, and there is an exception to the 'unaffordable' coverage penalties for situations coverage by 'free choice vouchers." (Flanagan, Miller, Pagano, and Wood, 2010)

'Free Choice Vouchers' must be offered by employers of any size that offer health coverage and pay a portion of the premium beginning January 1, 2014 to qualified employees. Free Choice Vouchers -- Health Reform Law requires that employers of any size offering health coverage and paying a portion of the premium must starting January 1, 2014 "provide free choice vouchers to 'qualified employees.[footnoteRef:1] Failure to offer the voucher does not result in tax or penalty but instead is reported to relieve the employer "of the $3,000 unaffordable-coverage penalty for each employee receiving the voucher. The voucher is stated to be deductible to the employer and tax-excludable to the employee. The amount of the voucher is the dollar value of the employer's contribution to the health plan, or, if multiple plans are offered, the dollar value of the plan with the largest percentage of employer-paid cost. A "qualified employee" can use the voucher as a credit against premiums required for Exchange-provided coverage, and the employee may retain the excess amount if the premium is less than the voucher." (Flanagan, Miller, Pagano, and Wood, 2010) [1: Qualified employees are those who do not participate in the health plan of the employers or those employees meeting other financial requirements.]

The Health Reform Act was amended by the FLSAS to make a requirement of employers providing not only a reasonable break time but also a private place for the female employee to express breast milk following having given birth to a child. It is reported that specific "conditions and exemptions may apply and if the state law that is applicable would offer greater protections to the employees that those provided under the FLSA amendments, then employers in those states will be required to adhere to state law. Employers are further required by the Health Reform Laws to report "…the value of each employee's health coverage on the employee's W-2." (Flanagan, Miller, Pagano, and Wood, 2010) Simplified Cafeteria plans may be established by employers with under 100 employees and this plan may have "…simplified nondiscrimination rules that would apply if certain contribution and eligibility requirements are met." Flanagan, Miller, Pagano, and Wood, 2010

The Health Reform Laws will not allow employers, following 2012, to take a tax deduction for the amount of any Medical Part D subsidy they receive for providing prescription drug coverage to their retirees.[footnoteRef:2] The Health Reform Laws require that beginning January 1, 2013, the "…employee portion of the Medicare tax increases to 2.35% for wages over $200,000 (for single filers) or $250,000 (for married filing jointly) The employer's withholding liability for any employee is based on wages in excess of $200,000 paid by that employee for the year, without regard to filing status or wages of the employee's spouse." (Flanagan, Miller, Pagano, and Wood, 2010) [2: This will not occur until 2013. accounting rules will require employers to immediately writedown deferred income-tax assets to reflect this loss. (Flanagan, Miller, Pagano and Wood, 2010) ]

The Health Reform Laws are reported to amend the FLSA and to require that employers make the provision for existing employees and for new employees and that the employers give notice to employees of: (1) the availability of the Exchanges[footnoteRef:3] (2) if the employer's share of health plan costs is under 60%, eligibility for certain credits and reductions if purchasing through the Exchange; and (3) if the employee purchases Exchange insurance, the employee will lose the employer contribution toward the value of coverage. (Flanagan, Miller, Pagano, and Wood, 2010) [3: the exchanges are not operational until 2014]

The Health Reform Laws amended the Code to make provision that every insurer and each employer that provides a health plan[footnoteRef:4] are required to report certain health insurance coverage data to the IRS and to each individual covered on a specific IRS provided form.[footnoteRef:5] The PPACA makes a literal requirement of this information however, this is only is the plan is insured. There is stated to be however, "reason to believe that this requirement will also be imposed on self-insured plans."[footnoteRef:6] (Flanagan, Miller, Pagano, and Wood, 2010) [4: This includes grandfathered plans] [5: This includes the portion of the premium the employer pays.] [6: Under a separate amendment to the Code some employers will be required to file an additional information return with the IRS. This information must also be provided to the full-time employee if the required employee contribution exceeds 8% of the wages the employer pays to that employee. While these two reporting requirements are separate the IRS may combine the two reports. ]

