5. New Coverage Requirements

  • "Essential health benefits" requirement for insurance sold to small groups. As noted in the "play or pay" discussion above at Section III.A, for purposes of the Code section 4980H tax on employers, the employer is not required to provide a group health plan that includes a certain minimum level of benefit. Yet as a practical matter, virtually all employers with 100 or fewer employees provide health benefits through an insured product rather than self-insurance. Consequently, such employers' ability to shape the design of their health plans is at the mercy of the insurance market, which heretofore was regulated almost exclusively by the respective states. In many states, catastrophic only or minimum benefit products have been made available to employers. New section 2707(a) of the PHSA, however, potentially alters that equation. That section provides that a health insurance issuer that offers health insurance in the "small group market" (i.e., for "small employers") must "ensure that such coverage includes the essential health benefits package required" for "qualified health plans" under the Exchanges. For these purposes, a "small employer" is considered an employer that employed on average no more than 100 employees on business days during the prior calendar year. (H.R. 3590 § 1304(b)(2)). As discussed above in Section II.B., an "essential health benefits" package must provide broad levels of coverage and must limit cost-sharing.

    It is unclear whether the language of PHSA section 2707(a) effectively means that any and all insurance products offered to employers with fewer than 100 employees will contain the "essential health benefits" minimums, or whether at least one such product offered to such employers must contain such minimums. The statutory language, while susceptible to either reading, is likely to be interpreted to require that all insurance product offerings contain the minimums. If so (and HHS will advise by regulation), it would appear that the ability of a small employer to acquire a low-cost, catastrophic only type product is eliminated by the New Law, and that may significantly increase the cost of coverage for small employers. Moreover, it is unclear how the grandfathered health plan rules will be affected by this new insurance carrier obligation. It may be the case that the forthcoming HHS regulations will prohibit carriers from renewing any existing policies unless the renewal arrangement satisfies new PHSA section 2707(a). New PHSA section 2707(a) will become effective for plan years beginning on or after January 1, 2014.
  • Cost-sharing limitations for all group health plans, insured and self-insured. In addition to the cost-sharing limitations described above on products in the small group market by virtue of new PHSA section 2707(a), new PHSA section 2707(b) bars group health plans—and therefore self-insured plans for large employers as well as insured arrangements for small employers—from imposing annual cost-sharing rules that are different from those imposed for "essential health benefits" arrangements. Annual cost-sharing (including the annual deductible) may not exceed $5,950 for individual coverage and $11,500 for family coverage, and annual deductibles may not exceed $2,000 for single individuals and $4,000 for spouse and family coverage (with such limits allowed to be increased by amounts "readily available" for reimbursement under a flexible spending account). For plan years beginning in 2015, HHS also may index this limit relative to the increase in the per capita cost of health insurance in the United States. Nonetheless, this limit on deductibles may significantly impede the ability of employers to offer truly high deductible plans. This limitation is effective for plan years beginning on or after January 1, 2014, and will not apply to grandfathered health plans.
  • No cost-sharing for certain preventive services. It is common for employer-provided health insurance to impose co-payments or co-insurance in connection with nearly all categories of covered services, including many preventive services. But the New Law will require group health plans and insurers to cover certain preventive medicine services—including certain immunizations and certain screenings for infants, children, adolescents, and women—and prohibit imposition of any cost-sharing for such preventive services. (New PHSA § 2713). While new PHSA section 2713 does not define the term "cost-sharing," other sections of the PHSA indicate that cost-sharing includes deductibles. (New PHSA § 2715(b)(3)(D)). Therefore, deductibles likely will not be permitted to be imposed in connection with the services covered by PHSA section 2713. New PHSA section 2713 will be effective for plan years beginning on or after September 23, 2010, and will not apply to grandfathered health plans.
  • Limitations on prior authorization requirements, primary care provider designation restrictions, and restrictions for emergency services coverage. The New Law will subject group health plans and health insurance issuers to several "patient protection" requirements. A plan that requires the designation of a participating primary care provider will be required to allow participants to choose any such provider who is available (including the choice of a pediatric specialist as the primary care provider for a child). Additionally, group health plans that cover emergency services will be required to cover such services without the need for prior authorization and without regard to any term or condition of the coverage, or whether the provider participates in such plan. Group health plans also will not be able to require authorization or a referral before a female participant/beneficiary could seek obstetrical or gynecological care from a professional specializing in such care. (New PHSA § 2719A). These requirements will be effective for plan years beginning on or after January 1, 2014, but will not apply to grandfathered health plans.

