President Obama signed the Affordable Care Act into law on March 23, 2010. Many of its requirements became effective at various times over the last three years:
- Making health care coverage available to children of plan participants until they reach age 26.
- Eliminating lifetime limits and annual limits on essential health benefits (with certain exceptions for grandfathered plans).
- Revising claims procedures to comply with new rules.
The effective date for most of these provisions was the first day of the plan year beginning on or after September 23, 2010 (January 1, 2011 for calendar year plans). If you have not yet made these required plan amendments you should contact your employee benefits professional immediately.
Some ACA provisions Are Only Applicable to Non-Grandfathered Plans:
- Preventive care services must be provided without cost sharing requirements – non-grandfathered status could have some additional expenses.
- Participants may select primary care providers, including pediatric care providers, and OB/GYNs from any such provider who participates in the plan’s network.
- Emergency care services must be provided without prior authorization and without regard to whether the emergency health care provider is a participating provider.
- Insured group health plans will be subject to nondiscrimination rules similar to those currently in effect for self funded plans. This will be a serious problem for discriminatory plans – $100 per day penalty for each individual discriminated against. The IRS has said this rule will not be effective until final regulations are issued. Recently, an IRS official stated that they hope to issue those regulations later this year. He noted that the IRS is very aware that employers will need time to comply with these regulations. Our prediction is that they will not be effective until at least 2015.
- Out-of pocket maximums. These become effective in 2014. This limit caps the amount a participant must pay by way of co-pays and cost sharing, and will apply to all plans. Specific imitations on deductibles will apply only in the small plan fully insured markets. Depending on your plan’s current provisions, this could be a significant cost, starting next year.
- Internal and external appeals processes must comply with new rules.
After finishing the first stage of PPACA compliance, employers were faced with a new set of requirements. Among these were:
- The coordination of HRAs with ordinary group health plans to ensure compliance with the prohibitions of lifetime and annual maximum benefits.
- Reporting the value of group health care coverage on employees’ Forms W-2.
- Creating and distributing the newly-required Summary of Benefits and Coverage, and
- Understanding and complying with the new 60-day advanced notice requirement for any “material modification” in a group health plan.
As previously discussed, the ACA generally prohibits group health plans from imposing annual and lifetime dollar limits on essential health benefits. Health Reimbursement Accounts, or HRAs, are group health plans that typically consist of an employer’s agreement to reimburse medical expenses up to a certain dollar amount. Thus, it is virtually impossible for an HRA to comply with PPACA’s prohibition on annual or lifetime dollar limit.
The final rules that implement the prohibition on annual and lifetime dollar limits made a distinction between HRAs that are “integrated” with other employer health coverage and those that “stand-alone.” Specifically, the rules provide that when an HRA is integrated with other employer health coverage that, by itself complies with the ACA’s annual and lifetime dollar limit prohibitions, the HRA will not violate PPACA because the combined benefit satisfies the requirements.
Although the ACA’s prohibition on lifetime or annual dollar limits has been in effect since 2010, any amounts credited to an existing HRA before January 1, 2014, may be used after December 31, 2013, without violating the ACA, regardless of whether the HRA is integrated. However, for future years, an HRA will be in violation unless participation in the HRA is conditioned on participation in another group health plan which, together with the HRA, meets PPACA’s prohibition on lifetime or annual dollar limits. Your HRA document should be amended to reflect this provision.
PPACA requires employers to include the aggregate cost of employer-provided health care coverage on employees’ Forms W-2. Originally, the effective date of this change was for taxable year 2011. However, IRS issued guidance delayed the effective date of the reporting requirement until the 2012 tax year (i.e., W-2s that were issued this past January).
IRS has also issued additional guidance that includes a delay in the W-2 reporting requirements until further guidance is issued for the following employers:
- Employers filing less than 250 W-2s for the previous calendar year;
- Employers sponsoring self-funded plans that are not subject to COBRA (e.g. self funded church plans); and
- Federally recognized Indian Tribal Government and Tribally Chartered Corporations wholly owned by a federally recognized Indian Tribal government.
Reminder: PCORI Fees Due Soon
Under PPACA, certain fees, known as Patient-Centered Outcomes Research Institute (“PCORI”) fees, have been established for funding medical research and comparing outcomes of various medical techniques. PCORI fees are assessed against insurers for fully insured plans and against plan sponsors of self-insured plans. (See our June 2013 Newsletter for further details.)
