On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (the "Act"). Along with revisions contained in the Health Care and Education Reconciliation Act, which the President signed into law on March 30, 2010, the Act establishes a comprehensive system of healthcare reforms with significant implications for individuals, employers, healthcare providers and health plans. Among other things, principally, the Act (1) requires most Americans to purchase health insurance, (2) establishes state-run insurance exchanges through which low-income individuals and qualifying businesses can purchase health insurance that meets minimum federal standards, (3) creates premium tax credits and cost-sharing reductions to subsidize the purchase of certain health insurance through an exchange, (4) imposes several new requirements for and potential penalties on employers and employer-sponsored insurance plans, and (5) creates a variety of new or increased taxes to fund the healthcare system as reformed.
This alert outlines the key provisions of the Act that will impact employers.
Health Insurance Coverage for Employees
Penalties for Not Providing Health Coverage
The Act does not require employers to offer health insurance coverage to their employees. However, effective January 1, 2014, the Act imposes "shared responsibility" penalties on large employers who fail to provide minimal essential coverage for full-time employees and their dependents under an employer-sponsored plan. "Large employers" generally are those who employ an average of at least 50 full-time employees during the calendar year. All persons treated as a "single employer" under Internal Revenue Service (IRS) aggregation rules (e.g., commonly controlled entities, affiliated service groups, and so forth) are treated as one employer. "Full-time" employees are those who are employed for an average of at least 30 hours of service per week. "Minimal essential coverage" is defined to include basic benefits for ambulatory patient services, emergency services, hospitalization, maternity and newborn care, mental health and substance use disorder services, prescription drugs, rehabilitative services, laboratory services, preventive and wellness services, and pediatric services.
The Act also imposes shared responsibility penalties on large employers who offer full-time employees and their dependents the opportunity to enroll in minimal essential coverage that is "unaffordable" or "inadequately subsidized" by the employer under applicable federal standards. Minimum essential coverage is considered to be "unaffordable" if the employee's required contribution for the coverage exceeds 9.5 percent of his or her household income (indexed for calendar years after 2014). Minimum essential coverage is considered to be "inadequately subsidized" if the employer does not contribute at least 60 percent of the total cost of benefits provided under the plan.
Effective January 1, 2014:
- A large employer who does not provide its full-time employees and their dependents with minimum essential coverage under an employer-sponsored plan will be subject to a penalty if at least one full-time employee purchases qualified health insurance through a state exchange and receives a related premium tax credit or cost-sharing reduction (together referred to as "health coverage assistance"). Health coverage assistance generally is available to qualified low-income individuals and families (i.e., those whose household income is not less than 100 percent, or more than 400 percent, of the federal poverty line). The penalty for any month is equal to the number of full-time employees employed during the month (excluding the first 30 employees), multiplied by one-twelfth of $2,000 (adjusted for inflation after 2014), regardless of how many employees actually received health coverage assistance.
- A large employer who offers its full-time employees and their dependents the opportunity to enroll in minimum essential health coverage that is unaffordable or inadequately subsidized also will be subject to a penalty if at least one full-time employee declines to enroll in the employer-provided coverage, purchases alternative qualified health insurance through a state exchange and receives related health coverage assistance. The penalty for any month is equal to the number of employees who purchased the alternative coverage and received health coverage assistance, multiplied by one-twelfth of $3,000 (adjusted for inflation after 2014). However, the penalty will not be imposed in any month with respect to any employee to whom the employer provided a free choice voucher (discussed below). In addition, the aggregate amount of this penalty for any month cannot exceed the penalty that would have been imposed on the employer if it had not offered any health coverage at all.
The Act requires the Secretary of Health and Human Services to establish a program to determine whether employees applying for health coverage assistance meet the applicable eligibility requirements. If the Secretary notifies a state exchange that an employee is eligible for health coverage assistance because the employer either does not provide minimum essential coverage through an employer-sponsored plan or provides minimum essential coverage that is unaffordable or inadequately subsidized, the exchange must notify the employer of that fact and that the employer may be liable for shared responsibility penalties. The notice also must explain the appeals process established for employers notified of potential liability for shared responsibility penalties and must inform the employer that discriminating against or terminating an employee because he or she received health coverage assistance is a violation of the Act's anti-retaliation provision (discussed below).