6. New Disclosure Requirements

  • Uniform explanation of coverage. Currently under ERISA, administrators of group health plans are required to provide enrollees with a summary plan description ("SPD") that explains the material terms of the plan, and a summary of material modification when material changes are made to such plans. (ERISA § 104(b)). The New Law creates separate summary benefit disclosure obligations under the PHSA that, at the very least, overlap with the SPD rules of ERISA. Specifically, new PHSA section 2715 requires HHS, by March 23, 2011, to develop standards for group health plans and insurers to provide to each applicant and enrollee a four-page summary of benefits and coverage explanation. The summary must be in at least 12-point font, and must describe the coverage under such plan, including details on cost-sharing, "exceptions, reductions, and limitations on coverage," and whether the coverage meets the standard to constitute "minimum essential coverage." For insured plans, the health insurer will be required to provide the summary. For self-insured plans, the plan sponsor (i.e., the employer) or the plan administrator will need to provide the summary. (New PHSA § 2715(d)(2)). The summary must be provided to any applicant for coverage at the time he or she applies for coverage, and to an enrollee prior to the time of enrollment or reenrollment. (New PHSA § 2715(d)(1)). Failure to provide the summary would subject the health insurance issuer or plan sponsor/administrator to a penalty of up to $1,000 for each such failure. (New PHSA § 2715(f)). In addition, a violation of new PHSA section 2715 will subject employers to the $100 per day, per individual tax under Code section 4980D. (See discussion above at Section III.E.1). This new PHSA section 2715 will apply to grandfathered plans. (H.R. 3590 §§ 1251(a)(3), 10103(d)).

    Clearly, this new summary benefit description obligation will, to a significant degree, duplicate the current SPD obligations imposed on plan administrators under ERISA. Moreover, it may not be feasible for plan administrators—even if authorized to do so by regulation, which would appear unlikely—to include the four-page summary required by PHSA section 2715 within the four corners of an SPD, in light of the number of occasions that the new summary will need to be provided to employees. Indeed, as benefit plans have become increasingly complex, plan administrators have struggled with how to keep SPDs relatively short in size and informative to average employees. The ability to include in a four-page summary the information required by new PHSA section 2715 would appear difficult. Finally, to the extent that employers (or insurers in the case of insured health arrangements) will have to provide a separate summary benefit description as required by PHSA section 2715, and a separate SPD as required by ERISA section 104, it will be crucial to ensure that the two documents are synchronized and do not contain conflicting rules. If any such documents are in conflict, the employer may bear the risk that if litigation were brought based on the conflict, a court would find that the document whose language is most favorable to participants wins the conflict. Cf. Burke v. Kodak Retirement Income Plan, 336 F.3d 103(2d Cir. 2003)("the consequences of an inaccurate SPD must be placed on the employer").
  • Reporting of health insurance coverage. The New Law adds reporting requirements under new sections 6055 and 6056 to the Code, designed to collect information regarding compliance with the employer "play or pay" rules and the individual coverage mandate. Large employers subject to the "play or pay" rules will be required to file a return regarding their compliance. In addition, all entities providing coverage that allows an individual to meet the individual coverage mandate will be required to file a return regarding the coverage provided to individuals. In both instances, the return will include specific information about the coverage, who was covered, and the dates of coverage. It may be feasible for the IRS to allow employers to satisfy these new reporting demands through a revised Form 5500 rather than new IRS form, but it is unclear at this time whether it will do so.

