|Oregon State Bar Bulletin JANUARY 2011|
For attorneys who don’t make a practice of curling up by a warm fire with a copy of sweeping Congressional legislation, “Health Care Reform” can feel like an endless maze of statutory references and effective dates — such a maze, in fact, that many of you may have opted for a quick legal summary of the law or opted to ignore it completely in 2010. However, even if your attitude to date has been one of steadfast indifference, it’s not too late to learn the basics you need to point clients and your own law firm in the right direction and address Health Care Reform’s effects on your own plans. You and your clients will be impacted by Health Care Reform in the coming years, so one of your New Year’s resolutions should be to learn about its impacts. Accordingly, the following information will ensure that regardless of whether you manage to hit the treadmill three times a week, quit smoking or meet your billable hours in 2011, you’ll be able to tick this resolution off your list — and you’ll be able to do it before you finish your coffee.
1. Find the Correct Law.
Health Care Reform is not a light read. It’s technical, messy and long. Plus, it’s a bit of a web; provisions within the two main legislative pieces, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (“Health Care Reform”), amend themselves — sometimes twice — and the numerous regulatory documents provide piecemeal and often contradictory direction. In addition, because it is constantly evolving, handy law firm or consulting firm summaries of the law you may find on the Internet are likely to result in outdated, inaccurate results. Attorneys attempting to learn Health Care Reform must start with the correct legislation and review the latest guidance to determine the impact of today’s provisions and tomorrow’s potential requirements.
2. Health Care Reform does not require any employer to offer health coverage, but it penalizes some who do not.
America’s health care system is largely delivered through Medicare and employer-provided group coverage today. As enacted, Health Care Reform does not change today’s delivery system for health care. Employers are not required to offer or pay for health coverage at any time. Health Care Reform provides access to health insurance for those individuals not eligible for Medicare or employer provided health insurance. However, reform will penalize some employers who fail to provide qualifying coverage as a cost offset to the new individual delivery system.
Beginning in 2014, employers with 50 or more employees who fail to offer coverage will be subject to a yearly civil penalty of $2,000 per employee (less the first 30 employees) if at least one of those employees purchases insurance through an exchange (exchanges are state-based health insurance portals created by Health Care Reform) and qualifies for government cost-sharing assistance in purchasing that insurance. Employers that choose to offer coverage will be penalized $3,000 for each employee who purchases insurance through an exchange and qualifies for government cost-sharing assistance in purchasing that insurance. All individuals are mandated to purchase insurance beginning in 2014, and therefore, an employee who does not receive insurance from his or her employer will purchase from the exchange out of necessity.
Looking at these penalties in action, if a client with 62 employees elects to forgo health insurance in 2014, that client would be subject to a penalty fee of $64,000 ((62-30) x $2,000) if at least one of the client’s employees qualifies for government assistance. Alternatively, if the client elects to offer coverage, and two employees qualify for government assistance the client would be subject to a penalty fee of $6,000 ($3,000 x 2) plus the amount the health insurance costs.
Employers typically pay more than $2,000 per employee per year to provide their employees with health coverage, so paying the penalty will be less expensive than offering health insurance for most employers. However, many employers believe providing health insurance is a moral obligation, and many employees consider employer health insurance as an entitlement. As a result, some employers considering whether to offer health insurance in 2014 may ultimately find that they are best served by paying penalties and directing employees to purchase individual coverage through the exchanges, while other employers may decide that the qualitative benefits of providing health insurance outweigh the potential cost savings.
3. The Internal Revenue Service has delayed the W-2 reporting requirement and may delay other provisions.
Among its many objectives, Health Care Reform amends the Internal Revenue Code to require employers to report certain health care costs on Form W-2, providing for increased disclosure. This amendment was initially scheduled to take effect in 2011, but in October 2010, the IRS delayed this requirement’s effective date. The Internal Revenue Service did not designate a new effective date, but it did provide that employers will not be required to comply in 2011.
Employees have a right to request their W-2s early, so once this requirement does take effect, employers will need to ensure compliance by the start of the tax year to which it applies, e.g., January of 2012. Health Care Reform also requires businesses to provide a Form 1099 to all entities receiving $600 or more in compensation during a given year, and this provision and others may be delayed as well due to administrative complexity.
4. Health Care Reform does not change the tax-exempt status of health care, and Oregon has not changed state income tax rules to conform to Health Care Reform.
Health care benefits have been exempt from taxation since 1954, and despite the W-2 reporting requirement, Health Care Reform does not eliminate this exemption. However, beginning in 2018, it will impose an excise tax on certain high-cost health plans (“Cadillac plans”). Health Care Reform allows tax-free coverage of dependents through the age of 27; however, as of the time of the writing of this article, the state of Oregon has not amended its tax code to allow for a similar tax-free status. Thus, for example, an employee covering a 25-year old dependent would be subject to Oregon state income tax for the value of the dependent’s coverage.
5. Employees who defer their salary for payment of
medical expenses should be aware of new rules.