Free Choice Vouchers
Effective January 1, 2014, employers who are offering minimum essential health coverage through an eligible employer-sponsored plan and are paying any portion of the costs of the plan, must provide qualified employees with a free choice voucher to be applied toward the purchase of health insurance through a state exchange. Qualified employees are those: (1) who decide not to participate in the employer's health plan; (2) whose required contribution for employer-sponsored minimum essential coverage (if they did participate in the plan) exceeds 8 percent, but does not exceed 9.8 percent, of the employee's household income; and (3) whose total household income does not exceed 400 percent of the federal poverty level for the family. After 2014, the 8 percent and 9.8 percent will be indexed based on the rate of premium growth over the rate of income growth between the current and preceding calendar year.
The amount of the free choice voucher must equal the dollar value of the employer contribution that the employer would have paid to the employer-sponsored health plan if the employee were covered under the plan. The amount of the voucher is not includable in the employee's gross income to the extent it is used to purchase health insurance coverage through a state exchange. If the amount of the voucher exceeds the premium cost of the health plan purchased by the employee, the excess must be paid to the employee and is includable in the employee's gross income. An employee who receives a free choice voucher is disqualified from receiving any premium tax credit or cost-sharing reduction for the purchase of a health insurance plan through an exchange. Similarly, if an employee receives a voucher, the employer will not be assessed a shared responsibility penalty with respect to that employee.
Automatic Enrollment in Plans Maintained by Larger Employers
Pursuant to regulations to be promulgated by the Secretary of Labor, employers with more than 200 full-time employees who offer one or more employer-sponsored health plans must automatically enroll new full-time employees in one of the plans offered, subject to any waiting period authorized by law. Employers also must give employees adequate notice of their automatic enrollment program and the opportunity to opt out of the employer-sponsored plan.
Tax Credits for Small Employers Offering Health Coverage
The Act creates a two-phased plan for tax credits designed to encourage qualified small employers to provide healthcare coverage for their employees. A qualified small employer generally is one with no more than 25 full-time equivalent employees (FTEs) whose annual full-time equivalent wages average less than $50,000. This wage limit will be indexed to the Consumer Price Index for Urban Consumers (CPI-U) each year beginning in 2014. The IRS aggregation rules for controlled groups of corporations, commonly controlled trades or businesses, and affiliated service groups, apply for purposes of determining whether the number of FTE employees exceeds 25.
For the period from 2010 to 2013, qualified small employers are eligible for a maximum tax credit equal to 35 percent of the non-elective contributions they make toward premiums for a qualified health plan offered to their employees. "Non-elective contributions" are contributions made by an employer other than an employer contribution under a salary reduction arrangement (e.g., under a "cafeteria plan"). Beginning in 2014, the maximum tax credit increases to 50 percent of employer's non-elective contributions. However, the contributions must be used to purchase a qualified health plan through a state exchange, and the credit is only available for a period of two consecutive tax years, beginning with the first year in which the employer offers a qualified plan to its employees through an exchange. In any case, the employer must subsidize at least 50 percent of the cost of the employee's insurance to be eligible for the tax credits.
Simple Cafeteria Plans for Small Employers
Effective January 1, 2011, the Act permits employers with 100 or fewer employees to provide tax-free health benefits through newly-created "simple cafeteria plans" (SCPs). An SCP is a cafeteria plan that (1) is established by an eligible employer, (2) requires the employer to make a prescribed minimum contribution to provide cafeteria plan benefits for all of its "qualified employees" (i.e., those who are not highly compensated or key employees), (3) meets minimum eligibility rules requiring all employees with at least 1,000 hours of service to be eligible to participate in the plan, and (4) meets minimum participation rules pursuant to which all eligible employees may (subject to terms and conditions applicable to all participants) elect any benefit available under the plan. In exchange for meeting these requirements, the employer is provided with a safe harbor from the nondiscrimination rules that generally prohibit cafeteria plans from favoring highly compensated and key employees in terms of eligibility for benefits, contributions, and types and amounts of benefits. Under the Act, SCPs are treated as meeting these nondiscrimination rules.
