Health-Care Reform: Critical Issues for Large Employers
|Editor's note: See "Recent Employment Law Changes" in the Spring 2010 issue of HR Horizons for the author's overview of employee-friendly laws signed by former President George W. Bush and President Obama that have taken effect since 2009.|
Ira M. Shepard
The Patient Protection and Affordable Care Act (aka “Health Care Reform Act”) signed into law earlier this year by President Obama is potentially the most significant change in health care and health-benefits law ever passed, as some commentators believe it will lead to greater collective changes in the provision of health-care benefits than the Employee Retirement Income Security Act (ERISA), Medicare, and Medicaid combined. The 2,400-page law is so complex that it defies accurate summary in one article. This article focuses on the issues that directly impact colleges and universities as large employers.
Overall, many of the provisions in the new law are geared to expanding access to health-care coverage through a mix of incentives for private insurance and a dramatic expansion of public programs, including new health-care cooperatives and exchanges as well as new individual and employer requirements concerning the acquisition and provision of health-care benefits and insurances. In general, the new law will require all U.S. citizens to purchase health-care coverage or otherwise be covered by a health-care plan. The Congressional Budget Office estimates that 32 million of an estimated 54 million uninsured Americans will obtain coverage as a result of the law.
Whereas ERISA imposed no specific requirements on the substance of what kinds of health-care benefits employers must provide and contained no minimum health-benefit rules, the new law will require some employers to provide health-care benefits meeting certain minimum requirements or face penalties. At this point, flagging the overarching issues and changes is more important than providing definitive guidance, which may evolve as the new law is implemented through interpretive regulations that are still months away—if not a year away, in some cases—from being issued.
Overview of Changes for Employer Group Plans
Since about half of all health-care benefits in the United States come from employer-provided plans, the new mandatory coverage and benefits requirements will impact the provision of at least half of all health-care benefits in the nation, and most likely much more. Likewise, reforms made across the health-care system have interactive effects, and none will be felt more acutely than in the employer market. Small and large employers alike can expect systemic changes during the next several years that will likely limit their options, increase benefit costs for many, reduce benefit costs for some, raise compliance costs, and change how health care is financed for all.
The benefits of the employer-based structure are well known. They include risk pools that are not formed on the basis of health status; ease of acquisition by workers; better negotiating power than individual consumers; economies of scale that breed administrative efficiencies; and covered workers who are more likely to be healthy and productive. ERISA and the Internal Revenue Code combined uniform regulation and flexibility with tax incentives to encourage employer-sponsored health insurance. Under the code, the cost of employer-sponsored health coverage is excluded from taxable income for the employee and deductible for the employer. ERISA provides a framework that permits employers that have employees residing in multiple states to offer and administer their health plans uniformly under a single set of federal rules that also allows them to respond quickly to the changing needs of the labor force. This type of system gave businesses the flexibility to design health plans that maximize tax benefits while meeting the unique needs of their employees.
The recently enacted health-care reform legislation moves away from the voluntary, flexible, employer-sponsored health-insurance system. The legislation imposes a mandate that many employers provide health insurance and effectively forces some employers to change what coverage they offer. This includes a minimum package of benefits determined by law. Failure to comply with the new requirements will lead to employer penalties. In the end, some employers may weigh the cost of providing coverage against these penalties and decide to drop coverage altogether. Under this scenario, some workers may suffer as flexible employer coverage is replaced by public programs.
Among the major provisions impacting employer group plans are these:
- Mandate to provide coverage or pay fines (firms with less than 50 employees not subject to mandate).
- Mandate to cover specific benefits in the small group market.
- New small-business tax credit to purchase coverage.
- New insurance exchanges for the small employer and individual markets.
- Limits on underwriting.
- Elimination of tax deduction for retiree drug subsidies.
- Restrictions on flexible spending account (FSA) salary deferral contributions.
- Existing plans grandfathered as of date of enactment from some, but not all, of the new plan requirements.
