Health Care Reform Considerations as 2014 Approaches
Recently, I decided to tackle some long overdue
home improvement projects, including modernizing a number of lighting and
electrical fixtures. Clearly, I am in the insurance industry for a reason. As I
tried to decipher various electrical schematics, I thought to myself, this must
be what health care reform looks like to everyone else. That suspicion actually
had been raised a few months earlier. On November 7th, my phone began to ring—a
lot. Clients, bankers, accountants, coworkers, friends, and prospects all had
one thing in common: each hoped that the election would lead to resolution of
the issue of health care reform. In this article, we’ll tackle a few of the
big considerations and touch on information business leaders need to know as we
enter the Patient Protection and Affordable Care Act’s (ACA’s) implementation
home stretch.
How will your business be
impacted? That largely depends on how many people you employ. Overwhelmingly,
concerns about the “Pay or Play” penalties have been at the forefront. So let’s
start there.
Pay or Play Rules
The ACA brings many changes to employers and health
plans. One such change essentially amounts to a requirement for some employers
to offer a certain level health care coverage to their employees or face
penalties. While ACA does not explicitly mandate an employer to offer employees
acceptable health insurance, beginning in 2014, some employers with at least 50
full-time equivalent employees will face penalties if one or more of their
full-time employees obtain(s) a premium credit through an Affordable Health
Insurance Exchange (“Exchange”—addressed in more detail later). An individual
may be eligible for a premium credit either because the employer does not offer
coverage, or the employer offers coverage that is either not “affordable” or
does not provide “minimum value.”
Only large employers may be
subject to the penalties regarding employer-sponsored health insurance. To
determine whether an employer is a large employer, both full-time and part time
employees are included in the calculation. Full-time employees are those
working an average of 30 or more hours per week. The number of full-time
employees excludes full-time seasonal employees who work for less than 120 days
during the year. The hours worked by part-time employees (that is, employees
working less than 30 hours per week) are included in the calculation of a large
employer, on a monthly basis, by taking their total number of monthly hours
worked and dividing by 120.
Example—A company has 35 full-time employees
(working 30+ hours/week). In addition, the company has 20 part-time employees
who all work 24 hours/week (96 hours/month). The part-time employees’ hours
would be treated as equivalent to 16 full-time employees, based on the
following calculation:
20 Employees x 96 Hours/120 =
1,920/120 = 16
This company would be considered a large employer,
based on a total full-time equivalent count of 51. That is, 35 full-time
employees plus 16 full-time equivalents based on part-time hours.
What Happens if I Am Not a “Large
Employer?“
If, after completing the calculation above, you
determine that you are not a large employer, your business will not be subject
to penalties. Determining whether or not to continue offering health benefits
to your employees will be driven solely by your unique business environment.
Many employers will continue to offer benefits because they see those benefits
as a critical component of their compensation package that improves their
ability to attract and retain a quality workforce. Other employers will
discontinue their benefits offering, or they may elect to make a contribution
toward the insurance but allow their employees to make their own insurance
selections through their local Exchange.
Potential Tax Penalties in 2014 on Large Employers
Regardless of whether or not a large employer
offers coverage, it will be potentially liable for a penalty beginning in 2014
only if at least one of its full-time employees—those individuals working 30
hours/week or more—obtains coverage through an Exchange and receives a premium
credit.
Part-time workers are not
included in penalty calculations, even though they are included in the
determination of whether an employer is a large employer. An employer will not
pay a penalty for any part-time worker, even if the part-time worker receives a
premium credit.
In contrast, although seasonal
workers are not included in the determination of large employer status, if an
employer is determined to be a large employer without counting its seasonal
workers, it still potentially could face a penalty for each month that a
full-time seasonal worker received a premium credit for Exchange coverage.
Beginning in 2014, individuals
who are not offered employer-sponsored coverage, and who are not eligible for
Medicaid or other programs, may be eligible for premium credits for coverage
through an Exchange. These individuals will generally have income between 138
percent and 400 percent of the federal poverty level.
Individuals who are offered
employer-sponsored coverage can only obtain premium credits for Exchange
coverage if, in addition to the other criteria above, they also are not
enrolled in their employer’s coverage and their employer’s coverage meets
either of the following:
- The individual’s required contribution toward the plan premium for
self-only coverage exceeds 9.5 percent of household income;or
- The plan pays for less than 60 percent, on average, of covered health
care expenses.
Employer Safe Harbor
The Internal Revenue Service has provided an
“affordability safe harbor” for employers that offer health coverage, which is
available through at least the end of 2014.
