The Patient Protection and Affordable Care Act (“PPACA”) was signed by President Obama on March 23, 2010, formally implementing health care reform in the United States. The new requirements imposed by PPACA (along with the Health Care and Education Reconciliation Act of 2010 passed shortly thereafter) will gradually take effect in phases over the next several years. This Client Alert addresses the first four phases of PPACA changes that will affect employers within the next year.
Phase One - Tax Credits, Grandfathered Plans and the Economic Substance Doctrine
- Small Business Health Care Tax Credit. Qualified small employers that provide coverage to their employees and that meet certain requirements will become entitled to a federal income tax credit for health insurance premiums they pay for certain employees. A qualified employer is one that (1) has fewer than 25 full-time equivalent employees for the tax year, (2) pays average annual wages of less than $50,000 per full-time employee, and (3) pays premiums under a qualifying arrangement. A qualifying arrangement is one where the employer pays premiums for each employee enrolled in health care coverage offered by the employer in an amount equal to a uniform percentage (not less than 50%) of the premium cost of coverage. If an employer pays only a portion of the premiums for the coverage with the employees paying the rest, the amount of premiums counted is only the portion paid by the employer. For tax years beginning in 2010 through 2013 the maximum credit is 35% (25% for tax-exempt qualified employers) of the employer’s premium expenses.
- Grandfathered Plans. Nothing in PPACA will prevent an individual from keeping his or her existing coverage or from renewing that coverage in the future. Thus, some currently existing plans are ”grandfathered.” Unfortunately, further guidance is necessary to completely understand what constitutes grandfathered coverage, how to maintain that status, and what benefits attach to it. At this time, however, we do know that even grandfathered plans must generally comply with many of PPACA’s requirements, including the “phase three” changes discussed below relating to annual and lifetime limits, pre-existing conditions, dependent coverage, and excessive waiting periods.
- Economic Substance Doctrine. PPACA clarified and codified the “economic substance doctrine” and added stiff new penalties to certain disallowances of claimed tax benefits by reason of a transaction lacking economic substance. The doctrine has been applied over the years to a wide range of transactions, including transactions in the retirement plan area. Under the new provision, a transaction is treated as having economic substance only if it is additionally shown that (1) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position, and (2) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction. The 20% accuracy-related penalty is specifically made applicable to any disallowance of claimed tax benefits by reason of a transaction lacking economic substance, or failing to meet the requirements of any similar rule of law; however, in applying this penalty, the following new rules apply: (1) if the transaction is not specifically disclosed on the taxpayer’s return, in the manner required by IRS Regulations, the 20% penalty is increased to 40%; and (2) the penalty cannot be avoided by demonstrating “reasonable cause.”
Phase Two - Early Retirees and High-Risk Participants
PPACA establishes two temporary programs that will be put into effect by June 21, 2010. They are as follows:
- Reinsurance for Early Retirees. A temporary, limited reinsurance program will provide relief for employer health plans that cover retirees who are at least age 55 and not yet eligible for Medicare. The program will end on January 1, 2014. To qualify for reimbursement under this program, a group health plan must implement cost-saving programs and procedures for participants with chronic and high-cost medical conditions. Then, if covered medical expenses incurred by an early retiree or dependent exceed $15,000, the plan may be reimbursed for 80% of covered medical expenses incurred by early retirees and their dependents between $15,000 and $90,000. However, the plan must use that reimbursement to lower participant costs, such as premiums, co-payments, deductibles, coinsurance, or other out-of-pocket plan expenses for plan participants.
- High-Risk Participants. PPACA also establishes a temporary high-risk health insurance pool for certain uninsured individuals. The pool will provide coverage with no pre-existing condition limitations and will cap participants’ out-of-pocket expenses. Although the high-risk health pool will have no impact on most employers’ health plans, PPACA imposes potentially costly sanctions on plans that encourage plan participants to drop coverage under the employer plan to become eligible for the high-risk pool.
Phase Three - Plan Design Changes in Upcoming Plan Year
PPACA’s next impact will be felt in plan years beginning on or after September 23, 2010. This means calendar year plans must begin complying with the changes below on January 1, 2011. These changes will affect the benefits that may be offered under group health plans and restrict the manner in which eligibility and benefits may be limited. The third phase of changes is as follows:
- Prohibition on Annual and Lifetime Limits. Plans will no longer be permitted to impose lifetime limits on the amount of essential benefits available under the plan and will be subject to restrictions on any annual limitations that are imposed on essential benefits. No annual limits may be applied to essential benefits beginning in 2014. Essential benefits include benefits such as hospitalization, prescription drugs, maternity and newborn care, pediatric services, preventive and wellness services, laboratory services and chronic disease management. Plans may, however, impose lifetime and annual limits on any benefits that are not essential benefits.
