On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (the "Act"). Along with revisions subsequently passed by Congress, the Act constitutes a much-publicized, comprehensive system of health care reform. The Act requires most Americans to purchase health insurance, expands Medicaid and establishes a series of state-run Exchanges through which individuals, families and businesses can purchase health insurance meeting minimum standards to be defined by the federal government. The Act also imposes new requirements on employers and employer-sponsored insurance plans. The following are key provisions that will impact employers:
Human Resources / Employee Benefits
The Act imposes several new requirements pertaining to employee benefits and employee policies and procedures. Companies should work with legal counsel to review and update their employee benefits and policies to take into account the following provisions under the Act:
Employers Must Provide Medical Coverage to their Employees:
- Effective January 1, 2014, employers with at least 50 full-time employees must provide a minimum level of medical coverage or pay a non-deductible $2,000 fee for each full-time employee (excluding the first 30) if at least one full-time employee enrolls in a qualified health care plan and receives a premium tax credit for purchasing such a plan.
- Effective January 1, 2014, employers with at least 50 full-time employees, and who offer at least minimum essential coverage, must pay a non-deductible fee of $3,000 for each full-time employee who does not participate in the employer's plan and qualifies for a premium tax credit. The aggregate amount of this penalty cannot exceed the penalty that would have been imposed had the employer not offered coverage at all.
Large Employers Must Automatically Enroll Employees in their Plans. Pursuant to regulations to be promulgated by the Secretary of Labor, employers with 200 or more full-time employees who offer health benefit plans must automatically enroll new full-time employees in one of the plans offered — subject to a waiting period authorized by law. Employers must also give employees an opportunity to opt out of the employer-sponsored plan.
Employers Must Offer Employees Vouchers for Coverage Under State-Run Health Plans. Effective January 1, 2014, employers that offer coverage must also offer "free choice vouchers" to qualified employees for the purchase of coverage through state-run Exchanges. Employers will not be assessed a fee (as described above) for employees receiving vouchers who also receive a premium tax credit.
Employers Must Inform Employees of Certain Health Care Provisions of the Act. Effective March 1, 2013, employers must inform their employees of the state-run Exchanges, including a description of the services provided by the Exchanges. Employers also must notify employees that they may be eligible for a premium tax credit under certain circumstances and that they will lose the employer contribution to their health benefit plan if they purchase coverage through an Exchange.
Employers Must Provide Breaks for Nursing Mothers. Employers must provide reasonable unpaid break time for an employee to express breast milk for her nursing child for one year after child birth each time the employee has a need to express milk. Employers with less than 50 employees can avoid this requirement if they can show that the break time would impose an undue hardship by causing the employer significant difficulty or expense.
Tax
The Act imposes new taxes, denies certain tax deductions and increases tax penalties as follow:
A 40 Percent Excise Tax is Imposed on High Cost Employer Health Plans. For taxable years beginning after December 31, 2017, the Act imposes a 40 percent excise tax on insurance issuers or plan administrators of "high cost employer-sponsored health coverage," which is defined as a plan where the cost of coverage exceeds the threshold of $10,200 for single coverage and $27,500 for family coverage.
A Tax Deduction is Denied to Health Insurance Providers for Compensation Over $500,000. For taxable years after December 31, 2012, the Act limits the deductibility of payments made by a health insurance provider (generally a state licensed health insurer) of over $500,000 to any officer, employee, director, or other service provider performing services for or on behalf of the health insurance provider.
A Tax Deduction is Denied for Medicare Part D Prescription Drug Plans. For taxable years beginning after December 31, 2012, the Act eliminates the deduction for employers who maintain prescription drug plans for their Medicare Part D eligible retirees.
HSA and Archer MSA Withdrawal Penalties are Increased. Effective January 1, 2011, the Act increases the additional tax on withdrawals other than for qualified medical expenses from 10 percent to 20 percent for HSA withdrawals and from 15 percent to 20 percent for Archer MSA withdrawals. Qualified distributions include amounts paid for medicine or a drug only if it is prescribed or is insulin. Effective 2013, the Act also limits the amount of contributions to health FSAs under cafeteria plans to $2,500 per year.
Payroll and Accounts Payable
The Act affects Form W-2 and Form 1099 reporting requirements:
Effect on Form W-2 Reporting:
- For taxable years beginning after December 31, 2010, the Act requires employers to disclose the aggregate cost of benefits provided for each employee on the employee's Form W-2.
- Effective January 1, 2013, the Act increases the hospital insurance tax rate component of FICA by 0.9 percentage points on individual taxpayers earning over $200,000 ($250,000 for married couples filing jointly). Penalties would apply to employers failing to withhold the additional tax. The 0.9 percent increase is not deductible for self-employment tax purposes.
Effect on Form 1099 Reporting: Effective January 1, 2012, the Act increases the information reporting burden of businesses by now requiring payments to corporations and payments for property over the $600 threshold to be reported on Form 1099s.
This list of provisions is far from exhaustive. It is intended to provide a brief summary of some of the key changes the legislation accomplishes and the high-level impact of those changes on employers. It will take considerable time to assess the overall impact of the health care legislation on employers. It is not, however, too early to start planning.
O'Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.
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.