    In connection with the filing of each of these returns, the employer will be required to provide a statement to each individual the employer lists in the filing that advises the individual of the information the employer has reported to the IRS with respect to him or her. This requirement appears to be similar to the current W-2 and 1099 processes. Because one of the goals is to determine whether the individual coverage mandate is met with respect to all individuals enrolled in the plan, group health plans and health insurance issuers will need to collect tax identification numbers (Social Security numbers) from all participants. Such a collection effort has begun for many group health plans to meet Medicare Secondary Payer Reporting requirements, but it will need to be expanded in order to comply with these reporting requirements. These requirements will apply beginning with the 2014 calendar year.
  • "Transparency" disclosures. Group health plans and issuers will be required to make certain "transparency" disclosures to HHS (and to the applicable state insurance commissioner and to the public), including information on claims-payment policies and practices, number of claims denied, rating practices, enrollment (and disenrollment), and information on cost-sharing and payments with respect to out-of-network coverage. (New PHSA § 2715A). To some degree, this new rule overlaps with the annual requirement to file Form 5500s and the disclosures required by the Form 5500, but it is conceivable employers will be required to satisfy these new filing obligations through new forms rather than by amendment to the existing Form 5500 structure. This requirement will apply to plans and issuers after guidance is issued by HHS. The effective date will likely not be until 2014 because this requirement mirrors a requirement imposed on coverage offered through an Exchange. This requirement does not apply to grandfathered plans.
  • Written Notice Upon Hiring. Under changes made to the Fair Labor Standards Act, the New Law will require employers to provide all current employees, not later than March 1, 2013, and thereafter to all new employees, written notice apprising them of their health care coverage options. (New FLSA § 18B, 29 U.S.C. § 218B). This notice must include information regarding the available employer-sponsored coverage, as well as information about the Exchange and the employee's potential eligibility for a premium tax credit or cost-sharing subsidy. The DOL will issue regulations providing more guidance on the content and distribution of this notice.
  • W-2 Reporting. Under the New Law, employers must include the aggregate cost of certain employer-sponsored health coverage on an employee's Form W-2. (New Code § 6051(a)(14)). The coverage to which this requirement relates is the coverage taken into account in determining whether the Cadillac-Plan Tax applies. (See discussion below at Section IV). The cost of coverage will be determined in a manner similar to that used for determining cost for COBRA purposes. This provision is effective for taxable years beginning after December 31, 2010. Therefore, employers should be prepared to include this information when preparing Form W-2s in 2012, as this requirement will apply for the 2011 tax year.

7. New Benefit Claim Dispute Resolution Rules

The New Law requires all group health plans and health insurance issuers to implement an "effective appeals process" for appeals of coverage determinations and claims. (New PHSA § 2719). An effective appeals process will require the plan or issuer to (1) have in effect an internal claims appeal process, (2) provide notice to employees, in a culturally and linguistically appropriate manner, of available internal and external appeals processes, and the availability of any applicable office of health insurance consumer assistance or ombudsman to assist such enrollee in the appeals process, and (3) allow an enrollee to review his or her file, to present evidence and testimony as part of the appeals process, and to receive continued coverage pending the outcome of the appeals process. Initially, a group health plan can comply with the internal claims and appeals processes that are currently contained in the ERISA regulations that were published in 2000 (including provisions applicable to urgent care claims), see 29 C.F.R. § 2560.503-1, and is required to "update such process" in accordance with future standards established by DOL. (New PHSA § 2719(a)).

A group health plan and health insurance issuer also must implement an external review process. The external review process is to be satisfied either (1) by complying with applicable state external review processes that, at a minimum, include the consumer protections set forth in the Uniform External Review Model Act promulgated by the National Association of Insurance Commissioners, or (2) by implementing an effective external review process that meets minimum standards established by HHS through guidance and that is similar to the requirements in (1) above if either the applicable state has not issued appropriate guidance, or if the plan is a self-insured plan that is not subject to state insurance regulation. (New PHSA § 2719(b)). For the time being, HHS may deem the external review process of a group health plan or health insurance issuer that is in effect as of the date of enactment of the New Law to be in compliance with the new external review requirements. New PHSA section 2719 is effective for plan years beginning after September 23, 2010, but will not apply to grandfathered health plans.

Because of the exclusion for grandfathered health plans, existing group health plans should be immune from these new appeal provisions to the extent that the provisions go beyond ERISA section 503 and the applicable DOL regulations. However, because new PHSA section 2719 also applies to insurers, if the forthcoming HHS regulations require insurers to amend their existing policies to comply with these new rules, existing insured employer plans will find themselves subject to the new PHSA section 2719 requirements indirectly through regulation of insurers.

For those plans to which these new rules will apply, the biggest change from existing federal requirements will be the imposition of an external appeal right (certain states currently mandate external appeals for insured plans, although such state laws typically limit external appeal rights to claim disputes involving medical necessity denials). Such an additional dispute resolution layer obviously will increase the cost of claims administration, particularly if courts extend the judicially-created ERISA exhaustion doctrine and require claimants to also exhaust this new external appeal right prior to gaining access to federal court. New PHSA section 2719 also changes the existing regulatory framework by allowing benefit claimants to "present . . . testimony as part of the appeals process." It is unclear whether the regulations will limit that testimony right merely to the new external appeal stage. Under existing regulations, which provide only for internal appeals, the process authorizes parties to submit documents and records but there is no express requirement to allow testimony. Finally, it is unclear how the new requirement "to receive continued coverage pending the outcome of the appeals process" will be interpreted, and an unnecessarily expansive interpretation could provide significant administrative and cost burdens on plans and insurers.

