Barlament (left) and Pelikan (right)
By John L. Barlament and Kirk A. Pelikan, Michael Best & Friedrich, LLP, Milwaukee
April 7, 2010 – On March 21, 2010, the U.S. House of Representatives passed major health care reform legislation that is likely to affect every citizen and every employer in the country. The Patient Protection and Affordable Care Act (H.R. 3590) (PPACA) is the same bill passed by the U.S. Senate on December 24, 2009. President Obama signed the Act into law on March 23, 2010. On March 25, 2010, the House and Senate each passed the Health Care and Education Reconciliation Act of 2010 (H.R. 4872). The Reconciliation Act modifies some of the PPACA provisions and is meant to be read in conjunction with PPACA. The President signed the Reconciliation Act into law on March 30, 2010.
The PPACA and the Reconciliation Act will affect nearly every group in the health care arena: large employers, small employers, individuals, insurers, and medical providers. This article focuses mainly on changes for medium- and large-sized employers.
High-level impact: Medium and large employers
Most medium- and large-sized employers (more than 50 employees) that offer traditional health coverage will likely see the least amount of changes – but there will be significant changes. These changes are likely to apply to both fully-insured and self-funded plans. Significant points to note:
Must offer minimum coverage. If an employer does not offer “minimum essential coverage” the employer likely will pay a fee of $2,000 per year per employee (calculated on a monthly basis).
Incentive to subsidize coverage. If an employer offers health coverage, an employee may not select it because the employer contribution is too small and the coverage is not affordable. (The “affordability” test examines whether the employee’s cost exceeds 9.5 percent of the employee’s household income.) If the employee is eligible for a federal subsidy for coverage, the employer may be penalized up to $3,000 per year for each of these employees (calculated on a monthly basis). This appears to be an effort to ensure that employers subsidize coverage sufficiently to keep such individuals in the employer’s plan, rather than the federally subsidized individual market.
- Must offer better coverage. PPACA (as amended by the Reconciliation Act) imposes new mandates on the type of coverage that must be offered. Changes include:
covering adult children up to age 26 in some circumstances;
eliminating lifetime limits and restrictive annual limits;
eliminating preexisting condition exclusions;
requiring coverage of certain preventative services (e.g., immunizations and infant screenings); and
prohibiting a “rescission” of coverage.
These changes can be somewhat complicated. They often have different effective dates and some changes do not apply to a “grandfathered” plan. The Reconciliation Act does provide some good news for employers struggling with how to calculate the fair market value of coverage for older dependents. (Many employers in Wisconsin are subject to a relatively new law (Wis. Stat. § 632.885) providing that older dependents, usually through age 26, be allowed to remain on a parent’s health plan.) It appears that the Reconciliation Act will, effective immediately, provide that such coverage generally is not included in an employee’s income.
New reporting obligations. Certain plan coverage information must be reported to the federal government (e.g., the aggregate cost of coverage must be reported on Form W-2).
Retiree health subsidy. An employer that offers retiree health coverage may be eligible for a subsidy from the federal government.
New taxes on high-cost plans. The so-called “Cadillac” tax on high-cost plans remains in place although. However, under the Reconciliation Act, the effective date is pushed back to 2018 and the threshold limits are increased to $10,200 for single coverage and $27,500 for family coverage.
Limits on health FSAs; HSAs. Beginning in 2013, health flexible spending arrangement contributions would be capped at $2,500 per year. Additionally, beginning in 2011, PPACA restricts a participant’s ability to use FSA and HSA funds to purchase unprescribed over-the-counter medications.
High-level impact: Small employers
Small-sized employers will face many of the same restrictions noted above (e.g., the requirement to offer better coverage, new reporting obligations, retiree subsidies, new taxes on high-cost plans and limits on health FSAs). However, employers with 50 or fewer employees will not face the $750 employee tax (or, under the Reconciliation Act, $2,000) for failing to offer coverage. Certain small employers with fewer than 25 employees and annual wages of less than $50,000 will receive a tax credit based on the employer’s contributions toward plan coverage.
High-level impact: Individuals
Beginning in 2014, nearly every U.S. citizen and legal resident must obtain minimum health insurance coverage. Tax penalties for failing to do so begin at $95 per person in 2014 and increase to $695 in 2016. A federal subsidy to purchase insurance would be available for those with income levels between 100 to 400 percent of the federal poverty level. There are exemptions from this requirement available to individuals for religious reasons and based upon Native American status.
Uncertain impact: Employers with collective bargaining agreements
"Grandfathering" of health plans provided for in collective bargaining agreements, whether insured or through participation in single or multiemployer trusts, is presently unclear. Numerous labor agreements have provided for "reopeners" as legislation has continued. Employers that provide health benefits pursuant to a collective bargaining agreement will want to pay particular attention to this provision.
What should employers do next?
Review the accompanying table, which summarizes many changes and their effective dates, and identify changes that will likely impact your health plans and your business (or, for attorneys, your clients and their plans). Consider both the short-term changes (e.g., new mandates that are effective later this year or early next year) and long-term concerns (e.g., considering whether to modify the plan to avoid any “Cadillac-tax” issues). Clients should be advised to discuss their situation with their benefits consultant/broker and legal counsel.
Resources
• Patient Protection and Affordable Care Act (PPACA)
• Health Care and Education Reconciliation Act of 2010
• Table summarizing many (but not all) of the changes the PPACA introduced; table focuses on the changes for large employers
John Barlament, Duke 1997, is a partner and Kirk Pelikan, Marquette 2004, is an associate in the Employee Benefits Practice Group at Michael Best & Friedrich LLP, Milwaukee. Reach Barlament at (414) 225-2793 or Pelikan at (414) 223-2529.
