Almost two and a half years have passed since President Obama signed into law the Patient Protection and Affordable Care Act ("PPACA"; P.L. 111-148, 124 Stat. 119), and its companion amendment, the Health Care and Education Reconciliation Act of 2010 ("HCERA"; P.L. 111-152, 124 Stat. 1029), (collectively, the "Affordable Care Act" or "ACA"). The ACA makes a remarkable number of changes to the U.S. health care system, many of which directly affect employers in their role as sponsors of group health plans offered to current and former employees, and their dependents. The ACA also altered many other facets of the U.S. health care delivery and payment system, such as Medicare, Medicaid, and community health services.
Shortly after the ACA was enacted, various legal actions were filed challenging its constitutionality, focusing largely on the individual mandate and the statute's expansion of Medicaid coverage. These key issues were finally decided in the Supreme Court's controversial National Federation of Independent Business decision.1 Additional legal challenges continue to be filed, but it is not expected they will be finally determined any time soon, or that their potential impact will be significant to the ACA overall.
Thus, in the absence of a major political shift in this November's election, the ACA would appear to be here to stay. A good portion of the law gets implemented in 2014, and it is important for employers to understand the forthcoming rules and how they will affect their providing health benefits to current and former employees. This White Paper discusses them. To be sure, significant pieces of the reform architecture were left to the Departments of Treasury, Labor ("DOL"), and Health and Human Services ("HHS") to frame out in regulations and new disclosure forms, and a good deal of it has yet to be determined. Furthermore, presidential politics suggest that much of the needed regulatory pieces will not be issued until after the November election. Nonetheless, even with the current structural deficits, it is still sensible for employers to take stock of the ACA after two and a half years in operation, and to consider how to navigate its likely new rules in 2014.
II.THE LEGISLATIVE ELEMENTS DESIGNED TO INCREASE THE NUMBER OF INSURED AMERICANS
Perhaps the most important legislative purposes of the ACA are to increase the number of Americans with health insurance, and to ensure that such health insurance satisfies certain minimum thresholds of coverage. The ACA does so, effective January 1, 2014, by: (i) requiring most Americans to purchase health insurance coverage or pay what the ACA calls a "penalty," which the Supreme Court deemed to be a tax (the "Individual Mandate"), (ii) prohibiting insurance companies from denying coverage to those with preexisting conditions or health issues (i.e., guaranteed issue), (iii) prohibiting insurance companies from charging unhealthy individuals higher premiums than healthy individuals (i.e., community rating), and (iv) providing avenues for Americans to acquire health insurance that provides a minimum basic level of coverage. The avenues for acquiring coverage are: (i) for persons age 65 or over or disabled, through Medicare, (ii) for persons whose income is under 133 percent of the federal poverty line,2 through Medicaid,3 (iii) for individuals and small businesses by purchasing insured coverage through "American Health Benefit Exchanges" ("Exchanges"), and (iv) for "full-time" employees of "Large Employers" (i.e., generally employers with 50 or more employees) through their employer, to the extent their employer elects to "play" under the Large Employer mandates. Many individuals will be eligible for coverage under more than one of these avenues and will be able to choose what is the best value for them. In addition, individual and group health insurance will still be available outside of the Exchanges.
In order to help individuals purchase coverage, premium tax credits and cost-sharing subsidies will be available through Exchanges to persons with incomes below certain levels. These are discussed in more detail in Section II.E.2. below. In addition, certain small businesses that provide health coverage will be entitled to a small business tax credit, as discussed in Section V.C.
These new rules provide a crucial context to the many other rules that directly affect employers.
A. The Individual Mandate
Under the ACA, most Americans will be required to purchase health insurance coverage or pay a tax for each month for which they do not have minimum coverage. (Code § 5000A(b)). A taxpayer will be liable for the tax with respect to himself or herself, as well as with respect to his or her tax dependents, to the extent any of them are required, but fail, to obtain health insurance. The tax must be included with the taxpayer's annual income tax return.
The annual tax (which is prorated for each month a person is without coverage) equals the greater of (i) a "flat dollar amount" and (ii) a percentage of the taxpayer's household income in excess of that year's filing threshold (the filing threshold is the total of the standard deduction plus the personal exemptions; for the 2011 tax year, for example, a married couple with no dependents would have a filing threshold of $19,000). The annual flat dollar amount is $95 in 2014, $325 in 2015, and $695 in 2016, with the amount being indexed for inflation thereafter. While the flat dollar amount is multiplied by the number of people in the household who do not have coverage, the number of people counted is capped at three. In addition, the flat dollar amount for individuals who are under 18 is one-half of the amounts listed above. The percentage also phases in and is 1.0 percent in 2014, 2.0 percent in 2015, and 2.5 percent thereafter. (Code § 5000A(c)(2),(3)). The annual tax due from a taxpayer is capped by the national average premium for bronze level coverage (as defined in Section II.E.1. below) for the taxpayer's family size that is offered through Exchanges for the applicable tax year.
Certain individuals will not have to pay the tax. (Code § 5000A(e)). These include (i) individuals whose required contribution for self-only coverage through an employer-sponsored planorwhose required contribution, reduced by any premium tax credit, for bronze level coverage through an Exchange (as described in Section II.E. below)exceeds 8 percent (which percentage will be adjusted annually for premium inflation relative to income inflation) of his or her household income; (ii) individuals whose annual gross income is below the filing threshold (as defined in the immediately preceding paragraph); (iii) individuals who are members of an Indian tribe; and (iv) any individual who HHS determines has suffered a hardship. In addition, the penalty will not apply for the months in a gap in coverage of less than three months, provided this exception only applies once per calendar year.
