Health Care Reform: What Is the Impact on Employers?

President Obama signed into law the Patient Protection and Affordable Care Act on March 23, 2010, and the Health Care and Education Reconciliation Act (collectively, the “Act“) on March 30, 2010, to extensively reform the American health care system.

The Act imposes significant new responsibilities on employers and employer-sponsored group-health plans. While some provisions are effective immediately or within a short period of time, many provisions do not take effect until 2014 or later, or are gradually phased in. The Act is likely to impact employers in the following ways:

Effective Jan. 1, 2010

Small-Business Tax Credit

A small-business tax credit of up to 35% of the employer's contribution to purchase health insurance for employees is now established for “qualified small employers.“ The latter is an employer that has no more than 25 full-time equivalent employees for the taxable year ' and the average annual wages of those employees do not exceed $40,000. When health-insurance exchanges are established in 2014, the available tax credit will increase to 50% of premiums.

Medicare Part D

The Act provides a $250 rebate check for all Part D enrollees who enter the “donut hole.“ Currently, the “donut hole“ coverage gap falls between $2,830 and $6,440 in total drug spending by Part D enrollees.

Adoption Tax Credit

The Act increases the adoption tax credit and adoption assistance exclusion by $1,000 (now set at $13,150), makes the credit refundable and extends the credit through 2011.

Effective 90 Days After Enactment (i.e., June 21, 2010)

Early Retirees

The Act establishes a temporary reinsurance program to provide reimbursement to employer health plans offering health coverage for early retirees (ages 55 to 64) and their families. The reinsurance program would reimburse employer health plans for 80% of the cost of benefits provided per enrollee in excess of $15,000 and below $90,000. The employer health plans are required to use the funds to lower costs assumed directly by participants and beneficiaries, and the program incentivizes plans to implement programs and procedures to better manage chronic conditions.

Pre-Existing Conditions

The Act provides that group-health plans and health-insurance issuers offering group or individual health-insurance coverage may not impose any pre-existing condition exclusions with respect to such plans or coverage. Therefore, group-health plans that include such pre-existing condition exclusions will no longer be permitted.

Effective Six Months After Enactment (i.e., Sept. 23, 2010)

Additional Protections for Children

The Act: 1) bars health-insurance companies from imposing pre-existing condition exclusions on coverage for children; and 2) requires any group-health plan or plan in the individual market that provides dependent coverage to continue to make that coverage available until the child turns 26 years of age, if the child does not have access to other health coverage (without regard to the child's marital status).

Lifetime Limits

The Act prohibits insurers from imposing lifetime limits on benefits. Additionally, beginning in 2014, the Act prohibits insurers from imposing annual limits on the amount of coverage an individual may receive.

Preventive Health Services

The Act requires that all new group-health plans and plans in the individual market provide first-dollar coverage for preventive services (i.e., not subject to a deductible). Examples of preventive services include well-childcare visits and certain immunizations.

Effective Jan. 1, 2011

Medicare Part D

The Act provides a 50% discount on all brand-name drugs and biologics in the “donut hole“ and begins phasing in additional discounts in brand-name and generic drugs to completely fill the “donut hole“ by 2020 for all Part D enrollees.

W-2 Reporting

The Act requires employers to disclose the value of the benefit provided by the employer for each employee's health-insurance coverage on the employee's annual Form W-2. This is a W-2 reporting obligation and will not result in additional taxable income to employees.

Additional Tax for Health Savings Account (HSA) Withdrawals. The Act increases the additional tax for Health Savings Account withdrawals prior to age 65 that are not used for qualified medical expenses from 10% to 20%.

Cafeteria Plans

The Act creates a Simple Cafeteria Plan to provide a vehicle through which small employers can provide tax-free benefits to their employees. Small employers are defined as employers who on average employ 100 or fewer employees over the previous two years. The Act aims to ease the administrative burden of sponsoring a cafeteria plan for such small employers. The Act also exempts small employers who make contributions for employees under a Simple Cafeteria Plan from pension-plan nondiscrimination requirements applicable to highly compensated and key employees.

Effective Jan. 1, 2013

Health Care Flexible Savings Accounts

The Act limits the amount of contributions to health care reimbursement flexible-spending accounts to $2,500 per year. No limit was previously imposed upon health care reimbursement flexible-spending accounts. This new limit will raise health care costs for employees with unreimbursed health care expenses in excess of $2,500 annually, to the extent the employee currently has a flexible-spending account that permits contributions in excess of $2,500 ' and would potentially create increased taxable income for employees.