- Prohibition on Discrimination in Favor of Highly Compensated Individuals. Insured group health plans will be prohibited from discriminating in favor of highly-compensated individuals under rules similar to those currently applicable to self-funded health plans. This is a major shift in the requirements applicable to employer-provided health insurance. Prior to this change, employers had been free to include or exclude any employees they chose under a plan funded by insurance.
- Plans May Not Rescind Coverage. Once an individual is covered under a plan, the plan may not rescind coverage with respect to that individual unless the individual commits fraud or intentionally misrepresents material facts as prohibited by the plan. It is currently unclear whether this new ban on rescissions means that plans may not change eligibility requirements under any circumstances with respect to existing participants or the extent to which coverage may be changed without constituting a rescission.
- Prohibition on Pre-existing Condition Exclusions for Children. Children under age 19 may not be denied coverage due to a pre-existing condition. Forthcoming regulations will address the implementation of this requirement. In response to comments that PPACA does not require the extension of coverage to children who are currently uninsured, Health and Human Services Secretary Kathleen Sebelius recently said the rule will require coverage of both currently insured and currently uninsured children without regard to any pre-existing condition the child may have.
- Required Coverage of Certain Preventive Services. Plans will now be required to cover certain preventative services and will be prohibited from imposing any cost-sharing with respect to such services. The specific services that must be covered will be determined under guidelines issued by various federal agencies, including the United Stated Preventive Services Task Force, the Advisory Committee on Immunization Practices and the Health Resources and Services Administration. While the list of specific covered services will change from time to time, this requirement could cover services ranging from aspirin regimens for the prevention of myocardial infarctions in men and ischemic strokes in women to breast cancer screenings to tobacco cessation programs. As the list of required preventative services changes, there will be a delay of at least one year between the changes and the time at which health plans and insurers will be required to implement such changes.
- Extension of Dependent Coverage. All plans that cover dependent children will now be required to continue such coverage until at least age 26. For insured health plans in Missouri, this will require one additional year of coverage as Missouri insurance statutes currently require dependent coverage up to age 25. This new requirement will not change the age requirement for insured plans in Illinois because Illinois insurance law already requires dependent coverage up to age 26. However, in both Missouri and Illinois, plans may no longer impose a requirement that dependents be unmarried in order to have coverage. It is unclear at this point whether this requirement will require coverage without regard to student status or whether plans will still be allowed to require student status for dependent coverage. We anticipate future guidance from Health and Human Services on this topic and will provide an update on this topic when such guidance is issued.
In coordination with these changes relating to dependent coverage, the Internal Revenue Code has been amended to allow an exclusion from gross income for amounts received under an accident or health plan for an adult dependent. Although coverage is required to be extended until age 26 (as discussed above), the exclusion from gross income applies until age 27. These tax changes became effective on March 31, 2010, even though the general requirement to extend coverage until age 26 will not take effect until plan years beginning on or after September 23, 2010.
- New Appeals Procedures. In addition to the claims and claim review procedures imposed by ERISA, plans will be required to comply with the appeals process mandated by PPACA for appeals of coverage determinations and claims and, most notably, most offer an external review process. The details of the external review process are to be worked out by the Secretary of Health and Human Services, although for insured plans the new law largely defers to state external review requirements. Plans must provide participants with notice of the available internal and external appeals processes.
- Additional New Health Plan Provisions. PPACA also imposes several new patient protections, such as disallowing prior authorization for emergency services and gynecological or obstetrical care and requiring plans to permit participants to designate any participating primary care provider who is available to accept that participant.
- New Reporting and Transparency Requirements. Group health plans must provide certain plan information to the Secretary of Health and Human Services, state insurance commissioners and the general public. That information will include data relating to the payment and denial of claims, financial disclosures, enrollment and disenrollment. Future guidance is expected to clarify certain issues relating to these new reporting requirements. For instance, there is some ambiguity as to the actual effective date of this provision. It may be effective as early as September 23, 2010, or it may not become effective until insurance exchanges go into effect in 2014 (at that time, plans offered through an exchange will also be required to report this information to the exchange). It also seems unlikely that self-funded health plans would be required to report information to a state insurance commissioner, although that is unclear at this time.