While the tax is required to be paid in connection with the taxpayer's annual income tax return, the IRS is limited in its collection methods. (Code § 5000A(g)). The IRS may collect payment by sending an assessment or by automatically offsetting any refunds by the amounts of the tax owed. However, the ACA prohibits the IRS from filing any liens or levies to collect this unpaid tax and does not impose criminal fines or penalties for failure to pay this tax. (Code § 5000A(g)(2)).
The Health Insurance Portability and Accountability Act of 1996, as amended ("HIPAA"), added provisions to the Public Health Service Act ("PHSA") requiring that insured coverage be available to certain individuals in every state, with no preexisting condition limitations. (PHSA § 2741). These individuals are ones that have at least 18 months of "creditable coverage," with the most recent prior "creditable coverage" being provided by an employer-sponsored group health plan. States have flexibility in how this coverage is provided, whether through private insurers or through a state-run high risk pool. There are, however, no limitations on the premiums for this coverage.
In addition, HIPAA requires that group health insurance for small groups (employers with two to 50 employees) be provided on a guaranteed issue basis. (PHSA § 2711). Some state insurance laws currently require broader guaranteed issue than that described above.
The ACA expands the guaranteed issue requirements under the PHSA. Specifically, for policy years beginning on or after January 1, 2014, with respect to nongrandfathered plans (as defined in Section IV.A.4. below), health insurance issuers are required to issue coverage to every employer and individual who applies for coverage. (PHSA § 2702). Enrollment may be restricted to certain open or special enrollment periods. However, the special enrollment periods must include events that are qualifying events for COBRA continuation coverage. In other words, an individual must be able to enroll in insured coverage at any time that they would be eligible for COBRA coverage. As discussed in Section IV.B.2. below, this coverage must be provided with no preexisting condition limitations.
Health insurance, whether sold through an Exchange (as described below) or sold outside the Exchange, is subject to the guaranteed issue requirement. There has been much speculation about whether the combination of guaranteed issue, the community rating requirement discussed in Section II.C. below, and the amount of the tax for not having coverage relative to the amount of likely premiums for obtaining coverage may cause many healthy people to choose the less expensive route of foregoing coverage and paying the tax. Yet such speculation fails to take into account the risk of not having coverage if one suddenly falls ill or is in an accident. We do not yet know the full parameters of any enrollment or waiting periods that may apply with respect to guaranteed issue coverage. However, it is questionable whether coverage would be issued on a retroactive basis to persons who had previously not had coverage. As such, an unexpected illness or injury may result in uninsured costs for obtaining treatment prior to the effective date of guaranteed coverage. Therefore, at least risk-averse individuals who can afford coverage will likely purchase it if only to manage for the potential risk of expenses immediately following an unforeseen medical emergency.4
C. Community Rating
In addition to the guaranteed issue requirement, the ACA sets community rating limits on insurance premiums, effective for policy years beginning on or after January 1, 2014. (PHSA § 2701). As with the guaranteed issue requirement, this requirement does not apply to grandfathered coverage. In addition, this requirement does not apply to large group (employers with more than 100 employees) coverage, unless that coverage is offered through an Exchange.
The community rating requirement places limits on the differences in rates that an insurer can set for the same coverage. Rates may only vary based on: (i) whether coverage is for an individual or a family, (ii) geographic location, (iii) age, and (iv) tobacco use. Rates may not vary for any other reason, including the health of the individual or group members. The geographic locations for which rates may vary will be set on a state-by-state basis, with at least one geographic location in each state. With respect to variations based on age, the variation may not be more than 3 to 1 for adults. In other words, the highest premium differential based on age may not be more than three times the lowest one. In addition, guidance will be issued defining the permissible age bands for rating purposes. Likewise, for variations based on tobacco use, the variation may not be more than 1.5 to 1. Until further guidance is issued, it will not be clear how this limitation on variations based on tobacco use will integrate with wellness program rewards (as discussed below at Section IV.F.1.) related to tobacco use. For family coverage, the permitted variations based on age and tobacco use must be applied based on the portion of the premium attributable to the applicable family member(s).
D. Medicaid Expansion
Medicaid, first enacted in 1965, is a partnership between the federal government and the various states to provide health coverage to certain low-income individuals. States that participate in the Medicaid program receive federal dollars as long as the state's Medicaid program meets certain requirements. Because these requirements give a great deal of flexibility to states, eligibility for Medicaid coverage varies greatly from state to state. In general, Medicaid coverage is currently available to: (i) pregnant women and children under age 6 with family incomes at or below 133 percent of the federal poverty line (as defined at footnote 2 above), (ii) children age 6 through 18 with family incomes at or below 100 percent of the federal poverty line, (iii) parents and child caretaker relatives who meet certain financial eligibility requirements, and (iv) elderly and disabled individuals who qualify for Supplemental Security Income benefits based on low income and resources. Some states have additional eligibility categories; however, coverage is generally not available for childless adults.
The ACA includes provisions to expand the Medicaid program to cover all individuals under age 65 with incomes below 133 percent of the federal poverty line. (42 U.S.C. § 1396a(a)(10)(A)(i)(VIII)). This Medicaid expansion is estimated to result in 16 million to 22 million additional individuals enrolling in Medicaid coverage nationwide.5 Individuals who are eligible for Medicaid under this new category must receive a benefit package that meets certain minimum coverage requirements. Initially, the federal government will pay 100 percent of the costs of medical coverage for these newly eligible individuals. However, beginning in 2017, the federal payment will decrease over four years, to a permanent (at least under current law) minimum of 90 percent beginning in 2020.