Penalty for Employers Depending on Whether Coverage is Offered
Beginning in 2014, employers that employed an average of 50 full-time employees during the previous calendar year must offer health coverage that meets minimum essential coverage requirements or pay a fine. The one exception is for firms with more than 50 employees that have no employees receiving a tax credit for health insurance. (Note: A premium tax credit is a credit available to taxpayers with income below 400 percent of poverty and who purchase health coverage in the individual or small-group market through an exchange. The credit is not available to any taxpayer eligible for employer-sponsored coverage unless the required contributions under the employer-sponsored plan equals or exceeds 9.5 percent of household income or the actuarial value of the employer-sponsored plan is less than 60 percent.)
For employers with more than 50 employees that offer coverage and have even one employee access a tax subsidy or cost-reduction benefit for health insurance, penalties are $3,000 per each employee who receives the tax credit. Employers that do not offer coverage and have one employee receiving the tax credit in an exchange must pay $2,000 per full-time employee after exempting the first 30 full-time equivalents.
The Joint Committee on Taxation estimates employers will pay $52 billion in penalties over 10 years for noncompliance.
Free-Choice Voucher Program
Beginning in 2014, an employer that offers health coverage to its employees must provide free-choice vouchers to each qualified employee. For the purpose of this program, qualified employees are employees who do not participate in a health plan offered by their employer, whose share of the premium costs required under the employer-sponsored plan exceeds 8 percent but is less than 9.8 percent of their household income, and whose household income is less than 400 percent of the federal poverty level (e.g., less than $88,200 for a family of four, for whom the federal poverty level is currently $22,050).
The amount of the voucher is equal to the largest portion of what the employer would have paid to provide health coverage to the employee under the employer-sponsored plan. The voucher amounts paid by the employer are tax deductible as compensation and are excluded from income for the employee. Employers that provide free-choice vouchers are not subject to penalties for employees who receive premium tax credits or cost-sharing reductions for coverage in an exchange. Employees may keep any difference between the voucher and the cost of coverage (which is treated as taxable income), possibly encouraging employees to move out of employer plans.
Other Employer Requirements
Large firm automatic enrollment program. Employers with more than 200 full-time employees and that offer enrollment in one or more health-benefit plans are required to automatically enroll new full-time employees in a health-benefit plan after enabling regulations are released. Furthermore, the automatic enrollment must include adequate notice to the employee of the right to opt out of the coverage.
Employee notification requirements. The new law requires all employers to provide each employee written notification of the existence of health-insurance exchanges and subsidies. New notification requirements that will take effect on March 1, 2013, include the following:
- Information about the existence of the exchange.
- A description of the services provided by the exchange.
- Details of how the employee may contact the exchange for assistance.
- A statement that the employee may be eligible for a premium tax credit for a qualified health plan purchased through an exchange if the actuarial value of the employer’s health-benefit plan is less than 60 percent.
- Notification that the employee will lose the employer contribution toward health coverage, and that all or a portion of the contribution may be excludable from federal income taxes, if the employee purchases a qualified health plan through an exchange.
Large employer reporting requirements. Applicable large employers are subject to increased reporting required by the Secretary of the Treasury. Required information includes:
- Details about the employer (name of business, employer identification number).
- Whether full-time employees are offered coverage through an employer-sponsored plan.
- Details regarding the employer-sponsored plan (waiting period, availability, premium costs, employer’s share of costs of benefits).
- Number of full-time employees for each month during the year.
- The name, address, and tax identification number of each full-time employee during the year and the months during which he or she was covered under the employer-sponsored health-benefit plan.
Essential health-benefits package. An essential health-benefits package refers to coverage that provides for essential health benefits. The package limits the cost sharing for such coverage and limits the deductible for small-group plans. The scope of the essential health benefits is intended to be equal to the scope of benefits provided under a typical employer plan and may be further expanded by the Secretary of Health and Human Services (HHS). All essential health-benefits packages must limit total out-of-pocket spending for covered benefits in new plans to no more than the limits for health savings accounts. The Committee on Ways and Means estimates these amounts will be $6,200 for an individual and $12,300 for a family in 2014. Minimum essential health-benefits package required services include:
- Ambulatory patient services.
- Emergency services.
- Maternity and newborn care.
- Mental health and substance use disorder services.
- Prescription drugs.
- Rehabilitative services.
- Laboratory services.
- Prevention and wellness services and chronic disease management.
- Pediatric services, including oral and vision.