The Health Reform laws further amend the Public Health Service Act to require issuers of health insurance to pay their customers rebates "if their medical loss ratios fall below 80%[footnoteRef:7] "averaged over three years." (Flanagan, Miller, Pagano, and Wood, 2010) These percentages may be increased by states however, this is subject to be adjusted by HHS. While employer plans are affected by this increase, self-insured plans will not be affected and it remains unclear whether the rebates will be paid to the plan, individual participants or to the employer. (Flanagan, Miller, Pagano, and Wood, 2010, paraphrased) [footnoteRef:8] [7: In some cases this is set at 85%. ] [8: "This provision generally applies to plan years beginning on or after September 23, 2010, but it appears to apply to grandfathered plans (which are described in more detail below) for plan years beginning on or after March 23, 2010, i.e., the date of enactment of PPACA. Because this results in an earlier effective date for grandfathered plansthan for nongrandfathered plans, it is possible that this effective date may be altered by further guidanceand/or statutory changes." ( ) ]

The Health Reform Laws are stated to "extend the same nondiscrimination rules currently applicable only to self-insured plans to insured group health plans. These rules prevent plans from providing significantly better coverage to higher-paid employees than to other employees. This provision has a separate $100-per-day penalty per affected participant, and the provision does not apply to grandfathered plans." (Flanagan, Miller, Pagano, and Wood, 2010) Starting in 2010, a small employer[footnoteRef:9] is reported to be eligible to "apply for a tax credit if they offer health insurance and subsidize, on a uniform basis, at least 50%[footnoteRef:10] of the cost of coverage." (Flanagan, Miller, Pagano, and Wood, 2010) The tax credit is to be paid in full for employers with less than 10 full-time employees and whose average wages total $25,000 or more. This phases out as employer size and average wage increases and the credit will be available on a reduced basis between 2010 to 2013 prior to the establishments of the Exchanges. (Flanagan, Miller, Pagano, and Wood, 2010, paraphrased) [9: An employer with 25 or fewer employees with average full-time wages totaling less than $50,000] [10: 35% for tax-exempt employers. ]

A new benefit will be created by the Health Reform Laws beginning in 2011 through the 'Community Living Assistance Services and Supports Act'[footnoteRef:11]which is a national long-term care benefit that is employee-funded. (Flanagan, Miller, Pagano, and Wood, 2010) Involvement in this benefit is voluntary although there is encouragement for employer participation and for employers to adopt automatic enrollment rules whereby the employees participates in this benefit by default. [11: Also known as the CLASS Act]

Beginning January 1, 2014, it is required that each state establish an Exchange for individual and employer-purchase of coverage under health plans that are qualified. Failure on the part of a state to establish and Exchange will result in the Department of Health and Humans Services being required to establish and operate an Exchange.[footnoteRef:12] These Exchange will be open to small employers[footnoteRef:13] If an employer grows too large to be a small employer that employer will not lose the ability to access an Exchange and in 2017, the Exchanges "may be opened to large employers, and any state that does so must allow large employers to purchase health insurance for their employees through an Exchange." (Flanagan, Miller, Pagano, and Wood, 2010 ) [12: This is stated to be directly or through an agreement with a not-for-profit entity. ] [13: Employers with 100 or less employees in the previous year. This may be reduced to 50 employees before 2016. ]

Beginning 2018, the Cadillac Plan Tax is effective. This tax is stated to be a "nondeductible 40% excise tax on the aggregate value of coverage per covered employee that exceeds $10,200 for an individual or $27,500 for a family, as adjusted according to specific criteria. The coverage taken into account includes all employer sponsored health coverage (including after-tax premiums, reimbursements from a health FSA or a health reimbursement arrangement (HRA), contributions to an HSA or Archer MSA, and other supplementary health coverage), but does not include certain other types of coverage, such as employer coverage for long-term care and separately provided dental or vision coverage. The tax is paid by the insurer for insured coverage, by the employer for HSA and MSA contributions, and by the plan administrator for other employer sponsored coverage (presumably including self-funded coverage)." (Flanagan, Miller, Pagano, and Wood, 2010)

