Health Law MonitorHealth Reform Whitepaper: Employer Impact of PPACA
The second installment of our Health Reform series focuses upon the impact of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (referred to together herein as “PPACA”) upon employers and their group health plans. PPACA places a number of requirements upon both existing and new group health plans (including both insured and self-insured plans) that will take effect for plan years beginning on or after September 23, 2010. Hence, for calendar year plans, many of the changes must be in place by January 1, 2011. PPACA also establishes certain employer health insurance play-or-pay mandates commencing in 2014.
A. MANDATES FOR EMPLOYERS
1. Pay or Play Mandate
PPACA does not establish an affirmative federal requirement that employers must offer health insurance coverage to employees or their families. However, commencing in 2014, an applicable large employer that does not offer to its employees affordable minimum essential coverage must pay a penalty.
For purposes of this requirement, an “applicable large employer” is one that employed an average of at least 50 full-time equivalent employees during the preceding calendar year. An employee working an average of at least 30 hours each week is counted as one full-time employee and all other employees are counted on a pro rata basis using 120 hours per month as the full-time equivalent. “Minimum essential coverage” includes coverage under government-sponsored programs, employer-sponsored plans, plans in the individual market offered through a state health exchange, and “grandfathered” health plans. “Affordable” means that the employee’s contribution for the coverage does not exceed 9.5% of the employee’s household income; also, the employer-sponsored group health plan must pay at least 60% of the plan’s total costs.
If any employee’s cost of coverage exceeds 8% of household income (but does not exceed 9.8% of household income), and the employee’s household income is less than 400% of the Federal poverty level, then commencing in 2014, employers must offer that employee a “free choice” voucher which may be used to purchase coverage through a state health exchange. The voucher amount must equal the cost the employer would have paid to cover the employee under the most generous option in the employer’s plan. The amount is for individual-only or family coverage, depending on the employee’s election. The employer pays the amount directly to the exchange, and the employee retains the excess amount if the cost of coverage in the exchange is less than the cost of the employer’s coverage.
If an applicable large employer does not offer affordable minimum essential coverage under its group health plan, and has at least one full-time employee enrolled in a plan under a state health exchange, then the employer must pay a monthly penalty equal to the number of its full-time employees, less 30, multiplied by $166.67.
If an applicable large employer does offer affordable minimum essential coverage under its group health plan, and still has at least one full-time employee enrolled in a plan under a state health exchange, then the employer must pay a monthly penalty of $250.00 for each full-time employee who enrolls in a state health exchange plan and is provided a premium subsidy or reduced cost sharing. (The employees who qualify for a premium subsidy or reduced cost sharing are those employees who must contribute more than 9.5% of their household income to receive coverage under their employer’s plan or whose employer plan does not cover at least 60% of the costs of benefits.)
Regarding the state health exchanges, beginning in 2014, states must establish American Health Benefit Exchanges and Small Business Health Option Programs (“SHOP”) exchanges to be administered by a governmental agency or non-profit organization. Under these exchanges, individuals and small businesses with 100 or fewer employees can purchase qualified coverage. States may form regional exchanges or allow more than one exchange to operate in the state as long as each exchange serves a distinct geographic area. The purpose of the exchanges under PPACA is to create a more organized and competitive market for health insurance by offering a choice of plans, establishing common rules regarding the offering and pricing of insurance, and providing information to help consumers better understand the options available to them. The exchanges will not be insurance companies themselves, but rather, will solicit bids from insurance companies and make those individual polices available to small employers and individuals.
2. Excise Tax on “Cadillac Plans”
B. Grandfathered Plans
An employer-sponsored group health plan in which an individual was enrolled on March 23, 2010, is a grandfathered plan for purposes of PPACA. A plan will maintain its grandfathered status if it has continuously covered at least one person (i.e., someone, but not necessarily the same person) since March 23, 2010. Grandfathered status is deemed desirable because grandfathered plans must comply with only certain provisions of Subtitles A and C of Title I of PPACA. The most significant of these requirements will be detailed below.
Initially, it was unclear whether an amendment to a plan in existence on March 23, 2010 would cause the plan and the individuals covered under the plan to lose grandfathered status. On June 14, 2010, the Department of Health and Human Services (“DHHS”), the Department of Labor, and the Department of Treasury released Interim Final Regulations clarifying how a plan can retain grandfathered status.