The ACA further provides that if a state does not elect to participate in this Medicaid expansion, it will not receive either the additional federal dollars earmarked for the expansion or any other federal dollars related to the Medicaid program. In other words, the ACA provided states with a choice of agreeing to the expansion or losing all of their federal Medicaid funding. This was of great concern to several state governments because, even though the federal contribution for the Medicaid expansion would be substantial, it would decrease from 100 percent of the cost of coverage to 90 percent by 2020, leaving states with the obligation to pay for 10 percent of the expanded coverage, and the additional cost burden of increasing their respective Medicaid regulatory agencies so as to administer the significant expansion in the Medicaid rolls. For many states, the Medicaid expansion will involve the addition of a huge number of people to coverage. For example, Texas' Medicaid rolls are estimated to increase by at least 1,798,314, Florida's by at least 951,622, and California's by at least 2,008,796.6 Ten percent of the cost of coverage of this volume of new enrollees is not insignificant.
In National Federation of Independent Business, the Supreme Court addressed a challenge by 26 states to these Medicaid expansion provisions. The states asserted that the ACA's provision to eliminate all federal Medicaid funding if a state opted not to expand Medicaid eligibility was so onerous as to be "coercive," making that condition on funds an unconstitutional exercise of federal power beyond the scope of the Spending Clause. The Court agreed 7-2. Although there was no opinion for the Court, the Court's judgment was that the constitutional violation could be remedied by limiting the power of the Secretary of HHS to withhold Medicaid funds to just withholding the new Medicaid funds from states that do not participate in the Medicaid expansion, rather than withholding all Medicaid funds from such states.
In essence, the Supreme Court's decision means that the Medicaid expansion is optional for the states. A number of states have indicated that they will not participate in the Medicaid expansion for the reasons described above. However, because the Medicaid expansion is not effective until 2014, it remains to be seen whether a compromise will be reached. To the extent that states do not elect to participate in the Medicaid expansion, the ACA's public policy objective of near universal health coverage will not be achieved. Further, many hospitals located in states that do not participate in the Medicaid expansion, yet serve substantial numbers of individuals near the federal poverty line, will be harmed by the loss of Medicaid revenue.
If a state does not participate in the Medicaid expansion, the number of individuals in that state who take advantage of the premium tax credits to acquire coverage on an Exchange may increase significantly. Were a state to elect not to expand Medicaid as described in the ACA, individuals in such state whose household income is greater than 100 percent but less than 133 percent of the federal poverty line would be eligible for premium tax credit assistance if they acquire an Exchange-provided insurance policy. (See discussion below at II.E.) Because an employer's liability for the Large Employer mandates (and related penalties) is contingent on a full-time employee accepting a premium tax credit, the increase in the working poor obtaining the premium tax credit could increase the potential tax liability for employers that opt out of providing group health insurance. (See discussion below at III.A. and B.) Employers with lower-paid workers in states that do not participate in the Medicaid expansion will want to pay careful attention to the potential for Large Employer mandate penalties.
E. Insurance Exchanges
The ACA requires each state to create and operate an Exchange where individuals and small employers can purchase health insurance coverage. (PPACA § 1311(b)). The guidance refers to the Exchange for small employers as the SHOP ("Small Business Health Options Program") Exchange. States can choose to have separate Exchanges for these two different categories or combine them in one Exchange. In addition, states can choose to enter into a partnership with HHS, where the Exchange is partially run by the state and partially run by HHS. If a state fails to create and have operational an Exchange by January 1, 2014, or to comply with HHS regulations respecting the design of the Exchanges, the ACA requires HHS to establish and operate an Exchange for such state. These are known as "federally facilitated exchanges" ("FFEs"). In this regard, states are required to submit a blueprint to HHS documenting their plan for establishing an Exchange no later than November 16, 2012 for the 2014 plan year. HHS must approve or conditionally approve state-based Exchanges no later than January 1, 2013. If a state does not have a state-run Exchange for the 2014 plan year, it has the opportunity to assume all or part of the Exchange functions in future years through a similar application process with HHS.
For purposes of the SHOP Exchange, a "small employer" is an employer that employed no more than 100 employees on average during the prior calendar year. (PPACA § 1304(b)(2)). However, for plan years beginning before January 1, 2016, states can elect to substitute a 50-employee limit for the 100-employee limit. In addition, beginning in 2017, states may choose whether to allow employers with more than 100 employees to offer coverage for their employees through an Exchange. Participation by individuals and employers in coverage through an Exchange will be completely voluntary, and employers may continue to offer (and individuals to accept) coverage through non-Exchange health insurance arrangements.
It is not yet clear how many states will establish Exchanges on their own. All states, except Alaska, have received initial Exchange planning grants from the federal government. The majority of states have also received additional grant money to help them establish an Exchange. However, even those states may not have moved far enough along by the deadline for HHS approval in order to have a state-established Exchange in 2014.
1.Qualified Health Plans
In order to ensure that the health insurance offered through an Exchange satisfies a minimum threshold of coverage, a "health plan" offered through an Exchange must be certified by the Exchange, pursuant to HHS regulations, as a "qualified health plan." (PPACA § 1311(c)-(e)).For these purposes, a "health plan" needs to be offered by a licensed insurer; it cannot be a self-insured plan sponsored by an employer or a Taft-Hartley plan and exempt from state regulation under ERISA's preemption rules. (PPACA § 1301(b)(1)). In addition, a "qualified health plan" will need to satisfy three categories of requirements.