F. Tax Law Changes to HFSAs, HSAs, HRAs, and Archer MSAs

1. Contribution Limit on Maximum Health Flexible Spending Arrangements

Under the New Law, salary reduction contributions to a health flexible spending arrangement are limited to $2,500 for a taxable year. (New Code § 125(i)). This limitation is effective for taxable years beginning after December 31, 2012. This statutory maximum will be adjusted annually for inflation beginning in 2014.

2. Over-the-Counter Drug Coverage

Under the New Law, coverage for over-the-counter drugs (other than insulin) purchased without a prescription will be eliminated for Health Reimbursement Arrangements ("HRAs") and Health Flexible Spending Arrangements ("HFSAs"), and the cost of such drugs will be included in gross income when paid or reimbursed from Health Savings Accounts ("HSAs") and Archer MSAs. (Code §§ 223(d)(2), 220(d)(2), 106(f)). This change is effective for amounts paid (by HSAs or Archer MSAs) or expenses incurred (for HFSAs and HRAs) with respect to taxable years beginning after December 31, 2010.

3. Increase in Penalty on Certain HSA and Archer MSA Distributions

The New Law increases the "penalty" for distributions from an HSA or Archer MSA that are used for purposes other than to pay "qualified medical expenses" to 20 percent, from the existing 10 percent for HSAs and 15 percent for Archer MSAs. (H.R. 3590 § 9004). These distributions also continue to be included in the recipient's gross income. This change is effective for distributions made after December 31, 2010.

IV. Other New Taxes and Tax-Law Changes

A. The Cadillac-Plan Tax

For taxable years beginning after December 31, 2017, the New Law imposes an excise tax on "Cadillac Plans" (New Code § 4980I). Cadillac Plans are plans with a total coverage cost that exceeds $10,200 for individual coverage and $27,500 for other than individual coverage. The Cadillac Plan tax will equal 40 percent of the cost of the coverage on a monthly basis that exceeds the thresholds described above (the excess benefit). The threshold limits are higher for persons in high-risk professions set forth in the New Law, including emergency personnel, and persons in certain jobs related to construction, utilities, and agriculture. In addition, the New Law provides for adjustments to the thresholds for firms whose health care costs are higher because of the age and gender of their employees. The Cadillac Plan tax is imposed on health insurance issuers for insured plans and on the plan administrator for self-insured plans. The Cadillac Plan tax is not discussed further in this analysis because the effective date is not until 2018, and it is likely that significant changes to the provision will occur before it is effective.

B. FICA Tax Increase

The New Law increases the rate of the "Hospital Insurance" tax (part of FICA) on wages for certain taxpayers, from 1.45 percent to 2.35 percent. (Code § 3101(b)). The increase applies only to the employee portion of the Hospital Insurance tax, not to the employer portion of the tax. A parallel increase applies to the self-employed under the provisions applicable to SECA taxes. (Code § 1401(b)). The increase applies to wages in excess of the following amounts: (1) for married taxpayers who file joint returns, $250,000, (2) for married taxpayers who file separate returns, $125,000, and (3) for all others who file returns, $200,000. Although this tax is imposed on employees, an employer will still be obligated to deduct and withhold for the hospital insurance tax from wages paid to such employees. (Code § 3102(a)). These changes for the FICA tax will be effective for taxable years beginning after December 31, 2012.

C. New "Unearned Income" Tax

The New Law also imposes an additional income tax of 3.8 percent upon individuals as well as upon estates and trusts for "unearned" income. (New Code § 1411). For an individual, the tax would be imposed on the lesser of "the individual's net investment income" for the taxable year, or the excess, if any, of a specially defined "modified adjusted gross income" over the threshold amount for the taxable year. For this purpose the threshold amount is (1) $250,000 for married taxpayers filing a joint return, (2) $125,000 for taxpayers filing a return as married filing separately, and (3) $200,000 for all others who file returns. (New Code § 1411(b)). Net investment income for this purpose includes income from "interest, dividends, annuities, royalties and rents," other than amounts that are derived in the ordinary course of a trade or business. (New Code § 1411(c)). Certain items are explicitly excluded from the definition of "net investment income" for these purposes, including distributions from qualified employer retirement plans, and items taken into account in determining self-employment income for the year if a tax is imposed on that income by Code section 1401(b), as described above in Section IV.B. The "unearned income" tax would apply to taxable years beginning after December 31, 2012.

