Health Care Reform: Long-Term Implications For Employer Health Plans

June 16, 2010

The Patient Protection and Affordable Care Act (the “PPACA”), as amended by the Health Care and Education Affordability Act of 2010 (the “Reconciliation Act”), makes a number of sweeping changes to the nation’s health care system, which are phased in over a period of several years. This Client Alert outlines the changes that affect employer health plans in 2014.

With the changes almost four years in the future, and a Presidential election in the interim, it is highly likely that the PPACA will be amended before 2014; however, employers need to begin preparing for the 2014 changes today. The shared responsibility regime introduced by the PPACA, whereby both individuals and employers face penalties if minimum essential coverage is not maintained by the individual or provided at a reasonable rate by the employer, will impact the coverage that an employer may choose to provide in 2014 and later.

Coverage Mandate for Individuals

Beginning in 2014, individuals are required to have minimum essential coverage. An individual may obtain this coverage from an employersponsored plan, purchase it from an insurance company through a state-sponsored exchange, or qualify for a government-sponsored program, such as Medicare or Medicaid. In order to assist individuals in purchasing affordable coverage, the PPACA provides for employerprovided free choice vouchers that may be used to purchase individual coverage through an exchange, premium assistance tax credits, and cost sharing reductions, all of which are described below.

Employer-Sponsored Coverage

The PPACA will impact the specific benefits that are provided by employer-sponsored group health plans. Prior to the PPACA, employers sponsoring self-funded group health plans governed by the Employee Retirement Income Security Act of 1974 (“ERISA”) have, for the most part, been able to determine the benefits to be offered under their plans without reference to state or federal laws. The PPACA amended both ERISA and the Internal Revenue Code to require group health plans to comply with certain of the PPACA’s “market reforms” included in the Public Health Service Act. A prior Client Alert discussed the provisions that are effective prior to 2014. Effective as of 2014, all group health plans, including grandfathered plans that were in existence on March 23, 2010, may not impose lifetime or annual limits, may no longer limit coverage if an enrollee has a preexisting condition, and may not impose a waiting period longer than 90 days for enrollment. In addition, as of 2014 non-grandfathered plans must provide essential health benefits, coverage for clinical trial participation, and comply with other market reform provisions mandated by the PPACA. Self-funded group health plans, whether grandfathered or not, are still exempt from state specific insurance mandates that are more generous than those required by the Public Health Service Act. While nothing in the PPACA requires an employer to offer a group health plan, large employers are subject to nondeductible tax penalties if they do not offer coverage or if health plan coverage is inadequate or unaffordable.

No Coverage Provided by Employer

Beginning in 2014, any “large employer” must offer “minimum essential coverage” to all of its full-time employees and their dependents or pay a penalty. A large employer is one that employs at least 50 full-time equivalent employees for more than 120 days during the calendar year. A full-time employee is one who on average performs at least 30 hours of service per week. An employer’s full-time equivalent employees for the month is determined by adding (a) the number of full-time employees plus (b) the number determined by dividing the aggregate number of hours of service for the month of employees who are not full-time employees by 120. All employees of entities in a control group, as defined under Internal Revenue Code Section 414, are aggregated when determining if an employer is a large employer.

Any large employer not offering minimum essential coverage is subject to a non-deductible tax penalty if any of its full-time employees enrolls in a qualified health plan through an exchange and receives a premium assistance tax credit or a cost-sharing reduction. The penalty is assessed on the number of full-time employees in excess of 30. Employers will be penalized $166.67 per month for each full-time employee in excess of 30 or $2,000 per full-time employee annually. For example, if an employer with 50 full-time employees is subject to the tax penalty, and the employer did not offer minimum essential coverage at anytime during the year, the employer would owe a tax penalty of $40,000.

Employer Offers Costly or Inadequate Coverage

A large employer that offers minimum essential coverage that is unaffordable or does not provide minimum value is subject to a nondeductible tax penalty if at least one full-time employee enrolls in a qualified health plan through an exchange and receives a premium assistance credit or a cost-sharing reduction. The penalty is $3,000 annually for each full-time employee who enrolls in a qualified health plan and receives a premium assistance tax credit or cost sharing reduction.

An employer’s plan is unaffordable if the employee’s required contributions are greater than 9.5% of the employee’s household income. An employer that wants to avoid the penalty by offering group health coverage that is affordable may need to adjust the amount of contribution required by the lowest paid employees. In addition, the employer may need to make assumptions about its employees’ household income since this information is typically not available to it and it will only receive from the exchange the names of the employees who obtained subsidized coverage.

