After many months of speculation, the Supreme Court of the United States ruled yesterday that the central provision of Health Care Reform, the individual health insurance mandate, is constitutional. The result is that this provision and the other provisions of the Patient Protection and Affordable Care Act will remain ­intact. Accordingly, employers should act now to ensure that they are in compliance with currently effective provisions of the law, as well as those that are slated to come into effect in the coming months and years.

Background

On March 23, 2010, President Obama signed into law the ­Patient Protection and Affordable Care Act (P.L. 111-148) ("Health Care Reform"). The centerpiece of Health Care Reform is the requirement that, with limited exceptions, all individuals must be covered by an employer-provided health plan or individual health insurance policies that provide "minimum essential coverage" (i.e., the "individual mandate") beginning in 2014. In order to help individuals find such coverage at a reasonable ­expense, states must set up insurance exchanges and individuals will be provided with tax credits to help pay insurance premiums. Employers will have the choice to offer compliant health coverage for employees or pay significant penalties ("pay or play"). 

Constitutional Challenge & Supreme Court Ruling

In response to the enactment of Health Care Reform, several parties, including a joint effort of 26 states, challenged its constitutionality, particularly that of the individual mandate. Challengers to the law argued that the individual mandate was an abuse of Congress's federal authority under the Commerce Clause of the United States Constitution. They concluded that because this key piece of the law is unconstitutional, the entire law must also be overturned.

The court challenges to Health Care Reform reached several Federal Circuit Court of Appeals, but the results were conflicting. The Fourth and Sixth Circuit Court of Appeals found the individual mandate to be constitutional. The Eleventh Circuit Court of Appeals found that the individual mandate was unconstitutional, but did not find the entire law to be invalid.

The Supreme Court agreed to resolve the split among the ­Circuits, and did so yesterday, in a 5-4 opinion in the matter of­ National Federation of Independent Business v. Sebelius ­authored by Chief Justice John Roberts. The Supreme Court found that, while the individual mandate is not a valid exercise of Congress's power under the Commerce Clause, it is constitutional under Congress's taxing authority. The Supreme Court also found that while Health Care Reform's expansion of Medicaid programs is constitutional, the federal government may not threaten States that do not comply with these new standards with the loss of their existing funding. 

What does this mean for Employers?

The results of yesterday's Supreme Court decision mean that nothing has changed for employers subject to Health Care ­Reform. Below is a summary of the Health Care Reform rules and requirements (many that are already in effect) that ­employers should re-familiarize themselves with now to avoid significant penalties for noncompliance: 

Application

Health Care Reform applies to both fully-insured and self-insured employer health plans. The extent to which these plans are subject to certain aspects of the law, however, depends on whether the plan is considered "grandfathered" or "non-grandfathered." Grandfathered plans include any group health plan or individual plan that was in existence on March 23, 2010. The Departments of Health and Human Services, Labor and Treasury have issued a comprehensive set of regulations regarding how a group health plan loses grandfathered status. For more information, click here and here.

Currently Effective Requirements of Health Care Reform

Generally beginning in 2011, the following requirements went in effect under Health Care Reform:

Requirements Applicable to Grandfathered Plans

No lifetime benefit limits.
No revocation of coverage (except for fraud/intentional conduct).
Limited restrictions on annual limits.
Requirement of plan coverage of dependent children up to age 26 if the dependent is not eligible to enroll in another employer-sponsored health plan.
No preexisting condition exclusions for enrollees under age 19.

Requirements Applicable to Non-Grandfathered Plans
No lifetime benefit limits.
No revocations of coverage (except for fraud/intentional conduct).
No restrictions on annual limits on the dollar value for "essential health benefits" as determined by the Department of Health and Human Services ("HHS").
Requirement for coverage of certain preventive health services and immunizations without cost to covered individuals.
No discrimination in favor of higher-wage employees for fully-insured group health plans (self-insured group health plans had previously been subject to this rule under Section 105(h) of the Internal Revenue Code) [currently subject to a delayed effective date].
No preexisting condition exclusions for enrollees under age 19.
Requirement for plan coverage of dependent children up to age 26.
New rules for processing claims appeals.

Additional Programs
Reinsurance: Employers could apply to be covered by a temporary program that is currently in place that provides reimbursement to employers whose group health plans cover individuals who retire, do not currently qualify for Medicare, and are between the age of 55 and the date on which the individual is eligible for Medicare. Employers providing such coverage may qualify for reimbursement of up to 80 percent of the costs of providing the coverage to such individuals. The reimbursements must be used to lower costs in the employer's plan. ­Applications to participate in this program were due by May 5, 2011. The temporary program expires on January 1, 2014.
Small Business Tax Credit: Qualifying small businesses currently receive a federal tax credit to offset up to 35 percent of health insurance costs. Beginning in taxable years after 2013, the employer must participate in an insurance exchange in order to claim the credit, which may be up to 50 percent, and may only claim the credit for up to two years after 2013.