Phase Four - Tax Changes Related to Benefit Plans in 2011
The next round of PPACA changes will be a series of changes to the Internal Revenue Code affecting benefits and will go into effect for taxable years beginning on or after January 1, 2011. Those changes are as follows:
- Simple Cafeteria Plans for Small Businesses. Employers with an average of 100 or fewer employees may offer a new employee benefit cafeteria plan known as a Simple Cafeteria Plan. Under a Simple Cafeteria Plan, an eligible small employer is provided a safe harbor from the non-discrimination requirements otherwise applicable to cafeteria plans. Under a Simple Cafeteria Plan, the employer must contribute a uniform percentage of an employee’s compensation for a plan year or another prescribed minimum amount, and the plan must permit all employees who had at least 1,000 hours of service for the preceding plan year to participate and permit all eligible employees to elect any benefit available under the plan.
- Over the Counter Drugs. Health reimbursement arrangements ("HRAs"), health flexible spending arrangements ("FSAs"), Health Savings Accounts ("HSAs") and Archer Medical Savings Accounts ("Archer MSAs") will be permitted to make reimbursements for over-the-counter medicine or drugs only if the medicine or drug is prescribed by a doctor.
- Nonqualifying Distributions from HSAs and Archer MSAs. The penalty for nonqualifying distributions from HSAs and Archer MSAs will be increased to 20% (currently 10% for HSAs and 15% for Archer MSAs) of the nonqualifying distribution.
- Reporting of Employee Health Coverage. Employers must include the cost of employer-sponsored health coverage on each employee's form W-2.
What Should Employers Be Doing Now?
Employers should take immediate action to determine what changes must be made to employer-sponsored health plans as a result of PPACA’s new requirements. We recommend that employers begin with the following steps:
- Identify Affected Plans. While PPACA applies to group health plans (both insured and self-funded), it also affects other health plans such as health FSAs, HRAs, HSAs and Archer MSAs. Employers should identify all of their plans that offer health benefits to determine whether and to what extent such plans will be impacted by PPACA. Provisions that do not comply with PPACA will need to be amended.
- Protect Grandfathered Status. Group health plans that were in place on March 23, 2010 are likely grandfathered and may be able to avoid complying with certain PPACA requirements. However, until the government issues detailed guidance, there is some uncertainty as to how to avoid losing grandfathered status. Consequently, employers should consult an advisor before amending any health plan (other than for PPACA compliance, as discussed below), renewing group health insurance policies or selecting a new health insurance provider.
- Update Plans for PPACA. Health plans will need to be amended by the end of 2010 to comply with PPACA’s new requirements. If an insurance company provides an amendment for a grandfathered plan, the plan sponsor should carefully review the amendment before adopting it to ensure that the amendment does not cause the plan to become subject to requirements that otherwise could be avoided as a result of the plan’s grandfathered status.
- Count Employees. Employers should keep in mind that the number of their employees will, in many circumstances, determine which provisions of PPACA apply. For example, within the next year, certain employers will be able to take advantage of Simple Cafeteria Plans and the small business health care tax credit, depending on the number of their employees. Additional provisions of PPACA that will phase in over the next several years will also depend upon the number of employees to varying degrees. Therefore, employers should begin familiarizing themselves with the various methods of counting employees under PPACA and should begin making employee counts so that opportunities under PPACA are identified and seized and obligations are not overlooked.
- Identify Financial Incentives: As discussed above, some employers may be eligible under PPACA for financial incentives such as the subsidy for early retiree coverage and the small-employer tax credit. In order for an employer to take advantage of these opportunities, its health plans must meet certain requirements. Every employer offering early retiree coverage and every small employer should investigate applicable requirements of the PPACA incentives and analyze whether it is feasible and cost-effective to meet such requirements. If it is, plans should be amended to meet such requirements so that the employer can claim the incentives.
Additional guidance is expected to be issued this year to further explain PPACA’s requirements; we will keep you apprised of any relevant developments. Also, although this Client Alert focuses on the provisions of PPACA that will become effective within the next year, additional provisions of PPACA will go into effect over the next several years that will have an impact on employer plans. We will keep you informed as those effective dates approach.