Effective March 1, 2013, covered employers must provide each current and newly-hired employee with written notice regarding a state-run insurance exchange, including a description of the services provided by the exchange and the manner in which the employee may contact the exchange to request assistance. The notice also must inform the employees that under certain circumstances, they may be eligible for health coverage assistance (i.e., premium tax credits and cost-sharing reductions) to subsidize the purchase of a qualified health plan through the exchange, and that they will lose the employer contribution to their health plan benefit if they purchase coverage through the exchange.
Protection for Whistleblowers and Employees Receiving Health Coverage Assistance
The Act amends the Fair Labor Standards Act (FLSA) by adding an anti-retaliation provision that protects whistleblowers and employees who receive health coverage assistance. Specifically, the new provision makes it unlawful for an FLSA-covered employer to discharge or in any manner discriminate against any employee with respect to his or her compensation, terms, conditions or other privileges of employment because the employee (or an individual acting at the request of the employee) meets any of the following criteria:
- received health coverage assistance in the form of a premium tax credit or cost-sharing reduction
- provided, caused to be provided, or is about to provide or cause to be provided to the employer, the federal government, or the attorney general of a state, information relating to any violation of, or any act or omission the employee reasonably believes to be a violation of, any provision of Title 29 of the United States Code
- testified or is about to testify in a proceeding concerning such violation
- assisted or participated, or is about to assist or participate, in such a proceeding
- objected to, or refused to participate in, any activity, policy, practice or assigned task that the employee (or other such person) reasonably believed to be in violation of any provision of this title, or any order, rule, regulation, standard or ban under Title 29
An employee who believes that he or she has been discharged or otherwise discriminated against by any employer in violation of this provision may seek relief in accordance with the procedures, notifications, burdens of proof, remedies and statutes of limitation set forth in 15 U.S.C. Section 2087(b) (the Consumer Product Safety Improvement Act of 2008). An aggrieved individual may file a complaint with the Secretary of Labor within 180 days of the alleged violation. The Secretary will then conduct an investigation and determine whether there is reasonable cause to believe that the complaint has merit. Upon the request of either party, the Secretary will convene a formal administrative hearing to address the allegations in the complaint. Under certain circumstances, the aggrieved individual may pursue his or her complaint in federal district court.
To prevail, the complainant must demonstrate that his or her protected behavior was a contributing factor in the challenged employment action. However, the employer may avoid liability by demonstrating with clear and convincing evidence that it would have taken the same employment action in the absence of the employee's protected behavior. If a violation is established, the available relief includes reinstatement to the employee's former position with compensation (including back pay), compensatory damages, and an award of attorneys' fees and costs.
Nothing in the new anti-retaliation provision will be deemed to diminish any rights, privileges or remedies of any employee under any federal or state law or under any collective bargaining agreement. In addition, the rights and remedies established by the anti-retaliation provision may not be waived by any agreement, policy, form or condition of employment.
Mandated Breaks for Nursing Mothers
The Act amends the FLSA by adding a provision requiring FLSA-covered employers to provide reasonable unpaid breaks to an employee who is breastfeeding and needs to express milk for her nursing child who is up to one year old. The new provision also requires employers to furnish a private space, other than a restroom, for employees to express milk in the workplace. However, the provision does not apply to employers with fewer than 50 employees if they can demonstrate that complying would "impose an undue hardship by causing the employer significant difficulty or expense."
Although this new provision allows the breaks to be unpaid, states may have laws covering expressing of breast milk that impose greater obligations on employers. In such cases, the employer must adhere to the law that is more beneficial to the employee. The new federal provision does not preempt state laws addressing the subject.
Grants for Workplace Wellness Programs
The Act creates a grant program to assist small employers to provide comprehensive workplace wellness programs. For this purpose, a "small employer" is one who employs fewer than 100 employees who work 25 or more hours per week. The grants will be awarded by the Department of Health and Human Services from a $2 billion, five-year program, beginning in 2011. To be eligible for a grant, the small employer must not have had a workplace wellness program as of March 23, 2010, the new program must be made available to all employees and the program must include all of the following components:
- health awareness initiatives, such as health education, preventive screenings and health risk assessments
- efforts to maximize employee engagement, including mechanisms to encourage employee participation
- initiatives to change unhealthy behaviors and lifestyle choices, such as counseling, seminars, online programs and self-help materials
- supportive workplace environment efforts, including policies to encourage healthy lifestyles, healthy eating, increased physical activity and improved mental health
Selected Benefit, Coverage and Testing Provisions
Ban on Annual and Lifetime Limits
Effective September 23, 2010 (i.e., six months after the date of the Act's enactment), group health plans will not be permitted to impose lifetime limits on the dollar value of benefits provided to plan participants and beneficiaries. The Act also generally prohibits group health plans from placing unreasonable annual limits on the dollar value of benefits provided to participants and beneficiaries. Benefit-based limits are still permitted for benefits that are not included within "minimum essential coverage" (discussed above).