Requirements of Health Care Reform Not Yet Effective

Coverage Disclosure
Summaries of Benefits and Coverage: Generally ­beginning with the first open enrollment period on or after September 23, 2012, employers must provide a summary of benefits to each employee that is not more than four pages in length, that is written in a culturally and linguistically appropriate manner, and contains certain content related to covered benefits, exclusions, cost sharing, and continuation coverage. Failure to comply may result in a penalty of up to $1,000 for each failure.

Tax Related Changes
Form W-2 Reporting: Beginning with Form W-2s issued for employees with respect to 2012, employers must report the cost of employer provided health coverage. Employers who do not comply face substantial penalties of $200 per Form W-2, capped at $3 million per employer. Certain exemptions apply. For more information click here.
FSA Limitations: Effective January 1, 2013, contributions to a flexible spending account for medical expenses are limited to $2,500 per year, increased annually by a cost of living adjustment.
Medicare Tax Adjustments: Effective January 1, 2013, the employee-side Medicare Part A tax rate increases from 1.45 percent to 2.35 percent on individuals earning more than $200,000 (indexed) and married couples filing jointly earning more than $250,000 (indexed). There is no corresponding increase in the employer-side payroll taxes. Health Care Reform also imposes a 3.8 percent tax on unearned income for higher-income taxpayers, for which the thresholds are not indexed.

"Pay or Play" – Health Insurance Exchanges

Beginning in 2014, states will begin to operate health insurance exchanges for both the individual and the small group market. These exchanges are intended to provide affordable coverage to those who seek to purchase coverage due to the individual mandate. Exchanges will offer insurance that complies with new federal standards for "essential health benefits."

Employer Penalties: While there is no mandate that an employer provide health care coverage, effective 2014, Health Care Reform imposes a fine on employers if an employee purchases health insurance through an exchange and receives a federal credit towards such purchase. Presumably an employee would do this only if his or her employer does not offer coverage or the coverage is expensive. The fines are as follows:

  • Employers (1) with more than 50 employees; (2) that do not offer health care coverage; and (3) have at least one full-time employee (FTE) who receives a premium tax credit from the federal government will be fined $2,000 per FTE per year. In calculating the number of FTEs, the first 30 FTEs are subtracted.
  • Employers (1) with more than 50 employees; (2) that offer health care coverage; and (3) have at least one FTE who receives a premium tax credit from the federal government will be fined the lesser of $3,000 for each FTE employee receiving a credit or $2,000 for each FTE.
  • In determining the number of FTEs, an employer must aggregate the number of hours of service of non-FTEs for a month and divide by 120 to determine the number of additional FTEs it should add to its actual number.
Notification: Beginning on March 1, 2013, employers must provide written notice to current employees—and new employees as they are hired—of the existence of a health insurance exchange and how the employee may contact the exchange to request assistance. If the employer's share of the total costs of benefits is less than 60 percent of the costs (actuarial value), the employer must inform each employee that he or she may be eligible for a premium tax credit if the employee purchases insurance through the exchange, but that the employee will lose the employer contribution (if any) made with respect to health coverage.
IRS Reporting: Effective January 1, 2014, employers with more than 50 FTEs must certify to the IRS whether they offer employees minimum essential coverage, the length of any waiting period, monthly premiums, the employer's share of the total costs of benefits, number of FTEs per month, and identifying employee information, including whether the employee was covered under any benefit plan. The IRS may by regulation require additional information. Employers must also provide employees with notice of the information provided to the IRS.
 

Additional Provisions

Automatic Enrollment: Beginning on January 1, 2014, employers with more than 200 FTEs that offer health insurance are required to automatically enroll employees in a group health plan if a plan is offered by that employer. Employees must be given reasonable advance notice and the opportunity to elect to enroll in a different level of coverage, if available, or to opt-out altogether. 

More Requirements for Grandfathered Plans:

  • Pre-existing Condition Exclusions: Effective January 1, 2014, the prohibition of pre-existing condition exclusions for all ages applies to all enrollees in grandfathered plans.
  • Dependent Coverage: Effective January 1, 2014, grandfathered group health plans must provide for adult dependent children up to age 26 regardless of whether they are offered other employer-provided coverage.
  • Coverage limits. Any remaining annual limits on benefits under grandfathered plans must be eliminated.
No Excessive Waiting Periods: Effective for plan years beginning on or after January 1, 2014, group health plans may not impose waiting periods in excess of 90 days.
Increased Incentive Percentages under Health and Wellness Programs: Health Care Reform increases the maximum incentive available under outcome based wellness programs to 30 percent of the total cost of coverage and authorizes the Secretaries of Labor, Treasury, and HHS to increase the incentive percentage limitation to 50 percent by regulations.
Excise Tax on Insurers of High-Cost Plans: Beginning on January 1, 2018, Health Care Reform imposes an excise tax with respect to employer-sponsored group health plans (both self-funded and fully-insured) whose annual premiums exceed $10,200 for an individual and $27,500 for family. The bill indexes the threshold premium to the consumer price index for urban consumers (CPI-U) beginning in 2020. In addition, threshold amounts will be increased for retirees age 55 and older who are not eligible for Medicare and for employees in high-risk professions. The tax is equal to 40 percent of the value of the plan that exceeds the threshold amounts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.