First, it will need to provide coverage that includes "essential health benefits." In general, essential health benefits will include coverage for ambulatory patient services, emergency services, hospitalization, maternity and newborn care, mental health and substance abuse care, prescription drugs, rehabilitative and habilitative services, laboratory services, preventive and wellness services, and pediatric care (including pediatric oral and vision care). (PPACA § 1302(b)). HHS has adopted an approach that would let each state choose from a number of "benchmark" plans in order to define in more detail what constitutes essential health benefits for insured coverage (both individual and small group) issued in that state. States could choose a "benchmark" plan from among the following health insurance plans: the largest insured plan by enrollment in any of the three largest small group insurance products in the state's small group market, any of the largest three employee health benefit plans for state employees by enrollment, any of the largest three national FEHBP (Federal Employees Health Benefits Program) plan options by enrollment, or the largest insured commercial non-Medicaid HMO operating in the state.
Second, a health plan must also satisfy limits on cost-sharing and deductibles. (PPACA § 1302(c)). Specifically, the annual cost-sharing i.e., the sum of the annual deductible, co-insurance, and copayments for a health plan cannot exceed the limits applicable to a so-called high deductible plan under Code section 223(c)(2)(A)(ii) for the 2014 tax year, with such amount being adjusted annually thereafter. By way of reference, the limits in place for 2012 are $6,050 for self-only coverage and $12,100 for multiperson coverage. In addition, the deductible cannot exceed $2,000 for self-only coverage and $4,000 for multiperson coverage (with such limits allowed to be increased by amounts "readily available" for reimbursement under a flexible spending account). Such amounts will be adjusted for inflation annually after 2014.
Third, the level of coverage that a "qualified health plan" must provide needs to satisfy one of five actuarial thresholds: (i) "platinum level" (providing coverage equal to 90 percent of actuarial value), (ii) "gold level" (providing coverage equal to 80 percent of actuarial value), (iii) "silver level" (providing coverage equal to 70 percent of actuarial value, (iv) "bronze level" (providing coverage equal to 60 percent of actuarial value), or (v) catastrophic. (PPACA § 1302(d), (e)). The catastrophic plan coverage level is available only to persons under the age of 30 (at the beginning of the plan year) or those otherwise exempt from the individual mandate tax due to the fact that they cannot afford coverage or suffered a hardship.
2. Premium Tax Credits and Cost-Sharing Subsidies
In order to help individuals purchase coverage, premium tax credits and cost-sharing subsidies will be available through Exchanges to persons with incomes below certain levels (Code § 36B (premium tax credit); PPACA § 1402 (cost-sharing subsidy)). These subsidies are available at least in Exchanges run by a state.7 As discussed further below in Part III.C., there is a substantial question whether they are properly available in Exchanges run by the federal government.
Premium tax credits are available to individuals with household income of at least 100 percent but not more than 400 percent of the federal poverty line (as defined at footnote 2 above) and to resident aliens with household income of less than 100 percent of the federal poverty line. In order to qualify for the credit, spouses must file a joint return. Individuals who are claimed as a dependent on another person's tax return are not separately eligible for the credit; persons not lawfully present in the United States are also not eligible for the credit. In addition, the credit is not available for individuals who are enrolled in an employer-sponsored plan or who are eligible for coverage under an employer-sponsored plan that meets the affordability and minimum value requirements described in Section III.B. below. (Code § 36B(c)(2)(B), (C)).
The premium tax credit is determined based on the individual's household income and the premium for the second-lowest-cost "silver level plan" available under the Exchange. The premium tax credit is set so that if an individual selects the second-lowest-cost silver level plan, the individual would pay no more than a certain percentage of his household income for the premium. This percentage starts at 2.0 percent for individuals with a household income up to 133 percent of the federal poverty line and gradually increases to 9.5 percent for individuals with a household income over 300 percent of the federal poverty line. The premium tax credit, while set based on the cost of a silver level plan, may nonetheless be applied toward the premium of any coverage purchased through an Exchange, but cannot, in any event, exceed the actual premium paid. In addition, advance payments can be paid directly to the insurer, with a reconciliation of any overpayment or underpayment being made on the individual's annual income tax return.
If an individual who is eligible for the premium tax credit enrolls in a silver level of coverage through an Exchange, that individual will also be eligible for a reduced out-of-pocket maximum, with the reduction being greater for individuals with a lower household income. (PPACA § 1402). Additional cost-sharing (i.e., deductibles, co-insurance, and copayments) reductions will be provided to individuals with a household income no greater than 250 percent of the federal poverty line.
III. THE MANDATES FOR LARGE EMPLOYERS
A."Play or Pay" Mandate
Effective January 1, 2014, the ACA will generally require all employers who employed an average of at least 50 "full-time equivalent" employees during the prior calendar year (which the ACA defines for this purpose as a "Large Employer") to either offer health insurance coverage constituting "minimum essential coverage" to full-time employees and their dependents8 or potentially be subject to a tax equal to $2,000 annually ($166.67 per month) for each full-time employee of the employer in excess of 30 employees. (Code § 4980H(a), (c)(1)). For these purposes, an employer is defined by the controlled group rules of Code section 414. The term "minimum essential coverage" does not require the employer to provide certain types of coverage or maintain certain cost-sharing limits, such as would apply to an "essential health benefits" plan eligible for certification by an Exchange as a "qualified health plan." Minimum essential coverage merely needs to be a group health plan (as defined in Section IV.A.1. below) offered by an employer. (Code § 5000A(f) (defining "minimum essential coverage")). That being said, there are numerous requirements that independently apply to such coverage. The ones added by the ACA are described in Section IV below.