To be eligible for the safe
harbor, an employer must meet certain requirements:
- The employer must offer its full-time employees (and their dependents)
the opportunity to enroll in minimum essential coverage under an
employer-sponsored plan; and - The employee portion of the self-only premium for the employer’s lowest
cost coverage that provides minimum value (the employee contribution) must not
exceed 9.5 percent of the employee’s W-2 wages.
If the employer satisfies both
of these requirements for a particular employee, along with any other
conditions for the safe harbor, the employer will not be subject to a penalty
for providing unaffordable coverage with respect to that employee. This is the
case even if the employee receives a premium tax credit or cost-sharing
reduction to purchase coverage through a health insurance Exchange.
Penalty for Large Employers Not Offering
Coverage
Beginning in 2014, a large employer will be subject
to a penalty if any of its full-time employees receives a premium credit toward
their Exchange plan. In 2014, the monthly penalty assessed on employers that do
not offer coverage will be equal to the number of full time employees (minus
30) multiplied by 1/12 of $2,000 for any applicable month. After 2014, the
penalty amount would be indexed by the premium adjustment percentage for the
calendar year.
Penalty for Large Employers Offering Coverage
But Not Safe Harbored
Employers that do offer coverage still may be
subject to penalties if at least one full-time employee obtains a premium
credit in an Exchange plan because the employer’s coverage is unaffordable or
insufficient. To trigger a penalty, the employee’s required contribution for
self-only coverage must exceed 9.5 percent of the employee’s household income,
or the employer’s plan must pay for less than 60 percent of covered expenses.
In 2014, the monthly penalty assessed on an employer for each full-time
employee who receives a premium credit will be 1/12 of $3,000 for any
applicable month. However, the total penalty for an employer would be limited
to the total number of the company’s full-time employees (minus 30), multiplied
by 1/12 of $2,000 for any applicable month. After 2014, the penalty amounts
would be indexed by the premium adjustment percentage for the calendar year.
What Are Health Insurance Exchanges?
One of the backbones of ACA is the call for
creation of state-based competitive marketplaces, known as Affordable Health
Insurance Exchanges, for individuals and small businesses to purchase private
health insurance. According to the Department of Health and Human Services
(HHS), the Exchanges will allow for direct comparisons of private health
insurance options on the basis of price, quality, and other factors; and will
coordinate eligibility for premium tax credits and other affordability
programs. ACA requires that Exchanges become operational in 2014.
Due to a number of factors,
states’ progress toward developing the Exchanges has been far from uniform.
There also has been uncertainty surrounding the structure of the Exchanges and
the role of entities that have been traditionally involved with the insurance
placement process, such as brokers and agents.
In addition to ACA’s Exchanges,
private health insurance exchanges are emerging to provide another way for
employers to provide health insurance coverage for employees.
Exchanges must be ready to
accept enrollees on October 1, 2013. Some states, such as Oregon, Colorado, and
Maryland—plus the District of Columbia—already have established Exchanges and
received HHS’ conditional approval for their Exchange plans. Other states that
intend to operate their own Exchanges starting in 2014 include Kentucky, New
York, Connecticut, Maine, Washington, Nevada, Idaho, Utah, New Mexico,
Minnesota, California, Mississippi, Vermont and Rhode Island. Some states have
announced that they do not intend to create their own Exchanges but will
partner with HHS to develop an Exchange. These states include Iowa, Arkansas,
Illinois, Michigan, West Virginia, Delaware, and North Carolina. A majority of
states will let HHS run an Exchange for their residents starting in 2014,
including Arizona, Texas, Louisiana, Wisconsin, Florida, Georgia, Ohio, and
Pennsylvania. A full list of state decisions is available online at http://statehealthfacts.kff.org/comparemaptable.jsp?ind=962&cat=17.
Summary of Other ACA Provisions To Be Aware of
in 2013
The two topics
above have generated the most interest, but there are a number of provisions on
the horizon that also should be on your radar, summarized briefly below. Be
sure to work with your broker or advisor to make sure your health benefits
program stays compliant as these provisions go into effect.
Modification
- Applicable to: All non-grandfathered and grandfathered
health plans - Effective:For plan years and open enrollment periods
beginning on or after September 23, 2012 - Details: Employers must provide a Summary of Benefits and
Coverage to all plan participants and employees who are eligible to
participate. The summary must be written in easily understood language and is
limited to four double-sided pages. Any mid-year changes to the information
contained in the summary must be provided to participants 60 days in advance.
- Applicable to: Employers that file at least 250 W-2 Forms
must comply with this reporting requirement for 2012. The requirement is
optional for small employers (those filing fewer than 250 W-2 Form) for at
least the 2012 tax year and will remain optional until further guidance is
issued. - Effective: For 2012 W-2s to be issued by
January 31, 2013 - Details: ACA requires employers to disclose the value of
the health coverage provided by the employer to each employee on the employee’s
annual Form W-2, regardless of who pays the premium for that coverage.