An employer’s plan does not provide minimum value if the plan’s coverage is designed to provide benefits that are actuarially equivalent to less than 60% of the full actuarial value of the benefits provided under the plan. A large employer that wants to avoid the penalty for providing less than minimum value will want to review these regulations with its TPA, insurer or consultant to determine if any modifications need be made to the employer’s plan so that it will meet the 60% threshold.

As an alternative to decreasing employee contributions or increasing benefit coverage levels, an employer could provide free choice vouchers to eligible employees and avoid the penalty for unaffordable or inadequate coverage.

An employer will pay the lesser of the tax penalty for offering no group health plan ($2,000 times number of full-time employees over 30) or for offering unaffordable or inadequate coverage ($3,000 times number of full-time employees who obtain a premium assistance tax credit or reduced cost-sharing).

Free Choice Vouchers

Employers offering minimum essential coverage through an employer sponsored plan are required to provide eligible employees with free choice vouchers. An employee is eligible for a free choice voucher if he or she meets all of the following requirements:

• the employee does not participate in the employer’s health plan;
• the employee’s required contribution to the employer sponsored plan is between 8% and 9.8% of his or her household income; and
• the employee’s total household income is at or below 400% of the federal poverty level.

As of May 31, 2010, 400% of the federal poverty line was $43,320 for a single individual and $88,200 for a family of four residing in the continental U.S.

The voucher will allow an employee to purchase coverage through the state-sponsored exchange. The amount of the voucher will equal the cost that the employer would have paid under its employer-sponsored plan to provide single coverage unless the employee elects family coverage. If the employer offers more than one plan with different levels of coverage, the voucher amount is based on the coverage under which the employer pays the largest portion of the cost.

The amount of the voucher that is used to purchase coverage through an exchange is not taxable income to the employee. The employee will be allowed to keep any excess voucher amount after purchasing coverage; however, this excess amount must be included in the employee’s gross income. Any employee receiving a free choice voucher is not eligible for the premium assistance credit for the purchase of coverage from the exchange.

Employers will be able to deduct the amount of free choice vouchers for tax purposes.

Premium Assistance Tax Credits

Certain individuals will be eligible to receive refundable tax credits that are used to pay premiums during the tax year for a qualified health plan purchased through a state exchange. An eligible taxpayer is an individual whose household income is at least 100% but not more than 400% of the federal poverty line and who is not eligible for Medicaid, an employer-sponsored plan or other acceptable coverage. Eligibility for and the amount of premium assistance credit will be determined in advance of the coverage year on the basis of household income and family size from two years earlier, and the monthly premium for the qualified health plan in the exchange market area in which the individual resides.

To receive the credit, the individual must enroll in a plan offered through the exchange and report his or her household income to the exchange. The IRS will pay the amount of the premium assistance credit directly to the insurance company. The individual is responsible for paying the difference between the health plan premium and the credit.

For employed individuals, the additional premium payments are made through payroll deductions. An employer could conceivably be required to forward these payroll deductions to a number of different insurance companies. An employer will be notified if an employee is eligible for the credit because the employer does not provide minimum essential coverage through an employer-sponsored plan or because the coverage the employer provides is unaffordable. The notice the employer receives will provide information concerning any potential penalty the employer may need to pay.

Importantly, also beginning in 2014, under the Fair Labor Standards Act, as amended by the PPACA, employers will be prohibited from discriminating against employees who receive premium assistance tax credits.

Reduced Cost-Sharing

Eligible low-income individuals may also qualify for reduced costsharing under a qualified health plan purchased through a state exchange. Cost-sharing refers to out-of-pocket co-payments, coinsurance and deductible amounts that are not covered by the health plan. An individual who enrolls at the “silver level” in a qualified health plan offered through a state exchange and whose household income is between 100% and 400% of the federal poverty line is eligible for the reduced cost-sharing. The actual amount of the reduction to an individual’s cost-sharing will depend on his or her household income. The Secretary of Health and Human Services will notify the issuer of a qualified health plan of an individual’s eligibility for reduced cost sharing.

Penalties for Individuals who Fail to Obtain Coverage

Individuals who fail to maintain minimum essential coverage must pay a penalty. The penalty will be the lesser of:

1. the national average insurance premium for a bronze level plan for the year, determined based on the applicable family size; or
2. the greater of:

• a percentage of the individual’s household income (up to 2.5% in 2016); or
• a set dollar amount that starts at $95 in 2014, increases to $325 in 2015, $695 in 2016 and is indexed thereafter.