The PCORI fees for each plan year are due by July 31 of the calendar year immediately following the last day of the plan year. Because the fees first became effective October 1, 2012, this means that if an employer sponsors a self-insured plan with a plan year that ended any time from October 1, 2012 through December 31, 2012, the first PCORI fees must be paid by July 31, 2013. Other plan sponsors will not be required to pay the PCORI fees until 2014.
Plan sponsors of self-insured plans must remit the fees to IRS annually using IRS Form 720.
Recently, the IRS has issued a Chief Counsel’s Memorandum stating that PCORI fees are tax deductible. The IRS said that Code Section 162 allows a taxpayer to deduct all ordinary and necessary expenses incurred by the taxpayer in carrying on a trade or business. Because the PCORI fees are required to be paid by certain issuers or sponsors, the IRS ruled the fees to be both ordinary and necessary and, therefore, deductible under Code Section 162.
The Department of Labor has previously stated that, with the exception of multiemployer plans, PCORI fees may not be paid out of plan assets because the fees are imposed on the sponsor of the self-insured plan and not the plan itself.
Summary of Benefits and Coverage (SBC)
The ACA requires group health plans and insurers to provide a new four-page “summary of benefits and coverage” or SBC. The material in the summary must use uniform, understandable language and include items such as cost sharing, limitations on coverage, examples of common benefit scenarios and whether the plan provides the minimum essential health benefits that individuals will need to avoid penalties under the PPACA. The summary can be no longer than four pages and the font cannot be smaller than 12 point.
The summary must be provided with or in addition to the plan’s summary plan description. The summary can be provided as a stand alone document or in combination with other plan materials if it is intact and prominently displayed at the beginning of the materials. The summary must be provided in a “culturally and linguistically appropriate form” and a translated summary must be provided upon request. The summary can be provided in paper format, or electronically, if the disclosure complies with the DOL’s rules.
The DOL and HHS have issued sample template summaries that can be used to fulfill the summary obligations. During the first year of applicability, no penalties will be imposed on group health plan sponsors that make a good faith effort to comply with the SBC requirement. Plan sponsors should document their efforts in case they need to avail themselves to this good faith compliance policy.
Notice of Modification
Employers that make mid-year material modification in any terms of the plan or coverage that is not reflected in the SBC must provide notice of the modification to enrollees no later than 60 days before the date that the modification takes effect. Providing an updated SBC reflecting the modification no later than 60 days before change takes effect will satisfy the obligation.
A material modification is “any change that average participants would find important and that would affect content of Summary of Coverage and Benefits.”
Employers are required to comply with the advanced notice requirement for any mid year changes once the SBC requirement becomes applicable to their group health plan.
Final Stage of ACA Compliance
The final stage of ACA compliance includes:
- Essential benefits – 10 categories of coverage that will be required in the small group market.
- 90-day waiting period. Plans may not impose waiting periods of more than 90 days after an employee or dependent is otherwise eligible. There is some chance the rules might be changed to allow initial enrollment no later than the first day of the calendar month following 90 days of service, but so far the $100 per day penalties will be triggered if affected individuals are not enrolled within 90 days.
- Annual out of pocket, maximums and deductible limits. Applies to almost all plans.
- Automatic enrollments in group health plans. Be prepared for required administrative changes in response to upcoming agency regulations.
- Health Care Exchanges. These will allow individuals to purchase insurance coverage on their own, without regard to preexisting health conditions. But if some of your employees receive subsidies because of their purchase of insurance through an Exchange, you, the employer, can be subject to penalties.
- Individual Mandate. Basically, the tax penalty imposed on individuals who do not have PPACA-compliant health insurance.
As of 2014, PPACA requires that non-grandfathered health insurance coverage offered in the individual and small group markets, both inside and outside of the health insurance exchanges, offer a standard package of coverage known as “essential health benefits.” PPACA identifies the following ten broad statutory categories of EHBs:
- Ambulatory patient services
- Emergency services
- Maternity and newborn care
- Mental health and substance abuse disorder services
- Prescription drugs
- Rehabilitative and habilitative services and devices
- Laboratory services
- Preventive and wellness services and chronic disease management, and
- Pediatric services, including oral and vision care.