Itemized Deduction for Medical Expenses

The Act increases the income threshold for claiming the itemized deduction for medical expenses from 7.5 percent to 10 percent. Individuals over age 65 would be able to claim the itemized deduction for medical expenses at 7.5% of adjusted gross income through 2016.

Limiting Deductibility of Executive Compensation for Insurance Providers

With respect to services performed after 2009, the Act limits the deductibility of executive compensation under section 162(m) of the Internal Revenue Code for insurance providers if at least 25 percent of the insurance provider's gross premium income from health business is derived from health-insurance plans that meet the minimum creditable-coverage requirements. The deduction is limited to $500,000 per taxable year (as opposed to the typical $1 million limitation) and applies to all officers, employees, directors and other workers or service providers performing services for, or on behalf of, a covered health-insurance provider.

Medicare Part D

The Act eliminates the federal income-tax deduction for the 28% subsidy for employers that maintain prescription drug plans for their Part D eligible retirees.

Effective Jan. 1, 2014

Promoting Employer Responsibility

The Act requires employers with 50 or more employees that do not offer health coverage to their employees to pay $2,000 annually for a “full-time employee“ (i.e., an employee working 30 or more hours per week). The 50-employee threshold is based on the employer's average number of employees on business days during the preceding calendar year. Both full-time and part-time employees are considered in determining whether the employer has 50 or more employees; however, the number of part-time employees to be counted is determined by dividing the aggregate number of hours of service for those part-time employees for each month by 120. The $2,000 penalty then applies only to full-time employees who work 30 or more hours per week. In order to encourage employers to expand beyond 50 employees, the first 30 employees are not included in calculating the applicable penalty amount. The penalty can also increase to $3,000 for a full-time employee receiving a federal tax credit in the exchange where the employer offers health coverage, but that coverage would be deemed “unaffordable“ because the employee has to pay more than 9.8% of his or her income, or the employer contributes less than 60% of the actuarial value of the plan. Therefore, while employers are not required to offer health coverage under the Act, significant penalties may be imposed on those employers that do not offer it or that only offer health coverage deemed “unaffordable.“ In addition, employers may still impose a waiting period for coverage without being subject to a penalty, but this waiting period may not exceed 90 calendar days.

Exchanges

The Act provides for the creation of health-insurance exchanges at the state level in 2014, where individuals and small employers would be able to buy health coverage in a manner similar to that of larger employers. Initially, the state exchanges would be open to individuals and small employers with 100 or fewer employees, unless the state opts to limit this to organizations with 50 or fewer employees. Beginning in 2017, states would have the option to expand the exchange to larger employers.

Wellness Programs

The Act provides that employers can offer increased incentives to employees for participation in a wellness program or for meeting certain health-status targets. The Act permits rewards or penalties, such as premium discounts of up to 30% of the cost of coverage. Existing wellness regulations are limited to wellness incentives of up to 20% of the total premium, provided that certain conditions are met. In addition, the Act creates a $200 million, five-year program to provide grants to certain small employers (fewer than 100 employees) for comprehensive workplace-wellness programs. The grants would go to small employers that did not have a wellness program when the Act was enacted. Implementation of such wellness programs may help employers lower costs, thereby avoiding the high-cost plan excise tax discussed below.

Effective Jan. 1, 2018

High-Cost Plan Excise Tax

The Act imposes a nondeductible excise tax of 40% on insurance companies and plan administrators (including self-insured plans) for any health-insurance plan where the combined annual employer/employee premiums exceed the threshold of $10,200 for self-only coverage and $27,500 for family coverage. The tax would apply to the amount of the premium in excess of the threshold. An additional threshold amount of $1,650 for singles and $3,450 for families would be available for retired individuals over the age of 55 and for plans that cover employees engaged in high-risk professions (e.g., law-enforcement professionals, EMTs, construction and mining).

The Act provides that health coverage offered under a collective-bargaining agreement that was ratified prior to the Act's effective date (i.e., March 23, 2010) will not be subject to the Act until the current collective-bargaining agreement expires.

The Act contains significant changes on how employers can sponsor their group-health plans and on an employer's initial decision regarding whether to sponsor such a plan. With this recent legislation, it remains to be seen how employers and their financial decisions will be impacted.

W. Michael Gradisek, a partner in the Philadelphia office of Duane Morris LLP, chairs the firm's Employee Benefits and Executive Compensation practice. His practice encompasses all areas of employee benefits and executive compensation. Timothy B. Collins, an associate in the same office, focuses his practice on employee benefit matters relating to corporate transactions, executive compensation, pension and retirement programs and welfare benefit programs.