Implementation Timeline for Employer Provisions
What follows is a projected implementation timeline for employer provisions under the Health Care Reform Act, as outlined by the U.S. Chamber of Commerce in its white paper, “Critical Employer Issues in the Patient Protection and Affordable Care Act.”
- Provide tax credits to certain small employers with no more than 25 employees and average annual wages of less than $50,000 that provide health insurance for employees.
- Create temporary reinsurance program for employers providing health-insurance coverage to retirees older than age 55 who are not eligible for Medicare.
- Limit the tax deductibility of executive compensation to $500,000 per individual employed by health-insurance providers.
First plan year beginning on or after Sept. 23, 2010
- Require individual and group policies to provide coverage for adult children up to age 26.
- Prohibit individual and group policies from imposing lifetime annual limits on insurance coverage, although certain annual limits may be imposed on coverage as determined by the HHS Secretary until 2014.
- Prohibit rescission of health-insurance coverage, except in cases of fraud or misrepresentation.
- Grandfather existing individual and group plans with respect to new benefit standards, but require grandfathered plans to adhere to some new conditions, including extension of dependent coverage and prohibition of restriction on coverage.
- Require employers (after enabling regulations issued) with more than 200 employees to automatically enroll employees into employer-offered health-insurance plans. Employees may opt out.
Beginning in 2011
- Establish a national, voluntary insurance program for purchasing long-term care insurance, known as the Community Living Assistance Services and Supports (CLASS) Act program.
- Provide grants for up to five years for small employers (employers with fewer than 100 employees who work 25 hours per week) that establish a wellness program.
- Initiate five-year state demonstration programs to address alternative approaches to existing medical malpractice litigation.
Beginning in 2013
- Create Consumer Operated and Oriented Plan (CO-OP) program to aid development of nonprofit, member-run, health-insurance companies to offer qualified health plans.
- Eliminate the tax deduction for employers receiving Medicare Part D retiree drug subsidy payments.
- Increase the itemized medical expense deduction threshold from 7.5 percent to 10 percent of adjusted gross income. Temporarily (year 2013 through 2016) exempt individuals 65 years or older.
- Limit FSA salary deferral contributions to $2,500 per year, indexed for inflation.
- Impose 2.3 percent excise tax on medical devises.
Beginning in 2014
- Establish state-based health-insurance exchanges through which individuals may purchase qualified health-insurance coverage.
- Create Small Business Health Options Program (SHOP) exchanges where small businesses (up to 10 employees) may purchase qualified health-insurance coverage.
- Require individuals to have qualifying health-insurance coverage or face a penalty, which is phased in over time.
- Assess employers with more than 50 employees that do not offer coverage and have at least one full-time employee receiving a premium tax credit a fee of $2,000 per full-time employee (excluding the first 30 employees from the assessment).
- Penalize employers with more than 50 employees that offer coverage and have at least one full-time employee receiving a premium tax credit a fee of $3,000 for each employee receiving a premium credit. The total penalty amount is capped at the amount an employer would have to pay if no insurance coverage were offered.
- Create an essential health-benefits package providing a comprehensive set of services covering at least 60 percent of the actuarial value of the covered benefits and limit the cost sharing such that the out-of-pocket expense does not exceed that applicable to health savings account-related coverage.
As one of the largest groups of large employers, colleges and universities are in store for many changes in how they offer group health benefits, what they offer, and what they provide employees in terms of required alternatives in the years to come as a result of this landmark legislation. Responsibility for planning and execution of the new administrative changes and new requirements will fall directly on the shoulders of the staffs of college and university business officers and human resource professionals who will be charged with legal compliance questions as well as making the workforce comfortable and content with the required changes—no easy challenge. As always, education is key, and in this case, professional staffs must recognize now that they will be charged with knowing and understanding the new requirements. By flagging the most important large-employer changes on the horizon, this article can serve as a first chapter in professional education with regard to the new health-care reform act.
Ira M. Shepard is an attorney with the law firm Saul Ewing, LLP. He has long served—for 30-plus and 20-plus years, respectively—as outside general counsel to CUPA-HR and ACCT (Association of Community College Trustees), two members of the Washington Higher Education Secretariat. E-mail: firstname.lastname@example.org.