Additional Dependents and New Employees Permitted. An employee enrolled in a grandfathered plan as of March 23, 2010, may enroll family members after that date without adversely affecting grandfathered status. Similarly, new employees and their families may enroll after March 23, 2010, without adversely affecting grandfathered status.
Factors Causing Loss of Grandfathered Status. The Interim Final Regulations provide useful explanations and examples of factors that will adversely affect grandfathered status. Generally, they include: (1) elimination of benefits to diagnose or treat a particular condition; (2) an increase in percentage cost-sharing requirements, such as an individual’s coinsurance; (3) an increase in a fixed-amount cost-sharing requirement other than a copayment, e.g., a deductible or out-of-pocket limit, if the increase exceeds medical inflation (as defined in the regulation); (4) an increase in a fixed-amount copayment if the total increase exceeds limits specified in the regulation; (5) certain decreases in the employer’s contribution rate or premium subsidy; (6) certain changes to annual limits; or (7) implementation of a new insurance policy or contract (versus renewal of an existing one).
C. KEY Changes THAT IMPACT EMPLOYER-SPONSORED GROUP HEALTH PLANS
1. Coverage for Children Up To Age 26
By adding a new Section 2714 to the existing Public Health Service Act, PPACA requires group health plans offering dependent child coverage to continue to make such coverage available for an adult child up to age 26 (i.e., through age 25). Interim Final Regulations issued May 10, 2010, clarify certain aspects of this new requirement:
Definition of “dependent.” Dependent status is now defined solely in terms of the relationship between a child and a participant. As a result, dependent status may not be conditioned upon whether the child resides with the parent, is financially dependent on the parent, is a student, is employed, is unmarried, or upon similar restrictions. Notwithstanding the foregoing, a grandchild of a participant is not required to be covered, and a spouse or dependent of the adult child is not required to be covered.
Uniformity irrespective of child’s age. The terms of the plan or health insurance coverage for dependent children cannot vary based on age (except for children who are age 26 or older). For example, a group health plan cannot charge a premium for adult children dependents.
Opportunity to enroll. The Interim Final Regulations contain transitional rules for children whose coverage previously ended (or who were not eligible for coverage) because their parents’ plan cut off dependent coverage before age 26. For these children, group health plans are required to provide at least 30 days’ prior written notice of the opportunity for these children to enroll in the group health plan. The notice may be included with other enrollment materials distributed by the plan as long as the notice is prominent, and the notice may be delivered to a participant on behalf of the participant’s child. The child must be offered all the benefit packages available to similarly situated individuals who did not lose coverage by reason of cessation of dependent status, and the child must not be required to pay more for such coverage. Coverage for these children must take effect no later than the first day of the first plan year beginning on or after September 23, 2010.
Effective Dates. This section applies for plan years beginning on or after September 23, 2010. For plan years beginning before January 1, 2014, grandfathered plans that offer dependent coverage of children may exclude an adult child who has not attained age 26 from coverage if the adult child is eligible to enroll in an employer-sponsored health plan other than his parent’s group health plan. However, for plan years beginning on or after January 1, 2014, a grandfathered plan must comply with all requirements of this section.
2. Prohibition on Pre-Existing Condition Exclusions
Under PPACA, group health plans may not impose any preexisting condition exclusion or limitation on a covered individual.
Effective Dates. This provision applies to covered children under age 19 for plan years beginning on or after September 23, 2010, and to all covered persons of any age for plan years beginning on or after January 1, 2014. Also applies to grandfathered plans.
3. No Lifetime or Annual Limits on Essential Benefits
PPACA prohibits lifetime and annual per-beneficiary dollar limits on benefits that are deemed “essential health benefits.”
However, regarding annual limits, until January 1, 2014, PPACA permits reasonable restrictions to be placed upon annual dollar limits (to be set by the Secretary of DHHS) on essential health benefits. The purpose of this temporary exception is to ensure access to needed services with minimal impact on premiums.
What precisely constitutes “essential health benefits” is to be more fully defined by future guidance. But PPACA lists the following broad categories of essential health benefits: ambulatory patient services, emergency services, hospitalization, maternity and newborn care, mental health and substance use disorder services, prescription drugs, laboratory services, preventive and wellness and chronic disease management, and pediatric services (including oral and vision care). Note that oral and vision care for adults are likely not essential health benefits.