The term "full-time employee" is defined as an employee working on average 30 hours or more each week. For determining the number of "full-time equivalent" employees the employer has in a month, the hours of part-time employees for the month are aggregated and divided by 120. (Code § 4980H(c)(2)(E)). An employer will not be subject to the "play or pay" rule if, in the prior year, the employer's workforce exceeded 50 full-time employees for only 120 or fewer days, and the employees in excess of 50 during that maximum 120-day period were seasonal workers. (Code § 4980H(c)(2)(B)). The Department of Treasury has issued preliminary proposals to use a "look back/stability period safe harbor" method to determine who constitutes a full-time employee for these purposes. (IRS Notice 2011-36). These preliminary proposals have also discussed but not yet provided rules for determining full-time status for new employees and employees who move into full-time status mid-year, as well as how the Large Employer mandates will interact with the automatic enrollment requirement and the 90-day limitation on waiting periods (discussed at Sections IV.E.1. and IV.E.3. below).
In order for the $2,000 per full-time employee annual tax to apply, at least one of the employer's full-time employees must enroll in a health plan offered by an Exchange and also qualify for a premium tax credit or cost-sharing subsidy (discussed above at Section II.E.2.). If no full-time employee receives such a credit or subsidy, then the tax does not apply. Because the credits and subsidies are available only to individuals with household incomes less than 400 percent of the federal poverty line, employers who pay relatively high wages to their full-time employees may not be at risk for the "play or pay" tax, even if they don't provide any coverage.
B.Affordability and Minimum Value Mandate
In addition to providing "minimum essential coverage," effective January 1, 2014, a Large Employer also is required by the ACA to provide coverage to its full-time employees (defined in the same manner as for the "play or pay" mandate) and their dependents that is "affordable" and provides "minimum value." If a Large Employer does not do so, a tax penalty may apply, as described below.
The affordability and minimum value requirements technically apply only to full-time employees with a household income that is less than 400 percent of the federal poverty line. Coverage is affordable for such employees if the employee's share of the cost of coverage does not exceed 9.5 percent of the employee's household income. Coverage has minimum value for such employees if the plan's share of the actuarial value of covered benefits (i.e., the amount that the plan would pay toward the actuarially projected cost of covered services) is at least 60 percent (i.e., it is at least the actuarial value of "bronze level coverage" under an Exchange). The Department of Treasury has issued a preliminary proposal to use the self-only premium for the lowest-cost coverage and an employee's Form W-2 wages (instead of household income) in determining whether coverage is affordable. (IRS Notice 2011-73). In addition, the Department of Treasury has issued preliminary proposals regarding whether coverage has minimum value, including an actuarial value calculator and design-based safe harbors. (IRS Notice 2012-31). As with the "play or pay" mandate, until final guidance is issued, employers will have difficulty designing their benefits for 2014 in a manner that clearly will avoid the tax.
If the employer-offered coverage fails to meet either of these requirements with respect to a full-time employee, and such full-time employee (despite the employer-offered coverage) enrolls in a qualified health plan through an Exchange and is eligible for a premium tax credit or cost-sharing subsidy, the employer would be subject to a tax of $3,000 annually ($250 per month) for each such employee. (Code § 4980H(b)(1)). The total monthly tax on an employer for any such month would, however, be capped at the amount that the employer would otherwise be taxed (as described in Section III.A. above) if it did not offer any health coverage. (Code § 4980H(b)(2)). Note that the $3,000 tax applies only with respect to full-time employees. Part-time employees who are eligible to enroll in the employer's plan and who eschew coverage and opt to enroll in an Exchange plan will not be aggregated and counted for purposes of calculating the $3,000 annual tax.
C.Questionable Applicability of Mandates in States with Federally Run Exchanges
As mentioned above at footnote 7, the language in Code section 36B would seem to indicate that premium tax credits are available only for coverage purchased through Exchanges established by states and not through federally facilitated Exchanges. Because the trigger for the imposition of the tax under both of the mandates for Large Employers described above is that at least one of its employees receives a premium tax credit or subsidy, this raises the question of whether such a tax can be imposed on a Large Employer in those states in which the federal government imposes a federally facilitated Exchange or runs an Exchange in partnership with the state. To wit, there is an argument that in any state in which a federally facilitated Exchange or partially federally run Exchange operates, the premium tax credit is unavailable. If such tax credit is unavailable, then a legal requisite for imposition of these taxes will never be satisfied, thus freeing employers to eschew providing minimum essential coverage or coverage that meets the affordability and minimum value thresholds without imposition of a tax. Indeed, the operative language in Code section 36B is that premium tax credits are available for coverage "through Exchanges established by the State under [section] 1311 [of the ACA]," (emphasis added), and section 1311, in turn, addresses only state creation of Exchanges and does not include the rules governing federally facilitated Exchanges or partially federally run Exchanges. Thus, there appears to be at least a plain-meaning-based argument that in such states, the premium tax credit is unavailable. To be sure, the Treasury Department has determined that premium tax credits will be available irrespective of what entity establishes the Exchange, and a court could grant deference to the Treasury Department's interpretation. Nonetheless, the issues of whether premium tax credits are available in a state that eschews creating its own Exchange, and whether the employer tax can be lawfully imposed, are bona-fide, and are likely to be resolved by the courts.