Preventive Care and Dependent Children
Effective September 23, 2010, the Act requires group health plans to provide certain preventive care recommended by the newly-created Preventive Services Task Force and other groups, and prohibits the imposition of any cost-sharing requirements on such care. In addition, any group health plan that provides dependent coverage must continue to make that coverage available to a child until he or she reaches 26 years of age.
Limit on Waiting Periods
Beginning in 2014, the Act prohibits any group health plan or health insurance issuer from applying a waiting period in excess of 90 days.
Extension of Nondiscrimination Rules to Insured Plans
Effective September 23, 2010, the Act extends to insured group health plans the nondiscrimination requirements that currently apply only to self-insured group health plans. These requirements prohibit plan sponsors of group health plans from (1) establishing rules relating to eligibility for healthcare coverage that are based on an employee's total hourly or annual salary, and (2) discriminating in favor of "highly compensated individuals" (which generally includes the five highest-paid officers, any 10 percent owners and the highest-paid 25 percent of all employees). This change will preclude employers from providing special health insurance coverage to their executives and other highly compensated employees on a pre-tax basis. Employers who sponsor an insured group health plan that violates the nondiscrimination requirements are subject to potentially substantial excise taxes.
Health-Related Taxes and Revenue Raisers
Excise Tax on Cadillac Plans
Beginning in 2018, health insurance issuers and (in the case of self-insured plans) plan administrators, are subject to a 40 percent non-deductible excise tax on the amount by which the aggregate cost of the applicable employer-sponsored coverage for the employee exceeds $10,200 (for individual coverage) or $27,500 (for family coverage). These high cost plans are referred to as "Cadillac" plans. The excess is determined on a monthly basis. Coverage under a collectively bargained multiemployer plan is deemed to be family coverage and thus always is eligible for the higher limits. The dollar limits are subject to employer-specific age and gender adjustments, and are increased for retired individuals who are at least 55 years old, plans that cover employees engaged in certain high-risk professions, and plans that cover employees who repair or install electrical or telecommunications lines. In addition, the dollar limits will be increased for inflation after 2018.
The excise tax is levied at the coverage provider level. However, the employer (or the plan, in the case of a multiemployer plan) is responsible for determining the excess amount subject to the excise tax, allocating it among different coverage providers (if there is more than one), and issuing information returns to the IRS indicating each provider's applicable share of the amount subject to the tax. The employer can be responsible for interest and penalties if it fails to correctly determine and report the taxable amount.
Additional Hospital Insurance Tax for High-Wage Workers
Beginning in 2013, the Act increases the Medicare Hospital Insurance tax rate component of FICA by 0.9 percent (i.e., from 1.45 percent to 2.35 percent) on taxpayer earnings in excess of $250,000 in the case of a married couple filing a joint return, $125,000 in the case of a married taxpayer filing a separate return and $200,000 in all other cases. The dollar thresholds are not indexed for inflation. The employer is liable for the amount of the additional tax and/or related penalties if it fails to withhold the tax on earnings received from the employer in excess of the applicable dollar thresholds.
Surtax on Unearned Income
Also beginning in 2013, the Act imposes a 3.8 percent surtax (called the "Unearned Income Medicare Contribution") on net investment income of higher income taxpayers. For individuals, the surtax is 3.8 percent of the lesser of (1) net investment income, or (2) the excess of modified adjusted gross income (MAGI) over the threshold amount. The threshold amount is $250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return and $200,000 in all other cases. For surtax purposes, "investment income" generally includes interest, dividends, royalties, rents, gross income from a trade or business involving passive activities and net gain from disposition of property (other than property held in a trade or business). "Net investment income" is arrived at by subtracting properly allocable deductions from investment income.
Elimination of Deduction for Employer Part D
Effective January 1, 2013, the Act eliminates the deduction for employers who maintain prescription drug plans for their Medicare Part D eligible retirees.