Group health plans may place lifetime and annual dollar limits on benefits that are not “essential health benefits” (i.e., PPACA does not affect non-essential benefits).
Effective Dates. This provision is effective for plan years beginning on or after September 23, 2010, except restricted annual limits on essential health benefits will be allowed until January 1, 2014. For plan years starting after 2014, annual dollar limits on essential benefits are prohibited entirely. Also applies to grandfathered plans.
4. Prohibition on Recissions of Coverage
Group health plans cannot rescind health insurance coverage of an enrollee once the plan has been issued and the enrollee is covered.
This prohibition does not apply in cases where the enrollee has committed fraud or intentional misrepresentation, and it does not affect a group health plan’s right to terminate coverage upon nonpayment, loss of eligibility for coverage, or plan termination.
Effective Dates. This provision is effective for plan years beginning on or after September 23, 2010. Also applies to grandfathered plans.
5. Revised Appeals Process
Group health plans must provide enhanced claims appeal processes which expand upon the current ERISA mandate. There must be an internal review process for coverage and claims issues that complies with ERISA. In addition, group health plans must establish external review requirements. Fully insured plans must, at a minimum, include the consumer protections in the Uniform External Review Model Act from the National Association of Insurance Commissioners. If the group health plan is self-funded and not subject to state insurance regulations, then the plan must implement an external review program that is similar to that in the Uniform External Review Model Act and that meet standards established by the DHHS.
Effective Dates. This provision is effective for plan years beginning on or after September 23, 2010 (but employers may apply to the Secretary of DHHS for a grace period). Grandfathered plans are exempt from this requirement.
6. Cost of Employer-Provided Healthcare To Be Included On Form W-2
Under PPACA, employers will be required to disclose on an employee’s annual Form W-2 the value of the employee’s health insurance coverage sponsored by the employer. For purposes of the W-2, the value of the coverage will be determined in the same manner as COBRA premiums.
Effective Dates. This provision is effective for taxable years beginning on or after January 1, 2011.
7. Limits on Reimbursement for Over-the-Counter Drugs
Many people use tax-advantaged health flexible spending accounts (“FSAs”) to help pay for medical care not covered by insurance, such as costly over-the-counter medical supplies and drugs. Effective January 1, 2011, costs for purchasing most over-the-counter drugs may no longer be reimbursed through a health FSA or health reimbursement arrangement (“HRA”), and may no longer be reimbursed on a tax-free basis through a Health Savings Account (“HSA”) or Archer Medical Savings Account (“Archer MSA”). (This provision essentially conforms the definition of qualified medical expenses for health FSAs, HRAs, and HSAs to the definition used for the medical expense itemized deduction.)
Costs for insulin and prescribed drugs –even if those drugs would be available over-the-counter– may continue to be reimbursed through a health FSA or HRA or on a tax-free basis through an HSA or Archer MSA.
Effective Dates. This provision is effective for taxable years beginning on or after January 1, 2011.
8. HSA and Archer MSA Penalties Increased
Current law generally prescribes a 10% penalty for any distribution from an HSA for an item other than a qualified medical expense. Under PPACA, this penalty will increase to 20% effective January 1, 2011. At the same time, the comparable penalty for distributions from an Archer MSA will increase from 15% to 20%.
Effective Dates. The increased taxes apply to distributions from these accounts made on or after January 1, 2011.
9. Mandated Coverage for Preventive Health Services
Employer plans must not require cost-sharing for the following services: preventative care recommended by the U.S. Preventative Services Task Force; immunizations recommended by the Centers for Disease Control and Prevention; or preventative care screenings for infants, children, adolescents, and women provided for under the Health Resources and Services Administration.
Effective Date. Employers will have one year after a recommendation or guideline is issued to provide the listed services without cost sharing. Grandfathered plans are exempt from this requirement.
10. Mandated Patient Protections
Participants and beneficiaries must be allowed to designate a primary care provider from those physicians covered under the plan of choice for themselves and a pediatric primary care provider of choice for their children. Additionally, if a plan covers emergency department services, it cannot require prior authorization, impose different costs or requirements on non-network providers, or apply any other terms or conditions to coverage for that service. If a plan covers obstetrical and gynecological care, women must have direct access to such care without a referral or authorization.