IV. HEALTH BENEFIT-RELATED MANDATES
The ACA imposes a variety of requirements on both "group health plans" and "health insurance issuers." These new requirements include rules governing who must be afforded coverage by such plans and insurers, what types of services must be covered, cost-sharing rules governing such coverage, and what coverage limitations can be imposed. Some of the new requirements build on an existing regulatory scheme first established under HIPAA. Others are added separately. The various requirements apply to different health coverages and have different penalties. Below is a discussion of the rules for certain of the requirements, which are mandates added by the ACA to the HIPAA scheme (herein, the "ACA Coverage Mandates"), followed by a list of the various requirements in chronological order by effective date.
A. ACA Coverage Mandates
The HIPAA regulatory scheme is found in the Public Health Service Act ("PHSA"), ERISA, and the Code. Some of the new requirements are added to the PHSA and are incorporated into ERISA and the Code by reference through ERISA section 715 and Code section 9815. It is important to understand the forms of employer-provided arrangements to which these mandates apply.
1. Health Benefits Subject to the ACA Coverage Mandates
The term "group health plan" is not defined in the ACA, but it is defined under the earlier HIPAA rules that are incorporated in ERISA, the Code, and the PHSA, and accordingly such definition will govern for ACA purposes. A group health plan is defined to mean "an employee welfare benefit plan ... to the extent that the plan provides medical care ... to employees or their dependents ... directly or through insurance, reimbursement or otherwise." (PHSA § 2791(a)). An employee welfare benefit plan, in turn, means an insured or self-insured health arrangement sponsored or maintained by an employer or union (or both) for employees. (ERISA § 3(1). As such, by imposing new requirements on "group health plans," the ACA effectively imposes them on virtually all employer-provided health benefit arrangements for employees. Furthermore, the term "health insurance issuer" is defined to mean an "insurance company, insurance service, or insurance organization ... licensed to engage in the business of insurance in a State and which is subject to State law ...." (PHSA § 2791(b)). Thus, the ACA, by also imposing its coverage mandates on health insurance issuers, has effectively imposed mandates on virtually all individual and group insurance market policies.
2."Excepted Benefits" and Retiree-Only Plans
Note, however, that the ACA Coverage Mandates do not apply to certain "excepted benefits," such as (i) limited-scope dental or vision benefits that are provided under a separate policy or are not otherwise an integral part of the group health plan, (ii) on-site medical clinics, and (iii) separate coverage for specific diseases or fixed indemnity coverage that is not coordinated with group health plan coverage. (PHSA §§ 2763, 2791(c); ERISA §§ 732(b) & (c), 733(c); Code §§ 9831(b) & (c), 9832(c)). Excepted benefits also include health flexible spending arrangements and health reimbursement accounts if other employer-sponsored group health coverage is available to the same class of participants, and the maximum benefit payable does not exceed the greater of (i) two times the participant's salary reduction election or (ii) $500 plus the participant's salary reduction election. (ERISA Reg. § 2590.732(c)(3); Treas. Reg. § 54-9831-1(c)(3)).
In addition, the ACA Coverage Mandates do not apply to any group health plan (or insurance offered in connection with a group health plan) "for any plan year, if, on the first day of such plan year, such plan has less than 2 participants who are current employees." (ERISA § 732(a); Code § 9831(a)(2)). This exception is commonly known as the "retiree-only plan" exception. It should be noted that the ACA could be read to have eliminated the retiree-only plan exception. However, federal agency guidance indicates that it still exists for group health plans. For more information, please see our Commentary on the subject at www.jonesday.com/retiree_only_plan_exception/.
3.Penalties for Violating the ACA Coverage Mandates
Violations of the ACA Coverage Mandates are subject to a tax under Code section 4980D. Under section 4980D, employers that sponsor or maintain group health plans are required to pay a tax of $100 per day during the noncompliance period with respect to each individual to whom a violation relates (although the tax is limited in cases of unintentional failure, and small employers (at least two but no more than 50 employees) are exempt to the extent they provide coverage through a health insurance issuer and the failure is solely due to the health insurance coverage offered by such issuer). This tax must be self-reported annually on Form 8928 no later than the deadline for filing the entity's federal income tax return, with no extensions.
The ACA also contains certain grandfathering rules. It effectively provides that group health plans or health insurance coverage do not need to comply with certain of the new ACA Coverage Mandates if the plan or coverage had at least one individual enrolled on March 23, 2010. Such plans are defined as "grandfathered health plans." (PPACA §§ 1251(e), 10103(d); HCERA § 2301). In order to maintain status as a "grandfathered health plan," a plan must (i) include a statement in any plan materials that the plan is a "grandfathered health plan" within the meaning of section 1251 of PPACA and (ii) maintain records necessary to substantiate the terms of the plan in effect on March 23, 2010 and verify its status as a "grandfathered health plan" for as long as it maintains that it is entitled to grandfathered status. The grandfathered health plan status extends to new enrollees in an otherwise grandfathered health plan, including family members of current enrollees, new employees, and family members of new employees. In the discussion of the mandates that follows, we identify which new rules may be avoided by "grandfathered health plans."
There are a number of ways that a grandfathered health plan may lose its grandfathered status. First, a plan will lose its grandfathered status if one of following occurs:
- A business restructuring (i.e., merger, acquisition, or similar restructuring) occurs for the principal purpose of covering new individuals under such plan; or
- Without a bona fide, employment-based reason, employees are transferred into a grandfathered health plan from other coverage, if the amendment of such other coverage to match the terms of the grandfathered health plan would violate one of the rules below.