Employers should take steps to ensure that payroll providers are prepared for
the new reporting requirement.
- Applicable to: Health FSAs (generally part
of a Section 125 plan) - Effective: For plan years beginning after
December 31, 2012 - Details: ACA limits the amount of pre-tax salary reduction
contributions to health FSAs to $2,500 per year.
- Applicable to: Non-grandfathered plans only
- Effective: Plan years beginning on or after
August 1, 2012 - Details: Beginning in 2010, non-grandfathered group health
plans and health insurance issuers offering group or individual
non-grandfathered health insurance coverage were required to provide coverage
for preventive care services without cost-sharing requirements. Effective for
plan years beginning on or after August 1, 2012, the required preventive care
services include specific services for women, including contraceptives;
contraceptive counseling; breastfeeding support, supplies, and counseling; and
screening for domestic violence.
- Applicable to: Generally all employers
- Effective: Required by March 1, 2013
- Details: Employers must provide a notice to employees
regarding the availability of the health care reform insurance Exchanges. The
notices will explain some of the benefits and consequences to employees if they
choose to purchase through the state Exchange instead of electing coverage
under an employer-sponsored plan. HHS has indicated that it plans on issuing
model Exchange notices in the future for employers to use.
- Applicable to: All employers
- Effective: January 1, 2013
- Details:Employers are required to withhold an additional
0.9-percent Medicare tax on an employee’s compensation in excess of $200,000. The
additional tax does not have an employer matching requirement.
- Applicable to: All plan sponsors (insurers will pay this
for fully insured plans) - Effective: First payment is due by July 31, 2013
- Details: Issuers and sponsors of self-insured health
plans must pay CER fees to fund health care research. The CER fees will be
effective for the 2012 through 2018 plan years. For plan years ending before
October 1, 2013 (that is, 2012 for calendar year plans), the research fee is $1
multiplied by the average number of lives covered under the plan. The fee goes
up to $2 for plan years ending on or after October 1, 2013 and before October
1, 2014, and will be indexed for future years.
- Applicable to: All plan sponsors
- Effective: By December 31, 2013
- Details: Group health plans must file a certification
statement with HHS certifying that their data and information systems for the
plan are in compliance with Health Insurance Portability and Accountability Act
standards; and operating rules for health plan eligibility, electronic funds
transfer, health claim status, health care payments, and remittance advice
transactions. HHS intends to issue more guidance on this requirement in the
future.
Major Provisions Take Effect in 2014
Several other important, additional health
insurance reform measures will be implemented beginning in 2014 in addition to
the individual and employer mandates, and the health insurance Exchanges
discussed above.
- Guaranteed Issue and Renewability. Health insurance issuers
offering health insurance coverage in the individual or group market in a state
must accept every employer and individual that applies for coverage in the
state and must renew or continue to enforce the coverage at the option of the
plan sponsor or the individual. - Pre-existing Condition Exclusions. Effective January 1,
2014, group health plans and health insurance issuers may not impose
pre-existing condition exclusions on any covered individual, regardless of the
individual’s age. - Insurance Premium Restrictions.Health insurance issuers in the
individual and small group markets will not be permitted to charge higher rates
due to heath status, gender, or other factors. Premiums may vary based only on
age (no more than 3:1), geography, family size, and tobacco use. The rating
limitations will not apply to health insurance issuers that offer coverage in
the large group market unless the state elects to offer large group coverage
through the state Exchange (beginning on or after 2017). Also, these
restrictions do not apply to grandfathered coverage. - Nondiscrimination Based on Health Status. Group health plans and
health insurance issuers offering group or individual health insurance coverage
(except grandfathered plans) may not establish rules for eligibility or
continued eligibility based on health status-related factors. - Nondiscrimination in Health Care. Group health plans and health insurance issuers
offering group or individual insurance coverage may not discriminate against any
provider operating within their scope of practice. However, this provision does
not require a plan to contract with any willing provider or prevent tiered
networks. It also does not apply to grandfathered plans. Plans and issuers also
may not discriminate against individuals based on whether they receive
subsidies or cooperate in a Fair Labor Standards Act investigation. - Annual Limits.Restricted annual limits will be permitted until
2014. However, in 2014, the plans and issuers may not impose annual limits on
the coverage of essential health benefits. - Excessive Waiting Periods. Group health plans and health
insurance issuers offering group or individual health insurance coverage will
not be able to require a waiting period of more than 90 days. - Coverage for Clinical Trial Participants. Non-grandfathered group
health plans and insurance policies will not be able to terminate coverage
because an individual chooses to participate in a clinical trial for cancer or
other life-threatening diseases, or deny coverage for routine care that they
would otherwise provide just because an individual is enrolled in such a
clinical trial. - Comprehensive Benefits Coverage.Health insurance issuers that
offer health insurance coverage in the individual or small group market will be
required to provide the essential benefits package required of plans sold in
the health insurance Exchanges. This requirement does not apply to
grandfathered plans. - Limits on Cost-Sharing. Non-grandfathered group health plans will
be subject to limits on cost-sharing or out-of-pocket costs. Out-of-pocket
expenses may not exceed the amount applicable to coverage related to Health
Savings Accounts, and deductibles may not exceed $2,000 (single coverage) or
$4,000 (family coverage). These amounts are indexed for subsequent years.