D. New Taxes on Health Plans to Fund Outcomes Research

The New Law imposes new fees on "specified health insurance policies" and applicable self-insured health plans, for policy and plan years ending after September 30, 2012. These new fees are scheduled to expire for policy years and plan years ending after September 30, 2019. (New Code §§ 4375, 4376, and 4377.) These fees will be deposited in a trust fund for the benefit of the newly established Patient-Centered Outcomes Research Institute (a nonprofit corporation), whose purpose is to advance the quality and relevance of evidence concerning the manner in which health conditions are effectively and appropriately prevented. For purposes of the new fees, "a specified health insurance policy" is any accident or health insurance policy (including a policy under a group health plan) issued with respect to individuals residing in the United States (except for limited-scope dental and vision coverage). Fixed payments or fixed premiums are treated as specified health insurance coverage if the fixed payments or fixed premiums are received as consideration for any person's agreement to provide or arrange for the provision of accident or health coverage to U.S. residents. An applicable self-insured plan is a health benefit plan that does not provide coverage through an insurance policy, and in the case of an employer-funded self-insured plan, the employer will be liable for the tax. The fee is $2 for each year ($1 for the year ending in 2013) multiplied by the average number of lives covered under the plan. Thus, for an employer-funded self-insured plan covering 5,000 employees and 15,000 dependents, the annual fee would be $40,000.

E. Small Employer Tax Credit

The New Law provides for a tax credit for small businesses and tax-exempt organizations that provide health care coverage for their employees. (New Code § 45R). To qualify for the credit, the employer must have fewer than 25 full-time equivalent employees (based on a 40-hour work week) and pay wages averaging less than $50,000 per full-time equivalent employee per year. Because the qualification is based on full-time equivalent employees, an employer could have more than 25 employees and still qualify, if some of those employees work part-time. In addition, to qualify for the credit, the employer must contribute at least 50 percent of the premium cost of the coverage. New Code § 45R is effective immediately. For the 2010–2013 tax years, the maximum credit is 35 percent of employer-paid premiums (25 percent for tax-exempt organizations), with the premium amount used in this calculation capped by the average premium for the local small group market. Beginning with the 2014 tax year, the maximum credit increases to 50 percent (35 percent for tax-exempt organizations). An employer with 10 full-time equivalent employees and average annual wages per full-time equivalent employee of $25,000 would receive the maximum credit. The credit is subject to a gradual phase out for employers with full-time equivalent employees in excess of 10 or average annual wages in excess of $25,000. In other words, the credit is targeted to smaller employers with lower paid employees. In addition, for tax-exempt organizations, the total credit is capped by the total amount of the organization's employee income tax withholding and Medicare employment taxes for the year. Small businesses would claim the credit on their 2010 income tax return, while tax-exempt organizations would claim the credit as described in forthcoming guidance. On April 1, 2010, the IRS released FAQs in connection with the small employer tax credit. See IR News Release 2010-38.

V. Expanded Requirements for Electronic Standard Transactions

The New Law adds additional requirements regarding the performance of electronic standard transactions by health plans, health care providers, and health care clearinghouses under HIPAA. HHS is directed to issue additional guidance with the goals of providing as much uniformity as possible in the performance of electronic standard transactions, reducing the number and complexity of forms and data entry required, and eliminating, to the extent possible, the need for paper or other non-electronic communications. The New Law provides a staggered schedule for the issuance of new guidance, with guidance on different topics being issued no later than July 1 of 2011, 2012, and 2014. The new guidance will be effective also on a staggered schedule with effective dates on January 1 of 2013, 2014, and 2016. Health plans will be required to certify and provide documentation showing that their data and information systems are in compliance with the applicable standards and rules. This requirement will have the largest impact on health insurance issuers and third-party administrators, as these are the entities that generally perform electronic standard transactions on behalf of health plans. The cost of compliance will undoubtedly increase the cost of providing health coverage in the short term. However, in the longer term, it may result in increased operating efficiencies and therefore decreased administrative costs.

VI. Conclusion

There will be significant challenges and uncertainties confronting employers and health care administrators in applying the New Law and forthcoming regulatory guidance to their particular group health plans. To help clients and friends navigate these complex and often ambiguous rules, Jones Day will be issuing a series of Commentaries on the new health care reform law and regulations, and this White Paper is merely one in that series.

Footnote

1. The 9.8 percent was supposed to be 9.5 percent in order to dovetail with the premium tax credit and cost-sharing subsidy rules, respectively, but the conforming language was never added.

To return to Part 1 of this article please click on 'Previous Page' below.

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.