II. Impact OF Health Care Reform on Employees

There has been much discussion concerning a requirement of obtaining health care coverage and the fact is that nearly all U.S. citizens and legal residents will be required to obtain health coverage beginning in 2014 and if they fail to obtain health coverage, "they will be subject to an annual penalty amount." (Flanagan, Miller, Pagano, and Wood, 2010) The amount of the penalty is stated at the "greater of 1.0% of household income above the tax filing threshold or $95, and then rises in 2015 to the greater of 2.0% of household income above the tax filing threshold or $325, and rises again in 2016 to the greater of 2.5% of household income above the tax filing threshold or $695.[footnoteRef:14] Following 2016 the penalty amounts are to be indexed with no assessment of penalty for individuals failing to obtain health insurance coverage for three months or less during the year. Individuals who are required to make coverage contributions through an Exchange or an employer plan exceed 8% of income are to be exempt from the penalty as are some low-income individuals who may be "entitled to premium and cost-sharing subsidies from the federal government in connection with coverage obtained through an Exchange." (Flanagan, Miller, Pagano, and Wood, 2010) [14: The family penalty is reported as capped at 300% of the individual penalty. ]

Beginning January 1, 2013 the employee portion of the Medicare tax increases to 2.35% for wages over $200,000 for those filing single and $250,000 for those filing jointly. Changes to benefits over the next few years are stated to include:

(1) Employees automatically enrolling and reenrolling in certain employer plans[footnoteRef:15]; [15: The employees can opt out of such coverage.]

(2) An employee will be allowed to cover a dependent child under an employer's plan until age 26;

(3) Preexisting condition limitations will be banned under group health plans, and lifetime and annual benefit limits will be severely limited and may be banned in some situations. Plans will also be prohibited from rescinding coverage except in the cases of fraud or intentional misrepresentation of material facts;

(4) Group health plans will be required to provide coverage for preventive health services and must provide coverage for emergency services without prior authorization;

(5) Annual contributions to FSAs will be limited to $2,500 per year, and FSAs, HRAs, Archer MSAs, and HSAs will not be allowed to reimburse a participant for most over-the-counter drug expenses; (6) Waiting periods under a plan will not be allowed to exceed 90 days.( Flanagan, Miller, Pagano, and Wood, 2010)

III. Health Care Reform: Impact on Health Plans

The Health Reform Laws make a requirement of plans if dependent coverage is offered to cover the participants adult children up to the age of 26 years of age and this includes married children. This requirement will become effective in 2011.[footnoteRef:16] The Health Reform Laws place a complete and total ban on limitations due to preexisting conditions under group health plans. This ban is effective beginning after September 23, 2010 and for children below the age of 19 years is effective for all participants starting in 2014. [16: for grandfathered plans (which are described in more detail below), thisprovision only applies to a child not eligible to enroll in another employer-provided plan. In plan yearsbeginning on or after January 1, 2014, however, this limitation for grandfathered plans is lifted, and thiscoverage expansion will apply equally to both grandfathered and nongrandfathered plans. Interim finalregulations on this matter were issued on May 13. The regulations impose a "uniformity" requirement underwhich the terms of a plan providing dependent coverage of children cannot vary based on age (except forchildren who are age 26 or older), and make clear that an additional premium surcharge on children who areolder than age 18 would be one type of impermissible variation based on age. The regulations also establisha transitional rule and a special 30-day enrollment period for individuals whose coverage ended by reason ofreaching a plan's age threshold, but who will be eligible under this adult-child coverage expansion.Although that provision is not effective for most plans until 2011, the Health Reform Laws also amendedthe Code, effective in 2010, to allow (but not require) plans to extend coverage to an employee's children on a more generous basis than had been previously allowed (up to age 27). However, any such coverageexpansions are only effective (at least for tax purposes) after the plan has been amended. The IRS hasissued guidance to clarify that this Code amendment applies to permit the value of health care coverageexpanded to cover adult children (i.e., the premium) to be excluded from the income of the employee, andhas also indicated that the cafeteria plan regulations will be amended to accommodate midyear electionchanges due to this change in law (i.e., for adult children who are newly eligible under the PPACA change inthe law)." (Flanagan, Miller, Pagano, and Wood, 2010) ]

The Health Reform Laws makes a requirement of HHS for establishment of a temporary reinsurance program to reimburse those who retire early as well as their spouse and dependents.[footnoteRef:17] Reimbursements will not exceed "80% of the cost of benefits for a year with respect to a retiree (and his or her spouse and dependents) between $15,000 and $90,000 (adjusted for inflation). The program will be in existence from June 21, 2010 (i.e., 90 days after the date of enactment of PPACA) to January 1, 2014, or when the $5 billion appropriation for this program is exhausted, whichever occurs first. Plans must apply to be a part of this program, and certain limitations apply to how the reimbursement amounts may be used" (Flanagan, Miller, Pagano, and Wood, 2010) Stated to be important aspects of the regulations are the following: [17: Early retirees are individuals 55 years of age or older who are not active employees and who are not eligible for Medicare. ]