Provisions Affecting HSAs, Archer MSAs and FSAs
Beginning in 2011, the Act increases the penalty on nonqualified distributions from health savings accounts (HSAs) from 10 percent to 20 percent, and the penalty on nonqualified distributions from Archer medical savings accounts (Archer MSAs) from 15 percent to 20 percent. Effective January 1, 2011, distributions from HSAs, Archer MSAs and health flexible spending accounts (FSAs) for medicine or a drug will be considered "nonqualified" unless the medicine or drug is prescribed or is insulin. Beginning in 2013, the Act also places a $2,500 limit on the amount an employee may contribute by salary reduction to an FSA maintained under a cafeteria plan. This dollar limit will be adjusted for inflation after 2013.
Cost of Employer-Sponsored Health Coverage
For tax years beginning after December 31, 2010, employers must report on each employee's annual W-2 Form the aggregate cost of benefits provided to the employee under applicable employer-sponsored health plans. For this purpose, the aggregate cost is determined under rules similar to those in Code Section 4980B(f)(4), dealing with the employee's cost for COBRA coverage.
Reporting by Employers Subject to Shared Responsibility Penalties
Beginning in 2014, every large employer who is subject to shared responsibility penalties (i.e., because the employer fails to provide the minimum essential coverage to its full-time employees and their dependents, or offers minimum essential coverage that is unaffordable or inadequately subsidized), and every employer offering a free choice voucher, must report certain health insurance coverage information to both its full-time employees and the IRS. The information that must be reported includes:
- the name, address and employer identification number (EIN) of the employer
- a certification as to whether the employer offers its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan
- the number of full-time employees of the employer for each month during the calendar year
- the name, address and taxpayer identification number (TIN) of each full-time employee employed by the employer during the calendar year and the number of months (if any) during which the employee (and any dependents) was covered under a plan sponsored by the employer during the calendar year
- other information as required by the IRS
Large employers who offer the opportunity to enroll in minimum essential coverage also must report:
- the length of any waiting period with respect to that coverage
- the months in the calendar year during which the coverage was available
- the monthly premium for the lowest-cost option in each of the enrollment categories under the plan
- the employer's share of the total allowed costs of benefits under the plan
- in the case of an offering employer (i.e., one who offers minimum essential health coverage through an eligible employer-sponsored plan and pays any portion of the costs of the plan), the option for which the employer pays the largest portion of the cost of the plan and the portion of the cost paid by the employer in each of the enrollment categories under each option
The Act allows employers to enter into agreements with insurance issuers to include the foregoing information in the reports that the issuers are required to provide to the IRS and individuals to whom they are providing minimum essential coverage (as described below).
Reporting by Insurers Providing Minimum Essential Coverage
Beginning in 2014, insurers (including employers who self-insure) who provide minimum essential coverage to any individual during a calendar year must report the following information to both the covered individual and the IRS:
- the name, address, and taxpayer identification number (TIN) of the primary insured, and the name and TIN of each other individual obtaining coverage under the policy
- the dates during which the individual was covered under the policy during the calendar year
- whether the coverage is a qualified health plan offered through an exchange
- the amount of any premium tax credit or cost-sharing reduction received by the individual with respect to such coverage
- other information as required by the IRS
If the minimum essential coverage is provided by the insurer through an employer's group health plan, the insurer also is required to report the name, address and employer identification number of the employer, the portion of the premium (if any) required to be paid by the employer, and any other information the IRS may require to administer the new tax credit for eligible small employers.
The impact of these new healthcare reforms on employers is multi-faceted and complex. This article is intended to provide employers a quick overview of how this monumental overhaul in the provision of healthcare in the United States will directly require employers to modify their practices and policies. The Act constitutes the commencement of a new era in healthcare services which will directly and profoundly impact individual employees, employers and healthcare providers throughout the country.
Holland & Knight attorneys practicing in the firm's Labor and Employment Law Group and the Healthcare & Life Sciences Team, as well as attorneys practicing in other areas affected by the new legislation, have a solid knowledge base concerning the provisions of the Act and the necessary experience and acumen to help clients successfully meet the myriad obligations created by the Act. For more detailed information and assistance in meeting these new standards, please contact one of attorneys below or any member of the Holland & Knight Labor and Employment Law Group with whom you are familiar for further guidance.
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.