Effective Date. Effective for plan years beginning on or after September 23, 2010. Grandfathered plans are exempt from this requirement.
11. Extension of Nondiscrimination Rules
Plans cannot discriminate in favor of highly compensated individuals with respect to eligibility or benefits. This nondiscrimination rule under the Internal Revenue Code Section 105(h) is extended from self-insured health plans to fully-insured group health plans.
Effective Date. Effective for plan years beginning on or after September 23, 2010. Grandfathered plans are exempt from this requirement.
12. Uniform Notice Requirements
Employers must provide new enrollees with a summary of benefits and coverage explanation, which must be presented in a way that can be understood by the average enrollee. The summary must indicate whether the plan provides minimum essential coverage and whether the plan pays less than 60 percent of the total cost of benefits provided under the plan. Thus summary must also provide a description of coverage and cost-sharing under the plan; exceptions, reductions and limitations on coverage; renewability and continuation of coverage provisions; a coverage facts label that includes examples to illustrate common benefits scenarios, including pregnancy and serious or chronic medical conditions; and contact numbers and web addresses where the actual group certificate or policy may be obtained. Further, plans must provide employees with 60 days prior notice of material changes to their plans. Willful noncompliance with this requirement will result in a $1,000 penalty per failure.
Effective Date. The summary must be available by March 23, 2012. Also applies to grandfathered plans.
13. National Voluntary Community Living Assistance and Support (CLASS) Program
PPACA establishes a new, voluntary, self-funded public long‐term care insurance program, to be known as the CLASS Independence Benefit Plan, for the purchase of community living assistance services and supports. For people employed by an employer who decides to participate, the employer will sign employees up automatically, with premiums handled through a payroll deduction. Any employee who chooses not to participate may do so by “opting out.” Neither employees nor employers are required to participate in the program. Employers may pay all or part of the premiums, but are not required to do so. The Secretary of DHHS will develop enrollment procedures for those who are self-employed or whose employer chooses not to participate in the automatic payroll deduction plan.
The program will pay a cash benefit of no less than $50/day. Higher cash benefits will be available for people with a greater need for assistance with basic activities such as bathing, eating, dressing, and mobility. The cash benefit will be adjusted annually for inflation, and there is no lifetime limit on the benefits.
Effective Dates. PPACA requires the Secretary of DHHS to release the details of the CLASS program no later than October 1, 2012, and it is likely that individuals will be able to sign up sometime after that.
14. New Limit on Contributions to Cafeteria Plan FSAs
Many people have become accustomed to making salary-reduction contributions to a health FSA offered through their employer’s cafeteria plan to reimburse themselves for medical expenses not otherwise covered by insurance. Although employers have been allowed to limit the amount their employees may contribute to a health FSA annually, there has been no federal limit on contributions. PPACA prohibits employees from contributing more than $2,500 annually to a health FSA. (This amount will be indexed in future years for cost-of-living adjustments.)
Effective Dates. Effective for taxable years beginning January 1, 2013.
15. Excessive Waiting Periods Prohibited
PPACA prohibits group health plans from establishing any waiting period that exceeds 90 days.
Effective Date. Effective for plan years beginning on or after January 1, 2014. Also applies to grandfathered plans.
16. Automatic Enrollment for Employees of Large Employers
An employer that has more than 200 full-time employees and offers its employees enrollment in one or more group health plans must automatically enroll new full-time employees in the plans. By amendment to the Fair Labor Standards Act of 1938 (29 U.S.C. 218), PPACA requires adequate notice and opportunity for an employee to opt out.
Effective Date. The statutory change contains no effective date, but the majority of commentators believe that the intent is that it will not be effective until January 1, 2014. It is expected that regulations will be issued, which will also clarify the effective date.
D. SUMMARY CHART
The follow chart summarizes the most significant changes that take effect for plan years beginning on or after September 23, 2010, and that will require employers to make changes in calendar year plans by January 1, 2011.
PLAN YEAR 2011 CHANGES
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Changes Affecting ALL Group Health Plans |
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Changes Affecting ONLY Non-Grandfathered Health Plans |
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Other Changes for Employers in 2011 |
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