National health care reform became a reality in March of 2010 by the passage of two pieces of federal legislation, “Patient Protection and Affordable Care Act” and the “Health Care and Education Reconciliation Act of 2010.” The legislation was designed to provide access to health insurance coverage for most Americans by imposing new responsibilities on employers, individuals and insurers, Medicare and Medicaid as well as the states. The legislation covers both insured and self-insured employer group health plans, multi-employer welfare arrangements, governmental health plans and individual insurance coverage. The legislation added new provisions to the Tax Code, ERISA and the Public Health Service Act (“PHSA”).
Although numerous reforms have already been enacted such as health coverage for adult children until age 26, elimination of pre-existing conditions limitations on children under age 19, the prohibition of rescission of coverage except for fraud, the elimination of lifetime dollar limits and unreasonable annual dollar limits on essential health benefits, arguably the most important components of the legislation, the individual and employer mandates become effective in 2014. These mandates will be the focus of this article along with several other important changes that will become effective in 2013 and 2014.
Individual and Employer Mandates
The United States Supreme Court ruled that the federal government does not have the power to order people to buy health insurance but it does have the power to impose a tax on those without health insurance. Thus, beginning in 2014, Tax Code Section 5000A provides that individuals (with limited exceptions) who do not enroll in “minimum essential coverage” will pay a tax penalty. Minimum essential coverage includes Medicare, Medicaid, employer plans and exchange-based health coverage. Individuals and small employers (fewer than 50 employees) can obtain coverage through new health exchanges created by the legislation. The Tax Code provides individuals with financial subsidies for exchange coverage through premium assistance tax credits and cost-sharing subsidies. Like many provisions of the Tax Code, the calculation of the penalty under Section 5000A(c) is complex. The penalty is based on the lesser of a) the average national exchange premium cost or b) the greater of a flat dollar amount (indexed for inflation) or a percentage of income as set forth in Section 5000A(c).
Although the legislation does not require that employers provide health care coverage, starting in 2014, large employers must provide compliant health coverage to all full-time employees (30 or more hours per week) or pay a tax penalty as set forth in Tax Code Section 4980H. Section 4980H defines a large employer as an employer that employs 50 full-time equivalent employees (counting full and part timers) on more than 120 business days during the preceding calendar year. The determination of whether an employer is a large employer in 2014 will be based on the number of full-time employees in the 2013 calendar year plus the number of “full-time equivalent employees” or FTEs. The number of FTEs in a month is determined by adding up the hours worked by all non-full-time employees and then dividing the total hours by 120. If the monthly average of FTEs plus full-time employees is 50 or more, the employer must comply with the law throughout 2014. In early 2013, the Internal Revenue Service issued proposed regulations on numerous aspects of the 4980H employer penalty provisions. The proposed regulations include a transition rule under which employers may use any consecutive six-month period in 2013, instead of the full year, to calculate the average number of employees in 2013. Thus, hiring decisions made in 2013 could determine if an employer is subject to the employer mandate. The proposed regulations also clarify that all common law employees of all entities that are part of the same controlled group or affiliated service group must be counted to determine whether the 50 full-time employee level is met.
Section 4980H and the proposed regulations provide for yearly penalties of up to $3,000 per employee if coverage is not offered to substantially all full-time employees and their dependents or the coverage offered is not affordable (less than 9.5% of an employee’s salary for single coverage) and of “minimum value” (under new federal standards) and employees obtain tax subsidized coverage through an exchange. The proposed regulations provide numerous rules on how to determine if an employee is full-time working 30 hours and therefore entitled to employer coverage. These rules include allowing employers the ability to use a look back period to determine full-time status and a future stability period of a comparable length for which coverage is required. It is important to note that employers do not have to provide coverage to part-time employees working under 30 hours per week and receive no benefit for doing so under the 4980H penalty scheme.
Employers also need to be cognizant of the new waiting period limitations of PHSA Section 2708 effective for 2014. Waiting periods can be no longer than 90 days from the date of employment, if the employee is expected to be employed on a full-time basis. The waiting period for variable rate employees can be after the measurement period to determine if the employee is eligibility under Code Section 4980H. In such cases, coverage must commence no later than the first day of next calendar month 13 months after date of hire. IRS Notice 2012-59 provides current guidance on waiting periods. In order to assist the IRS with enforcement of the employer mandate and related rules, employers who employ more than 50 full-time employees will be required to report annually on various aspects of their health plans and workforce.
Other Key Reform Provisions
PHSA Section 2716 adds new nondiscrimination rules “similar to” the Tax Code Section 105(h) nondiscrimination rules applicable to self-insured health plans effective as of 2011 for fully-insured group health plans. Because fully insured plans were not subject to any discrimination rules, employers with fully-insured group health plans were previously able to maintain different coverage with respect to certain highly-compensated employees. Although the IRS stated in Notice 2011-1 that enforcement of the nondiscrimination rules would be delayed pending the issuance of regulations, employers need to be aware of the new rule due to the potential for significant excise tax penalties (up to $100 per day for each employee discriminated against) when enforcement commences. Key details to be determined in regulations include how highly compensated employees are determined and the precise nature of the discrimination tests.
Beginning in 2013, Tax Code Section 4376 imposes a new federal premium tax of $1 on each covered life in a self-insured or fully insured health plan to finance a new private corporation, the Patient-Centered Outcomes Research Institute, formed to assist patients, clinicians, purchasers, and policy-makers in making informed health decisions by advancing the quality and relevance of evidence-based medicine. The tax will increase to $2 per covered life in 2014 and will thereafter be indexed to the medical component of the consumer price index and will sunset in 2019. The legislation also reduced the annual contribution limit for health care flexible spending accounts (FSAs) to $2,500 effective for tax years beginning after December 31, 2012. This limit is adjusted for inflation and does not apply to dependent care accounts. In order to educate employees as to the value of health care, the legislation required employers to report the value of health benefits on Form W-2 starting in 2011. Subsequent IRS guidance delayed the reporting and currently only employers issuing more than 250 W-2s are required to comply.
Lastly, the legislation creates new incentives to promote employer wellness programs and encourage opportunities to support healthier workplaces. Effective January 1, 2014, the maximum reward under a health-contingent wellness program will increase from 20 percent to 30 percent of the cost of health coverage, and the maximum reward for programs designed to prevent or reduce tobacco use will be as much as 50 percent.
John E. Rich, Jr. is a Director at McLane, Graf, Raulerson & Middleton, Professional Association who specializes in employee benefits, pension, ERISA and tax-related matters.