The penalty is assessed when the individual files his or her annual income tax return. A parent is responsible for the tax penalty charged with respect to a dependent child that does not have coverage. Only time will tell whether the amount of the penalty along with the premium assistance tax credits, reduced cost-sharing, and free choice vouchers will be a sufficient incentive to encourage individuals to purchase coverage.

State Exchanges

No later than January 1, 2014, each state is required to establish an American Health Benefit Exchange that facilitates the purchase by individuals of qualified health plans in that state. A qualified health plan is defined by the PPACA and is required, in part, to provide essential health benefits coverage. There may be different levels of coverage offered by insurers, known as the bronze, silver, gold and platinum levels of coverage. To be a qualified health plan, the plan must be offered by an insurer who offers at least one health plan in the silver level and one in the gold level and who agrees to charge the same premiums on the exchange as it would charge elsewhere.

Additionally, an exchange will provide for the establishment of a Small Business Health Options Program or SHOP. This program will be designed to help small employers enroll their employees in qualified health plans. A state may choose to provide only one exchange that provides exchange services for both qualified individuals and qualified small employers. While states manage their exchanges, the Department of Health and Human Services will establish criteria for certification of health plans as qualified health plans.

Beginning in March 2013, employers will be required to notify employees of the services provided by the state exchange. An employer whose plan does not provide minimum value must also advise an employee that he or she may be eligible for premium assistance tax credits or a cost sharing reduction if the employee purchases a qualified health plan through an exchange, and that if an employee elects to purchase coverage through the exchange and the employer does not offer a free choice voucher, the employee will lose the employer’s contribution to coverage, at least part of which may be excluded from taxable income.

Additional Reporting Requirements

As might be expected, large employers will be required to report certain coverage information to the covered individual and the IRS. This information includes a certification as to whether the employer offers minimum essential coverage and if such coverage is offered, the length of the waiting period to enroll in such coverage, the months during the calendaryear for which the coverage was available, the monthly premium for the lowest-cost option, the employer’s share of the total allowed costs of benefits, the number of full-time employees for each month during the calendar year, and the name, address, and taxpayer identification number of each full-time employee during the calendar year and the months, if any, during the calendar year that the employee and any dependents were covered under the employer’s plan. If any required contribution of any employee exceeds 8% of that employee’s compensation, the employer must also provide information about the coverage option for which the employer pays the largest portion of the cost of the plan and the amount that the employer pays for such coverage. This reporting information is required for calendar years beginning after December 31, 2013, and will be due on the January 31st following the end of the calendar year.

Wellness Plans

Additionally, the PPACA provides employers with the ability to increase the incentive given to an employee who satisfies a healthstatus wellness standard. Effective for plan years beginning on or after January 1, 2014, the maximum reward that an employer can provide for participating in such a wellness program will be increased from 20% to 30% of the cost of coverage under the plan. The plan must  allow individuals to qualify for the reward at least once each year. A reasonable alternative standard for obtaining the incentive or wavier of the applicable standard must be provided for any individual for whom it is unreasonably difficult due to medical conditions, or it is medically inadvisable to attempt to satisfy the otherwise applicable standard.

Next Steps

An employer should determine whether it is a large employer subject to the penalty for failure to provide coverage and the extent to which it employs individuals who work on average at least 30 hours per week but are not eligible for health care coverage. The employer should identify the extent to which its employee population may be eligible for a free choice voucher or a premium assistance tax credit, and whether the employer is willing to reduce the employee contribution so to avoid eligibility for either or both of these programs. The benefits offered under an employer’s plan should be reviewed to determine if the plan would cover at least 60% of the actuarial value of the benefits provided under the plan.

An employer who is contemplating eliminating health coverage in 2014 will want to consider all the costs associated with such a decision, including the additional compensation that it may have to pay to middle income employees who will not be eligible for the premium assistance tax credit, and how this additional income will increase the employer’s payroll taxes and workers’ compensation costs. Nonmonetary costs and benefits, such as whether health coverage is needed to attract talent and the ability to influence employees’ health through prevention and wellness programs should also be considered. As additional guidance is issued, employers will want to reassess their preliminary conclusions as to how they will respond to 2014’s “pay or play” regime.

For more information, please contact:

Deborah L. Grace is a member in the Troy
office. Her expertise is in Employee Benefits Law,
including welfare benefit plans, qualified retirement
plans and non-qualified deferred compensation
plans. She can be reached at 248.433.7217 or dgrace@
dickinsonwright.com.