(1) plan sponsors are now included among the groups that can receive reimbursement, thereby making it possible for self-funded (i.e., noninsured) plans to participate fully in the reimbursement program;

(2) plans are allowed significant leeway in identifying and implementing programs and procedures to provide cost savings to participants with chronic and high-cost conditions, including, for example, direct reductions in financial requirements for such participants or the adoption of disease-specific wellness or health improvement programs; and (3) once a plan is certified for participation in the program, annual reapplications for continued participation in the program are not required. (Flanagan, Miller, Pagano, and Wood, 2010)[footnoteRef:18] [18: Because of the limited four-year duration and limited funding ($5 billion) of this program, it is imperativethat plans and plan sponsors apply for certification as soon as possible after the June 21, 2010, start-update. This is particularly true because HHS has noted in a series of FAQs published in early June 2010 thatapplications will be handled on a first filed basis.]

Other aspects of the Health Reform Laws include those briefly described as follows:

Temporary Insurance Program for High-Risk Individuals -- Health Reform Laws require HHS to establish a temporary insurance program for those who have preexisting conditions and have not had group health plan coverage for at least six months.

Ban on Lifetime and Annual Limits;

Limits on Rescission of Coverage;

Required Preventive Health Services;

Emergency Services and Clinical Trials;

Access

Internal/External Reviews;

Requirement to Disclose Certain Information

Reimbursements for Over-the-Counter Expenses

Benefits Summary Disclosures

Per Participant Fee Under Internal Revenue Code

FSA Annual Contribution Limits

Waiting Periods cannot exceed 90 days;

Cost Sharing: under a plan (1) may not exceed certain Code specified limitations; (2) may not charge a deductible in excess of $2,000 (individual) and $4,000 (family) for coverage;

Discrimination Against Providers

Low Actuarial Risk Plan Assessment;

Cadillac Tax -- effective 2018; and Grandfathered Plans -- covers all employees enrolled on March 23, 2010 and their family members even if not yet enrolled as well as all new employees.

Enforcement and Penalties -- "The new coverage mandates under the Health Reform Laws will generally be enforced through a new Internal Revenue Code section which imposes a penalty of $100 per day for each affected participant for violations of the new coverage mandates. This penalty is measured from the date of failure to the date of correction, does not apply to retiree-only plans, and can be capped if the failure was unintentional. It is important to note that this penalty is a new penalty; it does not replace any of the old penalties that could be assessed against employers or health plans and could potentially be assessed in addition to such existing penalties." (Flanagan, Miller, Pagano, and Wood, 2010)

It is reported that the tax proposals for financing the Health Care Reform can be differentiated in terms of "their effects on behavior and where the burden falls in the income distribution. Although most taxes rise with income in absolute amounts, the burden relative to income may fall more heavily on higher-income taxpayers (a progressive change), about equally on all taxpayers (a proportional change), or more heavily on lower-income taxpayers (a regressive change). For instance, the limit on itemized deductions increases taxes for high-income taxpayers (roughly the top 2%) and is a highly progressive change; similarly, the tax on high-adjusted gross incomes largely affects the top 1%. The burden of limiting health-related income and payroll-tax exclusions tends to increase taxes as a percent of income proportionally more in the middle-income brackets, with smaller effects at both the low and high ends of the income distribution. Excise taxes tend to be regressive and fall more heavily on lower-income classes." (Gravelle, 2010) Tax options for financing health care reform re stated to include such as: (1) taxes on non-diet soda drinks; (2) Modification of FISA exempt status allowance; (3) extension of Medicare payroll tax for state and local employees; (4) excise taxes on alcohol and on-diet sweetened beverages; (5) taxes on alcoholic beverages; (Gravelle, 2010)[footnoteRef:19] [19: Gravelle, Jane G. (2010) Tax Options for Financing Health Care Reform. Congressional Research Service Report for Congress -- Tax Options for Financing Health Care Reform. April 6, 2010. 11th Congress. ]