Second, a grandfathered health plan will lose its status if any of the following changes are made to the coverage:
- Elimination of all or substantially all benefits to diagnose or treat a condition;
- Any increase in a percentage cost-sharing requirement (e.g., coinsurance) measured from March 23, 2010;
- An increase in a fixed-amount cost-sharing requirement other than a copayment (e.g., a deductible or out-of-pocket limit) if the total percentage increase, as measured from March 23, 2010, exceeds a percentage reflecting medical inflation, as defined in the regulations, plus 15 percentage points;
- An increase in a fixed-amount copayment if the total increase, as measured from March 23, 2010, exceeds the greater of: (i) $5, with such amount being increased by medical inflation (as defined in the regulations) from time to time, or (ii) a percentage reflecting medical inflation, as defined in the regulations, plus 15 percentage points;
- A decrease in the employer's contribution rate toward the cost of any tier of coverage for any class of similarly situated individuals by more than 5 percentage points below the contribution rate in place during the coverage period that includes March 23, 2010; or
- Adopting an overall annual limit on the dollar value of benefits if (i) the plan did not have an overall annual or lifetime dollar limit on March 23, 2010, (ii) the plan had an overall lifetime dollar limit (but no overall annual dollar limit) on March 23, 2010 and the new overall annual limit is lower than the lifetime limit, or (iii) the plan had an overall annual dollar limit on March 23, 2010 and the new overall annual limit is less than the prior limit.
Changes that are not effective until after March 23, 2010, but were made pursuant to a legally binding contract or filing that was effective, or written amendments to a plan that were adopted, prior to or on March 23, 2010 will not affect the plan's grandfathered status. Health insurance coverage maintained pursuant to a collective bargaining agreement that was ratified prior to March 23, 2010 will continue to be a grandfathered health plan at least "until the date on which the last of the collective bargaining agreements relating to the coverage that was in effect on March 23, 2010 terminates." (26 CFR § 54.9815-1251T(f); 29 CFR § 2590.715-1251(f); 45 CFR § 47.140(f)). Upon termination of such last collective bargaining agreement, a determination as to whether the plan continues to be a grandfathered health plan is made under the terms described above.
B. Currently Effective Mandates That Apply Generally to Health Benefits
1.Coverage of Children to Age 26
Effective for plan years beginning on or after September 23, 2010, group health plans and health insurance issuers that offer coverage for children are required to continue to make such coverage uniformly available (i.e., cannot vary based on age) for a child until such child turns 26 years of age, whether or not such child is married; meets the financial dependency, residency, student status, or employment requirements; or is eligible for other coverage. (PHSA § 2714). With one temporary exception, eligibility distinctions may be only based on (i) the age of the child, for children over age 26, or (ii) the relationship of the child to the employee (for example, a plan could provide no coverage for stepchildren because that is a relationship-based distinction). For plan years beginning before January 1, 2014, grandfathered plans do not need to extend coverage to children who are eligible to enroll in another plan other than one sponsored by the employer of the parent(s).
A conforming change was made to Code section 105(b), providing beneficial tax treatment for dependent health coverage until the end of the year in which the child attains age 26. Although PHSA section 2714 requires coverage only "until" the child turns age 26, because the new language in Code section 105(b) extends the tax exclusion until the end of the taxable year in which the child attains age 26, tax-free coverage could be provided until the end of the month or even until the end of the year in which the child "ages out" of the plan. The income tax exclusion rules also apply to other health benefits, such as dental plans, health care flexible spending arrangements ("HFSAs"), and health reimbursement arrangements ("HRAs"). Of course, because the age 26 mandate does not apply to these plans, extension of coverage under these plans is discretionary. This mandate is subject to the excepted benefits exclusion, retiree-only exclusion, and Code section 4980D penalty, all described at Section IV.A. above.
2.No Preexisting Condition Exclusions for Children
Effective for plan years beginning on or after September 23, 2010, group health plans and health insurance issuers are prohibited from excluding individuals under the age of 19 from coverage "on the basis of any preexisting condition exclusion." (PHSA § 2704(a)). For individuals age 19 and over, the prohibition will apply for plan years beginning on or after January 1, 2014. This mandate is subject to the excepted benefits exclusion, retiree-only exclusion, and Code section 4980D penalty, all described at Section IV.A. above.
To be sure, as a consequence of the HIPAA rules of 1996, even prior to the ACA, there were restrictions on the ability of insurers or group health plans to impose preexisting condition exclusions. (PHSA § 2701; ERISA § 701; Code § 9801). The ACA, however, effectively created a blanket prohibition on preexisting condition exclusions for all individual insurance policies and employer plans. Further, as a consequence of the HIPAA rules, the term "preexisting condition exclusion" is already defined in the PHSA, ERISA, and the Code (see, e.g., PHSA § 2701(b)(1)), and HHS, DOL, and Treasury promulgated final regulations in 2004 that interpret and apply the term "preexisting condition exclusion." (45 C.F.R. §§ 144.103, 146.111-119; 29 C.F.R. §§ 2590.701-1-2590.701-7; 26 C.F.R. §§ 9801-1-9801-6). Presumably this existing regulatory definition of the term "preexisting condition exclusion" will continue to govern for purposes of the ACA's blanket prohibition on such exclusions, but it is unclear.
Moreover, the current legal requirement to provide certificates of creditable coverage was not removed from the law, which is temporarily sensible given that the ACA's elimination of preexisting condition exclusions will not apply until 2014 for adults. Presumably, regulatory action will be forthcoming to eliminate the burden of creditable coverage certificates going forward after 2014.