Tax-advantaged health care accounts — such as like flexible spending accounts, health savings accounts and health reimbursement accounts — are a common feature in many employer health plans, and employees are in the habit of using these accounts for a wide-range of medical purchases, including nonprescription drugs. However, effective Jan. 1, 2011, employees are no longer able to use these accounts to purchase over-the-counter drugs and medicines unless they have a doctor’s prescription (other than insulin). In conjunction with this change, the tax on nonqualified purchases using a health savings account will increase from 10 percent to 20 percent. Then, beginning Jan. 1, 2013, maximum annual deferrals to a flexible spending account will be limited to $2,500. (The current limit is $5,000, although some employers impose a lower limit.)
6. Clients (and law firms) with fewer than 25 employees may want to look into the small employer tax credit.
Employers with fewer than 25 employees and average wages of less than $50,000 per year may be eligible for a tax credit equal to up to 35 percent of the employer’s eligible premium expenses if they pay for at least 50 percent of the cost of employees’ health care. Eligibility is based on full-time equivalents, so employers with a significant base of part-time employees should review guidance from the Internal Revenue Service on counting employees to determine if they may qualify for the credit.
7. Grandfathering is simple (sort of).
The concept of “grandfathering” in Health Care Reform is simple in theory. Grandfathering, which was designed in response to questions regarding individuals’ ability to retain existing health coverage, essentially creates a carve-out in the health care reform legislation through which existing plans can avoid some of the legislative requirements (as discussed in sections 8 and 9, below).
A plan is “grandfathered” for purposes of Health Care Reform if it had at least one participant on March 23, 2010 (the date Health Care Reform was enacted). In the union context, the plan’s eligibility for grandfathering turns on the expiration date the last collective bargaining agreement relating to the plan that was in place on Sept. 23, 2009. In all other situations, however, a plan will remain grandfathered unless and until it 1) raises coinsurance charges; 2) raises copayment charges more than $5 or a percentage equal to medical inflation plus 15 percentage points; 3) raises deductibles more than a percentage equal to medical inflation plus 15 percentage points; 4) lowers employer contributions by more than 5 percentage points; 5) adds a new annual dollar limit (unless replacing a lifetime limit of a same or lesser amount); or 6) significantly cuts or reduces benefits. Notably, while a change in insurance companies was initially sufficient to trigger a loss of grandfathering, a recent amendment to the grandfathering regulations eliminated this trigger.
As is clear from the exhaustive list of changes that can trigger a loss of grandfathering, grandfathering is not designed to be a robust or long-standing status. Rather, most employers are likely to lose grandfathering in the relatively near future, and even those not losing their status may find that their insurance carriers will treat their plan as nongrandfathered for improved efficiency. Employers wishing to remain grandfathered will want to take a close look at plan amendments to determine if a loss of grandfathering has occurred and will need to include a notice of grandfathered status along with any plan changes. A model notice is available on the Department of Labor’s website.
8. All health plans are required to comply now (or in the near future).
Health Care Reform began to truly take effect on Sept. 23, 2010, six months after its enactment. Consequently, all plans beginning a plan year after that date (Jan. 1, 2011, for calendar-year plans), are required to make amendments as necessary to meet the following requirements:
Plans may not impose lifetime limits on coverage for essential benefits.
Plans may not impose annual limits on coverage below certain standards (annual limits will be phased out through 2014).
Plans may not rescind coverage for individuals who make unintentional mistakes on coverage applications.
Plans must extend coverage to dependents through age 26, and most limitations, including marital and student status, are now prohibited.
Plans may be required to provide 60 days’ notice of all material plan modifications. (The effective date of this requirement is not clear; however, it appears to take effect in 2012).
Plans may not include coverage exclusions for children with preexisting conditions.
9. Nongrandfathered plans are subject to additional
In addition to the requirements discussed in section 8, nongrandfathered plans must comply with the following additional mandates by the start of their first plan year after Sept. 23, 2010:
Plans must cover certain preventative and wellness benefits without any co-payments or cost sharing.
Plans must allow for external independent claims reviews (though state requirements can be relied on until July 2011).
Plans must give out-of-network pediatric, ob-gyn and emergency care without preauthorization or increased cost sharing.
Plans that require participants to designate a primary care provider must permit each participant to designate any participating primary care provider who is available to accept such an individual.
Nondiscrimination testing on nongrandfathered insured plans was also initially required as of this date, but it has been delayed pending regulation further defining the new requirements.
10. Politics can change everything.
Health Care Reform is driven by legislation, regulation and appropriations. Health Care Reform is unlikely to be overturned in full, but its reliance on regulation and appropriations could nevertheless result in significant changes to its provisions in the years to come. The recent midterm elections shifted the majority in the House, so in the short term, the executive branch may have trouble securing appropriations to fund Health Care Reform. In addition, if the executive branch undergoes a political shift in the future, it could foreseeably issue administrative regulations designed to take much of the bite out of Health Care Reform. In short, it’s far too early to predict (or worry about) what provisions will ultimately take effect in 2014 and beyond.
ABOUT THE AUTHOR
Iris Tilley is an attorney at Barran Liebman in Portland, where she focuses on ERISA compliance and compensation advice. Contact her at (503) 276-2155 or firstname.lastname@example.org.
© 2011 Iris Tilley