However, the ACA neither defines the specific benefits required under each category nor sets a uniform standard for EHBs. In fact,the ACA requires the Secretary of HHS to define the specific benefits under each EHB category. Proposed regulations clarify that EHBs will be defined on a state-by-state basis using a benchmark approach. After a state selects its base-benchmark plan, it will be updated, as needed and used to define EHBs for the state.
Employer-sponsored self-insured and insured large group health plans are not required to offer all EHB categories or comply with EHB benchmarks; only non-grandfathered plans insured in the small group market must provide EHBs and conform to EHB benchmark standards.
Although employer-sponsored self-insured and insured large group health plans are not obligated to offer EHBs, they still cannot place lifetime or annual limits on EHBs provided under the plan. Accordingly, these plan sponsors will be required to understand the EHB benchmark standards for the state in which their plan operates in order to review their plan to ensure that it does not illegally impose lifetime and annual limits on EHBs.
For plan years starting in 2014, the out-of-pocket maximums, including both insured and self-insured plans of large and small employers, cannot exceed the self-only and family out-of-pocket maximums applicable to HSA-qualified high deductible health plans. These amounts will be indexed annually. The annual out-of-pocket maximums for qualified high deductible health plans for 2013 are $6,250 for self-only coverage and $12,500 for family coverage.
Under PPACA, employers with more than 200 employees will be required to automatically enroll new full time employees in one of their group health plans, giving the employees adequate notice and the opportunity to opt out of the plan.
Unfortunately, the law does not say when this provision is to be effective. Instead, it requires DOL to set the effective date through regulations. DOL originally intended to issue guidance by 2014. However, DOL recently acknowledged the guidance will not be ready by that time. According to DOL, employers do not need to comply with auto enrollment until the regulations are issued. DOL notes that the auto enrollment regulations will have a prospective effective date that will allow employers enough time to meet the requirement.
This means that many questions remain unanswered. For instance, under these auto enrollment rules, will an employer be responsible for enrolling only the employee or the employee’s entire family? If the employer has multiple plan options, can it choose the option in which the employees will be enrolled? What time frames will be involved and will coverage have to be retroactive to the date of hire? So, we will have to wait for regulatory guidance to get some answers.
Nevertheless, employers should currently be examining their HRIS and Benefit Systems to see if they are capable of handling these automatic enrollments, including the provision allowing an employee to reject the automatic enrollment.
The Affordable Care Act requires each state to set up its own Exchange for the purchase of providing health insurance coverage. Exchanges are arrangements through which insurers offer small employers, and individuals, the ability to purchase health insurance coverage.
Each Exchange will offer four “metal” categories of plans plus a catastrophic plan including:
- Bronze Plan – Essential Health Benefits covering 60 percent of the costs of the plan, with an out-of-pocket limit equal to the current maximum annual deductible and other out-of-pocket expenses for High Deductible Health Plans, which are $6,250 for individuals and $12,500 for families in 2013.
- Silver Plan – Essential Health Benefits covering 70 percent of the plan benefit costs, with High Deductible Health Plans out-of-pocket limits.
- Gold Plan – Essential Health Benefits covering 80 percent of the Plan benefit costs, with High Deductible Health Plans out-of-pocket limits.
- Platinum Plan – Essential Health Benefits covering 90 percent of the Plan benefit costs, with High Deductible Health Plans out-of-pocket limits.
- Catastrophic Plan – Available to individuals up to age 30, or to those who are exempt from the mandate to purchase coverage. This plan provides for catastrophic coverage only, with the coverage level set at the current High Deductible Health Plan levels except that the preventive benefits and coverage for three primary care visits would be exempt from the deductible.
Required Health Care Exchange Notice: Employers must provide a written notice to each current employee and to each newly hired employee, that explains:
- The existence of the state’s insurance Exchange including a description of the services provided by the Exchange, and the manner in which the employee may contact the Exchange to request assistance.
- If the employer’s plan pays less than 60 percent of the total allowed costs of benefits provided under the plan, a statement that the employee may be eligible for a premium tax credit and a cost-sharing reduction if the employee purchases a qualified health plan through the Exchange.
- If the employee purchases a qualified health plan through the Exchange, a statement that the employee may lose the contribution to any health plan offered by the employer and that all or a portion of any employer contribution may be excludable from income for Federal tax purposes.
The Health Care Exchange Notice was originally required to be distributed by March 1, 2013, but this requirement has been delayed until later this summer, in order to coordinate distribution efforts with the first open enrollment period for the Exchanges. The DOL has released a model notice for employers to use.