President Obama signed into law the Patient Protection and Affordable Care Act on March 23, 2010, and the Health Care and Education Reconciliation Act (collectively, the “Act“) on March 30, 2010, to extensively reform the American health care system.

The Act imposes significant new responsibilities on employers and employer-sponsored group-health plans. While some provisions are effective immediately or within a short period of time, many provisions do not take effect until 2014 or later, or are gradually phased in. The Act is likely to impact employers in the following ways:

Effective Jan. 1, 2010

Small-Business Tax Credit

A small-business tax credit of up to 35% of the employer's contribution to purchase health insurance for employees is now established for “qualified small employers.“ The latter is an employer that has no more than 25 full-time equivalent employees for the taxable year ' and the average annual wages of those employees do not exceed $40,000. When health-insurance exchanges are established in 2014, the available tax credit will increase to 50% of premiums.

Medicare Part D

The Act provides a $250 rebate check for all Part D enrollees who enter the “donut hole.“ Currently, the “donut hole“ coverage gap falls between $2,830 and $6,440 in total drug spending by Part D enrollees.

Adoption Tax Credit

The Act increases the adoption tax credit and adoption assistance exclusion by $1,000 (now set at $13,150), makes the credit refundable and extends the credit through 2011.

Effective 90 Days After Enactment (i.e., June 21, 2010)

Early Retirees

The Act establishes a temporary reinsurance program to provide reimbursement to employer health plans offering health coverage for early retirees (ages 55 to 64) and their families. The reinsurance program would reimburse employer health plans for 80% of the cost of benefits provided per enrollee in excess of $15,000 and below $90,000. The employer health plans are required to use the funds to lower costs assumed directly by participants and beneficiaries, and the program incentivizes plans to implement programs and procedures to better manage chronic conditions.

Pre-Existing Conditions

The Act provides that group-health plans and health-insurance issuers offering group or individual health-insurance coverage may not impose any pre-existing condition exclusions with respect to such plans or coverage. Therefore, group-health plans that include such pre-existing condition exclusions will no longer be permitted.

Effective Six Months After Enactment (i.e., Sept. 23, 2010)

Additional Protections for Children

The Act: 1) bars health-insurance companies from imposing pre-existing condition exclusions on coverage for children; and 2) requires any group-health plan or plan in the individual market that provides dependent coverage to continue to make that coverage available until the child turns 26 years of age, if the child does not have access to other health coverage (without regard to the child's marital status).

Lifetime Limits

The Act prohibits insurers from imposing lifetime limits on benefits. Additionally, beginning in 2014, the Act prohibits insurers from imposing annual limits on the amount of coverage an individual may receive.

Preventive Health Services

The Act requires that all new group-health plans and plans in the individual market provide first-dollar coverage for preventive services (i.e., not subject to a deductible). Examples of preventive services include well-childcare visits and certain immunizations.

Effective Jan. 1, 2011

Medicare Part D

The Act provides a 50% discount on all brand-name drugs and biologics in the “donut hole“ and begins phasing in additional discounts in brand-name and generic drugs to completely fill the “donut hole“ by 2020 for all Part D enrollees.

W-2 Reporting

The Act requires employers to disclose the value of the benefit provided by the employer for each employee's health-insurance coverage on the employee's annual Form W-2. This is a W-2 reporting obligation and will not result in additional taxable income to employees.

Additional Tax for Health Savings Account (HSA) Withdrawals. The Act increases the additional tax for Health Savings Account withdrawals prior to age 65 that are not used for qualified medical expenses from 10% to 20%.

Cafeteria Plans

The Act creates a Simple Cafeteria Plan to provide a vehicle through which small employers can provide tax-free benefits to their employees. Small employers are defined as employers who on average employ 100 or fewer employees over the previous two years. The Act aims to ease the administrative burden of sponsoring a cafeteria plan for such small employers. The Act also exempts small employers who make contributions for employees under a Simple Cafeteria Plan from pension-plan nondiscrimination requirements applicable to highly compensated and key employees.

Effective Jan. 1, 2013

Health Care Flexible Savings Accounts

The Act limits the amount of contributions to health care reimbursement flexible-spending accounts to $2,500 per year. No limit was previously imposed upon health care reimbursement flexible-spending accounts. This new limit will raise health care costs for employees with unreimbursed health care expenses in excess of $2,500 annually, to the extent the employee currently has a flexible-spending account that permits contributions in excess of $2,500 ' and would potentially create increased taxable income for employees.

