By: Carol Lucas, Esq., Arthur Chinski, Esq., Philip Wolman, Esq., Joshua Mizrahi, Esq.
On June 28, 2012, the U.S. Supreme Court, to the surprise of some, held that the Patient Protection and Affordable Care Act (the “Act”) was constitutional. Although the focus of the constitutional challenge was the requirement that all Americans have health insurance, the Act represents comprehensive health insurance reform that will have a direct impact on employers. The Act provides for the establishment of “exchanges” through which employers will be able to purchase health insurance for their employees, and imposes new requirements on employers and the employer-sponsored health insurance plans.
Beginning in 2014, all U.S. citizens and legal residents will be required to obtain qualifying health insurance, and there will be automatic employee enrollment requirements for employers with more than 200 employees. Employers will have to provide specified minimum levels of coverage to employees or pay an excise tax. Also an employer provided voucher program for employees will be implemented, as further elaborated below.
Even though some of the provisions will only take effect beginning 2014, a number of provisions have already taken effect. The Act did exempt (i.e., “grandfather”) certain health plans existing on or before the enactment date from some of the Act’s requirements. Employers’ grandfathered group health plans may also continue to enroll new employees and their families in plans existing on the enactment date without application of a number of the new requirements, but such plans will be subject to the excise tax on “excess” benefits.
The following is a brief synopsis of the provisions that specifically affect employers and an implementation timetable.
Effective on passage of the Act (March 23, 2010), the Act prohibits employers from denying benefits or precluding an employee from participating in a health program that receives Federal financial assistance based on an employee’s race, color, national origin, sex age or disability. The prohibition will be enforced through existing Federal anti-discrimination statutory law.
Further, the Act prohibits an employer from discharging or discriminating against any employee because that employee: (1) received a subsidy under the Act, (2) provided information to a government entity or his/her employer relating to actions that the employee reasonably believed to be a violation of Title I of the Act (i.e. sections regarding employer-sponsored group health plans), (3) provided testimony regarding such a violation, (4) assisted or participated in a proceeding relating to a violation, or (5) refused to participate in any activity, practice or task that the employee reasonably believes is in violation of the Act.
Small Businesses Implications
For tax years 2010 to 2013, qualified small businesses are eligible for tax credits up to 35 percent of certain qualifying contributions for health coverage. Small employers generally include employers with fewer than 25 full-time employees with annual average wages of $50,000 or less per employee. The amount of the credit is reduced for employers with 10 to 25 employees and average annual wages not to exceed $50,000 per employee. Qualified small businesses will be able to purchase insurance for their employees through state-based web portals that will be called Small Business Health Options Programs. These programs will allow small businesses to pool together in order to spread, and thereby minimize, financial risk.
For tax years 2014 and later, qualified small businesses that purchase coverage through an exchange will be permitted a tax credit of up to 50 percent of the employer’s contribution toward the employee’s health insurance premium if the employer contributes at least 50 percent of the total premium cost. Beginning in 2014, a qualifying employer may claim this credit for a maximum of two years. The full credit will be available to employers with 10 or fewer employees and average annual wages of $25,000 or less, with smaller credit amounts available to employers with more employees or higher average wages, and no credits available to employers with more than 25 full-time equivalent employees or average wages of at least $50,000 per year.
Restrictions on Annual and Lifetime Limits
Plans and insurers are prohibited from imposing lifetime limits on the dollar value of those of the benefits to be provided to any participant or beneficiary that constitute essential health benefits. Essential health benefits are defined by the Act to include emergency services, maternity and newborn care, hospitalization, pediatric care, and substance abuse services. Plans will also be prohibited, prior to 2014, from imposing annual limits on the dollar value of the essential health benefits to be provided to participants or beneficiaries, except for any annual limit that qualifies as a restricted annual limit. This rule applies to grandfathered plans as well as non-grandfathered plans.
Prohibition on Rescissions
Plans are prohibited from rescinding coverage except in cases where the covered individual committed fraud or intentional misrepresentation. All plans are subject to this provision.
Coverage for Preventative Care
Plans must provide for certain preventative care and immunizations. There can be neither deductibles nor cost-sharing for this coverage.
Plans that provide dependent coverage must include coverage to a participant’s children (married or unmarried) up to the age of 26. This provision applies to grandfathered plans. There is no requirement, however, to provide coverage for children of covered dependent children.
Employers who provide minimum essential coverage will be required to file information returns with the Internal Revenue Service stating, as applicable, any employee who pays a premium, and the coverage and amount paid. There will be penalties imposed on any employer who fails to file an information return.
Internal Revenue Code section 105(h) is extended to fully-insured group health plans. Essentially, there may be adverse tax treatment to officers, 10 percent owners, and highly compensated employees who participate in insured as well as self-insured health plans that discriminate in favor of such employees with respect to eligibility for coverage and benefits.
Pre-existing Conditions for Children Under the Age of 19
Plans may not impose a pre-existing condition exclusion or limitation for children under the age of 19. (Note: prohibition on pre-existing condition exclusion or limitation becomes effective for adults in 2014).
Certain Employer Tax Changes
Effective in 2013, the Act eliminates the deduction previously permitted employers for the Medicare Part D subsidy. Further, beginning in 2013, employers with employees whose modified adjusted gross incomes exceed $200,000 for single filers and $250,000 for married filers will be subject to an additional 0.9 percent FICA (social security) tax increase on any wages above these figures. A parallel 0.9 percent social security tax increase will also apply to self-employed individuals. While not an employer tax per se, individuals with income exceeding these thresholds, beginning in 2013, will be subject to an additional 3.8 percent additional Medicare contribution tax on their unearned income, such as income from interest, dividends, rents, royalties, annuities and certain capital gains.
Flexible Spending Accounts
Effective in 2013, maximum annual contributions to flexible spending accounts will be reduced from $5,000 to $2,500.
Effective 2014, employers must also meet the following requirements:
Employers are not required to provide health insurance coverage under the Act. However, employers with 200 or more full-time employees that offer at least one health plan benefit option must enroll all new employees into a health insurance plan offered by the employer.
Any employer with 50 or more employees that does not offer coverage and who has at least one full-time employee who receives a premium tax credit will be assessed a fee of $2,000 per full-time employee, excluding the first 30 employees. Employers with more than 50 employees that offer coverage but have at least one full-time employee receiving a premium tax credit will pay the lesser of $3,000 for each employee receiving a premium credit or $2,000 for each full time employee. Employees may opt out of coverage.
Employers will be permitted to offer employees rewards of up to 30 percent, increasing up to 50 percent if appropriate, of the cost of coverage for participating in a wellness program and meeting certain health-related standards.
Free Choice Voucher
If an employer pays a portion of the cost of coverage under an employer-sponsored plan, then the employer must also provide “free choice vouchers” to employees whose income is less than 400 percent of the poverty level. The “free choice voucher” corresponds to the monthly portion of the cost of coverage that the employer would have paid in the event the employee was covered under the employer’s plan. The free choice voucher can be used by the employee to purchase alternative health care coverage through the exchanges. The amount of the free choice voucher is deductible by the employer.
The Act has already begun to affect employers and their group health plans, and now seems to be here to stay. The foregoing is a brief synopsis of the most significant provisions of the Act that will affect employers now and in the future. Of course, this Act is voluminous legislation containing general and specific provisions and requirements which will take interpretation, rulemaking and, possibly, further litigation to completely understand its full impact on business entities and society in general. If you have a question about this Client Alert, please do not hesitate to contact Buchalter Nemer’s Labor and Employment Practice Group, its Tax Practice Group or its Health Care Practice Group.