One of the ACA’s most basic rules is the requirement that individuals have minimum essential health care coverage or face a tax penalty. An individual is considered to have minimum essential coverage for any month in which he or she is enrolled in one of the following types of coverage:
- Employer sponsored coverage (including COBRA and retiree coverage);
- Coverage purchased in the individual market; and
- Government sponsored coverage, such as Medicare coverage (including Medicare Advantage), Medicaid coverage, Children’s Health Insurance Program coverage, veterans coverage or TRICARE; and
- Any other health benefits coverage, such as state health benefits risk pool, as recognized by the HHS Secretary.
Minimum essential coverage does not include specialized coverage for only vision care or dental care, workers’ compensation, disability policies, or coverage for a specific disease or condition.
PPACA provides certain statutory exemptions from the individual mandate. Individuals who meet the following criteria are exempt from paying the shared responsibility penalty:
- Members of religious organizations that object to coverage on religious principles;
- Members of health care sharing ministries (i.e., non-profit religious organizations where members share medical costs);
- Members of federally recognized Indian tribes;
- Individuals with incomes below the minimum threshold for filing a tax return;
- Individuals who have a gap in minimum essential coverage of less than three consecutive calendar months in a year;
- Individuals who qualify for a hardship exemption;
- Individuals who cannot afford coverage because their required contribution towards minimum essential coverage exceeds 8 percent of their annual household income;
- Individuals who are incarcerated; and
- Individuals not lawfully present in the United States.
U.S. citizens residing in a foreign country are also generally exempt from the shared responsibility penalty so long as they meet certain requirements, such as living abroad for the entire calendar year.
Penalties for Violating Individual Mandate
Penalties for noncompliance with the individual mandate for health coverage are determined by calculating the greater of either a flat dollar amount or set percentage of income. For 2014, the penalty amount will be the greater of $95 per adult and $47.50 per child under age 18 (maximum of $285 per family) or 1 percent of income over the tax-filing threshold. For 2015, the penalty amount will increase to the greater of $325 or 2 percent of income over the filing threshold. And for 2016, the penalty amount will again increase to the greater of $695 or 2.5 percent of income over the tax filing threshold. After 2016, the flat-dollar penalty amount will be indexed for inflation.
The 2014 shared responsibility penalties are payable when individuals file their 2014 federal income tax returns in 2015. If the penalty applies for less than a full calendar year, the penalty is prorated to 1/12 of the annual penalty per month without coverage.
Employer Mandate Postponed One Year
Often called the “play-or-pay” provision, the employer mandate is basically the penalty employers will pay for non-compliance.
Beginning in 2014, the ACA’s employer shared responsibility provisions were to require employers with 50 or more full time equivalent employees to provide affordable health care coverage that offers a minimum level of coverage or pay a penalty. The Obama Administration recently announced that this requirement will be postponed to 2015.
When the requirement becomes effective, employers will determine whether they reach the 50 full time equivalent threshold and are subject to the mandate by averaging the number of full time employee equivalents from the calendar months of the previous calendar year.
An employer will determine its monthly full time equivalent employees count by adding: (i) each employee who works more than 30 hours per week (i.e., full-time), plus (i) the total number of hours worked during a month by employees who are not full-time divided by 120. Monthly counts are then totaled and divided by 12. If the resulting number is 50 or more, the employer is subject to the mandate.
All employees of all members of the employer’s controlled group (or affiliated service group) must be counted when determining whether an employer is subject to the mandate. However, penalties imposed under the mandate will be done on an individual member basis. In other words, a member of a controlled group of corporations that provides health coverage to its full-time employees and dependents will not be subject to the penalty because another member of the controlled group does not. If a member of a controlled group is assessed a penalty under the mandate, the calculation of the penalty will be based on the number of full time employees employed by that member and not by the total number of full time employees within the controlled group.
In general, only work performed in the U.S. will be required to be counted by employers when determining hours of service for purposes of counting full time employee equivalents. Thus, if a foreign employer has a large workforce worldwide but less than 50 employee equivalents in the U.S., that employer would not be subject to the mandate. Employers can also exclude workers that are exclusively employed outside of the U.S., regardless of whether the workers are U.S. citizens.