Proposed guidance on this requirement indicates that the limits will apply to
plans and issuers in the small group market only and not self-funded plans or
plans in the large group market. - New Incentive Standards for Wellness Plans. Wellness programs can
increase incentives provided for meeting health factor standards from 20 to 30
percent of the total cost of the applicable coverage. - Transitional Reinsurance Payments. Insurance and third-party
administrators will be required to pay, on an annual basis, a fee to support
the transitional reinsurance program. This program is designed to stabilize
premiums for coverage in the individual health insurance market. The fees will
be distributed to insurers selling coverage in the Exchanges to offset the cost
of covering individuals with high claims. HHS has proposed annual fees equal to
$63 per covered individual/year.
Closing Thoughts
Needless to say,
the schematic drawing of health care reform confounds nearly everyone. Even
more challenging, it continues to change and will grow more complex as each
state begins to implement its own rules and processes of Health Insurance
Exchanges. This article only touches on a small part of the ACA puzzle. A great
deal of health care reform will address Medicaid, Medicare, and other
health-related components that do not immediately impact the business
community. Other parts, specifically those that address how to measure employee
service, exceed the scope of this discussion.
At this point, many of the
provisions lack integration. Grandfathering provisions do not impact the pay or
play penalties. The nondiscrimination language scheduled to go into effect in
2014 does not address an individual’s eligibility for credits or subsidies.
What should you do? For
starters, employers should begin by gathering information. Do you know which of
your employees meet the definition of full-time employees? Does your waiting
period need to be reduced to fewer than 90 days?
Next, employers should assess
potential costs to their organization. Will your business costs change if you
begin offering coverage to those who work 30 hours or more? Does your
contribution requirement of employees exceed 9.5 percent of your employees’
wages?
Finally, employers should
consider their relationship with their employees. How will health care reform
impact your ability to attract and retain a quality workforce? Arguably, this
might be the most important consideration of all. At the end of the day,
behaviors drive outcomes. What do you want your outcome to be? How important
are your people in making that happen? If your people are critical to your
future successes, health care reform may not be all that complex after all.
SIDEBAR
Six Employer Penalty Scenarios Beginning in 2014
- Scenario
A—Employer does not meet the definition of
large employer. No penalty would be assessed. - Scenario
B—Large employer offers coverage deemed to
be both affordable and sufficient, qualifying them for the employer safe
harbor. No penalty would be assessed. - Scenario
C—Large employer does not offer coverage,
but no full-time employees receive credits for Exchange coverage. No penalty
would be assessed. - Scenario
D—Large employer does not offer coverage and
one or more full-time employees receive credits for Exchange coverage. The
annual penalty calculation is the number of full-time employees (50, in this
case) minus 30, multiplied by $2,000. In this example, the penalty would not
vary if only one employee or all 50 employees received the credit. The
employer’s annual penalty in 2014 would be (50-30) x $2,000, or $40,000. - Scenario
E—Large employer offers coverage and no
full-time employees receive credits for Exchange coverage. No penalty would be
assessed. - Scenario
F—Large employer offers coverage, but one or
more full-time employees receive credits for Exchange coverage. The number of
full-time employees receiving the credit is used in the penalty calculation for
an employer that offers coverage. The annual penalty is the lesser of:- The number of full-time employees minus
30, multiplied by $2,000 = $40,000 for the employer with 50 full-time
employees; or - The number of full-time employees who
receive credits for Exchange coverage multiplied by $3,000.
- The number of full-time employees minus
Although penalties are assessed on a
monthly basis (with the dollar amounts above divided by 12), this example uses
annual amounts, assuming the number of affected employees is the same
throughout the year. If the employer with 50 full-time employees had 10
full-time employees who received premium credits, then the potential annual
penalty on the employer for those individuals would be $30,000. Because this is
less than the overall limitation for this employer of $40,000, the employer
penalty would be $30,000. However, if the employer with
50 full-time employees had 30 full-time employees who received premium credits,
then the potential annual penalty on the employer for those individuals would
be $90,000. Because $90,000 exceeds the employer’s overall limitation of
$40,000, the employer penalty would be limited to $40,000.