Itemized Deduction for Medical Expenses

The Act increases the income threshold for claiming the itemized deduction for medical expenses from 7.5 percent to 10 percent. Individuals over age 65 would be able to claim the itemized deduction for medical expenses at 7.5% of adjusted gross income through 2016.

Limiting Deductibility of Executive Compensation for Insurance Providers

With respect to services performed after 2009, the Act limits the deductibility of executive compensation under section 162(m) of the Internal Revenue Code for insurance providers if at least 25 percent of the insurance provider's gross premium income from health business is derived from health-insurance plans that meet the minimum creditable-coverage requirements. The deduction is limited to $500,000 per taxable year (as opposed to the typical $1 million limitation) and applies to all officers, employees, directors and other workers or service providers performing services for, or on behalf of, a covered health-insurance provider.

Medicare Part D

The Act eliminates the federal income-tax deduction for the 28% subsidy for employers that maintain prescription drug plans for their Part D eligible retirees.

Effective Jan. 1, 2014

Promoting Employer Responsibility

The Act requires employers with 50 or more employees that do not offer health coverage to their employees to pay $2,000 annually for a “full-time employee“ (i.e., an employee working 30 or more hours per week). The 50-employee threshold is based on the employer's average number of employees on business days during the preceding calendar year. Both full-time and part-time employees are considered in determining whether the employer has 50 or more employees; however, the number of part-time employees to be counted is determined by dividing the aggregate number of hours of service for those part-time employees for each month by 120. The $2,000 penalty then applies only to full-time employees who work 30 or more hours per week. In order to encourage employers to expand beyond 50 employees, the first 30 employees are not included in calculating the applicable penalty amount. The penalty can also increase to $3,000 for a full-time employee receiving a federal tax credit in the exchange where the employer offers health coverage, but that coverage would be deemed “unaffordable“ because the employee has to pay more than 9.8% of his or her income, or the employer contributes less than 60% of the actuarial value of the plan. Therefore, while employers are not required to offer health coverage under the Act, significant penalties may be imposed on those employers that do not offer it or that only offer health coverage deemed “unaffordable.“ In addition, employers may still impose a waiting period for coverage without being subject to a penalty, but this waiting period may not exceed 90 calendar days.

Exchanges

The Act provides for the creation of health-insurance exchanges at the state level in 2014, where individuals and small employers would be able to buy health coverage in a manner similar to that of larger employers. Initially, the state exchanges would be open to individuals and small employers with 100 or fewer employees, unless the state opts to limit this to organizations with 50 or fewer employees. Beginning in 2017, states would have the option to expand the exchange to larger employers.

Wellness Programs

The Act provides that employers can offer increased incentives to employees for participation in a wellness program or for meeting certain health-status targets. The Act permits rewards or penalties, such as premium discounts of up to 30% of the cost of coverage. Existing wellness regulations are limited to wellness incentives of up to 20% of the total premium, provided that certain conditions are met. In addition, the Act creates a $200 million, five-year program to provide grants to certain small employers (fewer than 100 employees) for comprehensive workplace-wellness programs. The grants would go to small employers that did not have a wellness program when the Act was enacted. Implementation of such wellness programs may help employers lower costs, thereby avoiding the high-cost plan excise tax discussed below.

Effective Jan. 1, 2018

High-Cost Plan Excise Tax

The Act imposes a nondeductible excise tax of 40% on insurance companies and plan administrators (including self-insured plans) for any health-insurance plan where the combined annual employer/employee premiums exceed the threshold of $10,200 for self-only coverage and $27,500 for family coverage. The tax would apply to the amount of the premium in excess of the threshold. An additional threshold amount of $1,650 for singles and $3,450 for families would be available for retired individuals over the age of 55 and for plans that cover employees engaged in high-risk professions (e.g., law-enforcement professionals, EMTs, construction and mining).

The Act provides that health coverage offered under a collective-bargaining agreement that was ratified prior to the Act's effective date (i.e., March 23, 2010) will not be subject to the Act until the current collective-bargaining agreement expires.

The Act contains significant changes on how employers can sponsor their group-health plans and on an employer's initial decision regarding whether to sponsor such a plan. With this recent legislation, it remains to be seen how employers and their financial decisions will be impacted.

W. Michael Gradisek, a partner in the Philadelphia office of Duane Morris LLP, chairs the firm's Employee Benefits and Executive Compensation practice. His practice encompasses all areas of employee benefits and executive compensation. Timothy B. Collins, an associate in the same office, focuses his practice on employee benefit matters relating to corporate transactions, executive compensation, pension and retirement programs and welfare benefit programs.