Penalties for Violating Employer Mandate
Beginning in 2015, employers with 50 or more full time employees are subject to penalties if: (i) they fail to offer group health coverage to “substantially all” of its full-time employees; and (ii) a low-income, full-time employee receives a premium tax credit through an Exchange. In those situations, the employer must pay an annual penalty of $2,000 multiplied by: the number of full-time employees, minus 30.
An employer is considered to have offered health care coverage to “substantially all” of its employees if the offer is made to at least 95 percent of the full-time employees. Therefore, an employer that offers health coverage to 97 percent of its full-time employees is not subject to the $2,000 penalty but may be subject to the $3,000 penalty which will be discussed shortly.
For purposes of determining penalty amounts, only actual full-time employees are counted. Generally, a full-time employee is an employee who is employed an average of at least 30 hours per week. Hours of service include not only hours when work is performed but also hours for which an employee is paid or entitled to payment, even when no work is performed, such as vacation, sick leave, and holidays.
Premium Tax Credit
And what are premium tax credits? Beginning in 2014, individuals who are enrolled in group health plan coverage purchased through a health care Exchange may be eligible for a premium tax credit or cost-sharing subsidy.
The premium tax credit is available to individuals with incomes up to 400 percent of the Federal Poverty Level, excluding illegal immigrants and individuals eligible for employer-sponsored coverage, Medicare, Medicaid, CHIP, TRICARE or coverage through Veterans Affairs. The amount of the premium tax credit is equal to the lesser of:
- The total monthly premium for the taxpayer and any covered dependents; or
- The amount by which the adjusted monthly premium for the second lowest “Silver” plan purchased through the health insurance exchange exceeds a defined percentage of household income.
Penalties for Insufficient Employer Coverage
Under a second penalty provision, employers that offer coverage may still be subject to a penalty starting in 2015 if all three of the following conditions apply:
- The plan either: (a) has a value that is less than a minimum value of 60 percent; or (b) a full-time employee’s contribution for employee-only coverage exceeds 9.5 percent of the employee’s household income.
- The employee’s household income is less than 400 percent of the federal poverty level; and
- The employee waives the employer’s coverage and purchases coverage on an Exchange with premium tax credits
Under PPACA, an employer-sponsored health plan fails to provide minimum value to its participants and beneficiaries if its share of total allowed costs of benefits is less than 60 percent of the costs. The IRS has issued proposed regulations which offer three approved methods for measuring whether a plan provides minimum value:
- The minimum value calculator, which will be made available by HHS and IRS for use by employer-sponsored self-insured group health plans;
- Any safe harbor approach approved by HHS and IRS; and
- Certification of minimum value by an actuary where the minimum value calculator and safe harbor approaches are not appropriate.
The penalty will be calculated separately for each month in which these conditions apply. The amount of the penalty for a given month equals the number of the employer’s full-time employees who receive a premium tax credit for that month multiplied by 1/12 of $3,000. However, this penalty is capped at $2,000 multiplied by: the number of full-time employees minus 30.
For purposes of this second penalty, coverage is “unaffordable” if the employee’s share of the premium costs more than 9.5 percent of his or her annual household income. However, employers generally do not know their employees’ household incomes. To address this uncertainty, the IRS has issued guidance which provides the following affordability safe harbors that employers may rely on to ensure that their coverage is affordable:
- W-2 safe harbor. If the employee’s contribution for single coverage under the employer’s lowest cost medical option does not exceed 9.5 percent of the employee’s Box 1, W-2 pay for that year, the affordability test is satisfied.
- Rate of pay safe harbor. If the employee’s monthly contribution for single coverage under the employer’s lowest cost medical option does not exceed 9.5 percent of the employee’s monthly wage amount, the affordability test is satisfied.
- Federal Poverty Line safe harbor. If the employees contribution for single coverage under the employer’s lowest cost medical option does not exceed 9.5 percent of the federal poverty line for a single individual, the affordability test is satisfied.
Action Steps for Employers
As 2014 nears, employers must continue their implementation of the PPACA’s various reforms and coverage mandates, and although they will not be subject to the pay-or-play mandate until 2015, there are many other rules that are already applicable and many more that are becoming law with which employers must comply.
The Wagner Law Group offers a PPACA “audit” to ensure that you are compliant with ERISA and the Affordable Care Act, as well as other laws, such as HIPAA and COBRA, among others. Please contact us if you’d like us to perform this necessary review of your documents and status.