HEALTH CARE REFORM:

What it Means for Employers

April 2010Tye AndersenJackson Walker L.L.P.

100 Congress Avenue, Suite 1100Austin, Texas 78701

512-236-2007tandersen@jw.com

April 2010

The Bills

Patient Protection andAffordable Care Act

(PPACA)Passed March 23, 2010

Health Care and Education Reconciliation Act of 2010

Passed one week later

Grandfathered Plans

• What is it?• Adding new

employees ordependents is okay

• Can we modify it some? Probably

Grandfathered Plans, cont.• Grandfathered Plans are exempt from the

following requirements:– Coverage of preventative cost– Non-discrimination rules for fully-insured plans– Claims procedures– High risk pools– Electronic transaction standards – Cover certain clinical trial treatment– Transparency requirements

Grandfathered Plans, cont.• Grandfathered Plans are exempt from the following

requirements (cont.)– Require plans to implement various activities such as case

management, reduction in hospital readmission and wellness programs and report the status report to Secretary of HHS and participants

– Require certain choice of providers for pediatric and ob/gyn care and require in-network coverage for emergency room visits to non-network providers Allow for HHS to annually review premium increases

– Restrictions on premium rate differentials by age, geography and tobacco use (insurers only)

– Guaranteed issue and renewability (insurers only)– Prohibit discrimination based on health status, including increase

in premium reduction for wellness programs (insurers only)– Limit cost sharing

Grandfathered Plans, cont.• Grandfathered Plans (pre-March 23, 2010) are

required to:– Not have lifetime limits– Not have pre-existing conditions exclusions for dependents under

age 19• No pre-existing conditions exclusions for anyone (Jan. 1, 2014)

– Restricted annual limits from 2011-2013 and eliminate annual limits in 2014

– Prohibition on rescission– Extend coverage to unmarried or married, adult children to age 26– Use the standard uniform explanation of coverage (once

developed)– Give rebates if MLRs do not meet the applicable standards (only

for insurers, not self-funded plans)– Not have waiting periods greater than 90 days (Jan. 1, 2014)

Annual and Lifetime Limits• No lifetime dollar limit on “essential benefits”• Restricted annual dollar limits on “essential benefits”

– What does “restricted” mean for 2011-2013? It’s unclear

– In 2014, no annual dollar limits at all

Questions – • Is there a difference between in-network and out-of-

network? Probably not• Retiree programs? Probably not allowed• Are non-dollar limits okay? Maybe

Essential Benefits• Secretary of HHS will issue regulations defining essential

benefits• However, these general categories are “essential”:

– Ambulatory patient services – Emergency services– Hospitalization – Maternity and newborn care – Mental health and substance use disorder services – Prescription drugs – Rehabilitative services and devices – Prevention and wellness services and chronic disease

management, and – Pediatric services, including oral and vision care

Dependent Coverage Until Age 26• Meaning of age 26• Definition of dependent• Married or unmarried• Plan only has to cover the adult child, not

spouse or dependents• Coverage is not included in income for employee

or for adult child• “Full time student status” cannot be a

requirement• COBRA qualifying event and 125 plan event

Over the CounterDrug Prohibition

• Effective January 1, 2011• End of tax-advantaged treatment of OTC drugs• Prohibits reimbursement of OTC drugs from:

– FSAs– HRAs– HSAs

• Prescription drugs and insulin can still be reimbursed

Individual MandateIn 2014, all individuals must obtain health insurance or pay a penalty, which would be the greater of:

2014: 1.0% of AGI or $95/person

2015: 2.0% of AGI or $325/person

2016: 2.5% of AGI or $695/person

Indexed after 2016

Family flat dollar amount capped at 300% of individual penalty

Hardship Exemption: Individuals below tax filing threshold

The Exchanges• Beginning in 2014, states are required to create Health Insurance Exchanges where

individuals and employers can purchase health insurance, either through private insurers or a co-op

• Actuarial value: Bronze (60%), Silver (70%), Gold (80%), Platinum (90%)• Exchange open to employers with less than 100 employees• States can tinker with this limit or open exchanges to large employers after 2016 • Premium subsidiaries and cost-sharing subsidies available for individuals who are

below 400 % of the federal poverty level ($43,000 for individual, $88,000 for family of four)

• Employees, whose employer does not offer coverage, are eligible to obtain coverage from the Exchange

• Employees, whose employer does offer coverage, are eligible to join an Exchange if their employer coverage is unaffordable (9.5% of AGI) or the employer plan does not have at least a 60% actuarial value (bronze level)

• Overall, increased administrative burden for employers

Employer Mandate• Starting in 2014• If employer does not provide coverage and at least one employee

obtains low-income premium subsidy in an Exchange, there is a penalty of $2,000/year x number of full-time employees (30 hours/week)– Not deductible by employer

• Employer does provide coverage but– Employer plan fails:

• 60% bronze level test, or• 9.5% AGI affordability test; and• Employee enrolls in Exchange and receives low-income subsidy

– Employer does not have to calculate affordability test, employee discovers eligibility after going to the Exchange

– Penalty of $3,000 per employee with subsidy– Maximum of $2,000 times number of full-time employees

Small Employer Tax Credit

• Employers with less than 25 employees who do offer coverage

• Employee average wages must be less than $50,000

• Eligible for federal tax credit up to 35% of their premiums

• Effective immediately

VouchersStarting in 2014, if employer offers health care insurance, then:• Employer must offer cash voucher to any employee whose premium

is between 8% and 9.5% of the employee’s household income and whose income is below 400% of the FPL