3.No Lifetime or Annual Dollar Limits on Essential Health Benefits
Effective for plan years beginning on or after September 23, 2010, group health plans and health insurance issuers are prohibited from providing coverage that contains a lifetime limit on the dollar value of "essential health benefits." Similarly, subject to certain exceptions described below, group health plans and health insurance issuers are prohibited from imposing annual limitations on the dollar value of "essential health benefits." (PHSA § 2711(a)(1)). Group health plans and insurance carriers are free to impose either lifetime or annual limits on benefits that do not constitute "essential health benefits." A 30-day special enrollment period for persons who had previously reached a lifetime limit was required to be provided in connection with the first plan year beginning on or after September 23, 2010. This mandate is subject to the excepted benefits exclusion, retiree-only exclusion, and Code section 4980D penalty, all described at Section IV.A. above.
As discussed in Section II.E.1. above, the term "essential health benefits" refers to categories of benefits that must be provided in coverage sold through an Exchange. However, given that this term is being defined for Exchange coverage purposes on a state-by-state basis, it is not clear whether the same definition will apply in the context of the annual and lifetime dollar limit prohibition. No guidance has yet been issued on this point.9
With respect to plan years beginning prior to January 1, 2014, a group health plan is free to establish a "restricted annual limit" on the dollar value of an individual's benefits that are "essential health benefits" provided that the limit is:
Beginning on or after September 23, 2010 but before September 23, 2011
No less than $750,000
Beginning on or after September 23, 2011 but before September 23, 2012
No less than $1,250,000
Beginning on or after September 23, 2012 but before January 1, 2014
No less than $2,000,000
HHS established a program to provide for temporary waivers to the annual limit requirement for plan years prior to January 1, 2014, for plans for which compliance with the limit would result in a significant decrease in access to benefits under or a significant increase in premiums for the plan or health insurance coverage. However, HHS stopped accepting waiver applications on September 22, 2011. For coverage that received a waiver, the group health plan or health insurance issuer must retain records supporting its application and annually notify participants or subscribers that the plan has received a waiver from the annual limits requirement and therefore the annual limits have not been met.
Effective for plan years beginning on or after September 23, 2010, group health plans and health insurance issuers are generally prohibited from rescinding coverage with respect to an enrollee once such enrollee is covered. (PHSA § 2712). Rescission means a cancellation or discontinuance of coverage that has retroactive effect. A cancellation or discontinuance is not a rescission if it (i) only has a prospective effect or (ii) is effective retroactively to the extent it is attributable to a failure to timely pay required premiums or contributions toward the cost of coverage. Rescissions are permitted for fraud or the intentional misrepresentation of a material fact by the enrollee, if permitted under the terms of the coverage. The plan or issuer must provide at least 30 days' advance notice to an affected participant before coverage may be rescinded. This mandate is subject to the excepted benefits exclusion, retiree-only exclusion, and Code section 4980D penalty, all described at Section IV.A. above
1. Nat'l Fed'n of Indep. Bus. v. Sebelius, Nos. 11-393, 11-398, 11-400 (U.S. June 28, 2012).
2. The federal poverty line is set annually by HHS and varies by geographic location and household size. By way of example, the federal poverty line for 2012 for an individual living in the continental United States is $11,170; for a family of four, it is $23,050. The federal poverty line for individuals living in Alaska or Hawaii is slightly higher.
3. This avenue of coverage may not be available in all states, as discussed in more detail in Section II.D. below.
4. This appears to be the experience in Massachusetts relating to its Exchange. Under applicable Massachusetts law, the penalty for failing to obtain coverage is slightly less than the cost of a so-called "bronze" policy, and more than 94 percent of non-Medicare eligible adults now have health insurance. Massachusetts Health Care Reform: Six Years Later, Kaiser Family Foundation Focus on Health Reform (May 2012).
5. John Holahan and Irene Headen, Medicaid Coverage and Spending in Health Reform: National and State-by-State Results for Adults at or Below 133% FPL, 12-13 (May 2010).
7. The ACA provides that the credit is available for any month in which the individual, the individual's spouse, or the individual's dependents were enrolled in a qualified health plan "through an Exchange established by the State under [PPACA section] 1311." (Code § 36B(b)(2)(A)). The Department of Treasury has taken the position that the premium tax credit will be available with respect to any coverage purchased through an Exchange, whether it is established by a state, the federal government, or some combination thereof. See T.D. 9590, 77 Fed. Reg. 30377, 30378 (preamble to final regulations).
8. Guidance has not yet been issued defining which dependents must be eligible for coverage.
9. Health flexible spending arrangements, HSAs, Archer MSAs, retiree-only HRAs, HRAs that are integrated with other group health coverage, and HRAs that are "excepted benefits" (as defined in Section IV.A.2. above) are not subject to the prohibition on annual limits. Stand-alone HRAs that are not otherwise exempt from this rule and that were in effect before September 23, 2010 are covered by a temporary class exemption from the annual limit prohibition as long as they meet the record retention and annual notice requirements that apply generally to coverage allowed under a waiver. (CCIIO Supplemental Guidance (CCIIO - 1E): Exemption for Health Reimbursement Arrangements that are subject to PHS Act section 2711 (Aug. 19, 2011)). The temporary class exemption expires for the first plan year that begins on or after January 1, 2014. As such, and barring further guidance, these non-excepted HRAs will need to be modified or eliminated at such time.
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