• Voucher is equal to the greatest employer contribution which employer would have made to its own plan(ex. HMO only, HMO-PPO)

• Any excess amounts is given to the employees as wages

• No employer penalty for employees who receive a voucher

• Voucher amount is deductible by the employer

• Vouchers are excluded from employee’s income

• Administrative difficulties anticipated

New Employer Requirements• Starting in 2014 automatic enrollment mandatory for

large employers with 200+ employees who offer coverage after two notices and opportunities to opt-out

• Additional reporting and notice requirements– Explanation of Exchange (3/31/2013)– Reporting of insurance coverage to the IRS and the participant

(2014)– W-2 reporting of the value of employer-provided group health

coverage excludable from employee’s gross income• health, dental, vision, employer HSA contributions, and HRA

contributions– Cadillac tax calculation and reporting in 2018

• Excludes dental and vision costs for calculation

Cadillac Tax

• 40% tax on value above $11,850/$30,950 for retirees and high-risk industries

• Indexed at CPI-U+1% for 2019, CPI-U only after 2019• Higher indexing based on age and gender• Which benefits count? All medical benefits as well as account-based

plans (HSAs, FSAs, HRAs)• Excludes dental and vision• Tax applies for non-profits, multi-employer and governmental plans• Double-dipping allowed

• Begins in 2018

• 40% tax on value above $10,200 individual and $27,500 family

Tax Changes• Industry fees

– Health Insurers ($60.1 billion over 10 years)– Law exempts some VEBAs– Pharmaceutical Industry ($27 billion over 10 years)– Medical devices (2.3% excise tax on 1st sale, $20

billion over 10 years)• Medicare Hospital Insurance (HI) Tax

– Currently 1.45%– Increases tax rate from 1.45% to 2.35% starting in

2013 for high-income earners (income in excess of $250,000 for joint filers; $200,000 for single filers)

– 3.8% tax on net investment income (income in excess of $250,000 for joint filers; $200,000 for others

– Does not include distributions from qualified retirement plans

• Itemized medical deduction threshold increased from 7.5% of AGI to 10% starting in 2013

Other Issues

• Medicare Advantage plans– Not as advantageous to employers as in the

past• CLASS Act• Increased HSA penalty for non-medical

distributions (was 10%, now 20%)• FSA cap of $2,500 starting in 2013• Small employer “Simple” Cafeteria Plans

Immediate Implications• Health insurance reforms. These apply to the first plan year beginning after September 23, 2010:

– Extension of health plan coverage for adult dependent children up to age 26.– Eliminate pre-existing condition exclusions for children under age 19.– Eliminate lifetime limits and modify annual limits.

• Changes to medical reimbursement, HSA and HRA plans starting in 2011 regarding OTC reimbursements. Starting in 2011:

– These plans may no longer be used to reimburse for over the counter drugs, unless pursuant to a prescription from a doctor

– This may impact "grace period" claims from January to March of 2011 on account of 2010 elections– In addition, the excise tax on amounts distributed for nonmedical expenses increases to 20% from 10%

• Expanded W-2 Reporting. Starting for 2011 (due in January of 2012):– Employers must report the aggregate cost of employer sponsored health insurance coverage.

• Tax credit for employers with 25 or fewer employees. Effective now– Employers are eligible for a credit based on the employers cost of health insurance– Average wages must be $50,000 or less– Credit is on a sliding scale up to 35%

• Adoption of Temporary High Risk Pool– May replace the Texas high risk pool– Effective June 2010– Applies to individuals who do not have insurance.

The Tan Tax

• 10% tax on amounts paid for indoor tanning services

• EffectiveJuly 1, 2010

Tax on tanning?

That should bea deductable

business expense!

20120100

20120111 20122012 201201

3320120144

20120155

20120166

20120177

20120188

20120199

20220200

Jan. 1, 2020Jan. 1, 2020Part D

“donut hole”filled

Jan. 1, 2018Jan. 1, 2018Cadillac tax

is established

Jan. 1, 2014•Annual dollar limits prohibited

•Free choice vouchers for exchange •Auto enrollment required for employers

with 200+ employees•Low income premium subsidy for the exchange

•Individual & employer mandates effective•No waiting periods longer than 90 days

•Health insurance exchanges established•Pre-existing condition exclusions

prohibited for everyone

Jan. 1, 2013Jan. 1, 2013•Medicare (HI) tax•Health care FSA

contributions cappedat $2500

Jan. 1, 2011•Prohibition of lifetime dollar limits•Restriction on annual dollar limits

•Pre-existing condition exclusions fordependents under 19 years of age prohibited

•Dependent child coverage expanded to age 26•OTC drugs ineligible for FSA, HSA, HRA reimbursements

•Uniform explanation of coverage (once promulgated)•Phase out of Part D “donut hole” begins

•CLASS Act (long-term care program)•Medicare Advantage funding reduced

•W-2 reporting for 2011 tax year

11stst Qtr, 2010 Qtr, 2010RDS accounting

changes

Health Care ReformHealth Care ReformSummary of Selected Summary of Selected

ChangesChanges

Jan. 1, 2012Jan. 1, 2012Tax on comparative

effectiveness research

TimelineTimeline(as of March 30, 2010) *(as of March 30, 2010) *

*Timeline indicates calendar year

grandfathering plan