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Health Care Reform Upheld: Employers Must Plan to Comply

The U.S. Supreme Court has upheld the massive health care reform law, the Patient Protection and Affordable Care Act (ACA). While the law’s individual mandate has survived constitutional scrutiny, many challenges and questions for employers remain. Employers must make critical decisions about their health care coverage as key provisions of the ACA become effective.
Employer Plan Changes
The ACA attempted to both broaden and standardize the coverage provided by employers:
  • Plans must provide dependent coverage for children up to age 26 (effective in 2011; until 2014, grandfathered plans need not provide coverage to dependents who are eligible for other employer-provided coverage).
  • Plans must provide for preventive care without cost-sharing (effective in 2011; non-grandfathered plans only).
  • Plans must provide an enhanced internal appeals process and an external independent review stage (effective in 2011; non-grandfathered plans only).
  • Plans must not rescind coverage retroactively, except in situations involving fraud (effective in 2011).
  • Plans must not impose pre-existing condition exclusions for participants under the age of 19 (effective in 2011) and for all participants (effective in 2014).
  • Insured plans must not discriminate in favor of highly compensated participants, under rules similar to the nondiscrimination rules already applicable to self-insured plans (effective in 2011, but enforcement delayed until regulations are issued; non-grandfathered plans only).
  • Plans must not place lifetime limits on essential health benefits (effective in 2011) and may only place annual dollar limits that are at or above specified levels (with no annual limit permitted from and after 2014).
  • Plans must provide an eight-page Summary of Benefits and Coverage upon application, enrollment, and re-enrollment in the plan. Also, a notice of material modifications describing plan changes must be provided 60 days before modifications are effective (both effective in 2013).
  • Flexible spending account contributions by an employee must be limited to $2,500 per year (effective in 2013).
  • Plans must not have waiting periods for entry into a plan in excess of 90 days (effective in 2014).
  • Employers with more than 200 employees must automatically enroll full-time employees (delayed until regulations are issued—will not be effective by the original 2014 effective date).
  • The level of penalties/incentives for wellness plans may be as much as 30% of the cost of coverage—an increase from the current 20%; may rise up to 50% by regulation (effective in 2014).
Other key aspects of health care reform affecting employers include:
·        Play or Pay.  Each employer with 50 or more full-time employees will have to either (a) provide at least a specified minimum level of health coverage that its employees can afford or (b) pay a penalty beginning in 2014.
·        Tax Treatment.  Eliminated are the Code’s tax-free reimbursements for over-the-counter medicines and, beginning next year, the law limits the maximum health care flexible spending account amount to $2,500.
·        Retiree Drug Costs.  Beginning next year, the employer tax deduction for retiree prescription drug benefit costs for employers receiving a related subsidy is eliminated.

Tax Reporting.  Employers must report the annual cost of health coverage on each employee’s W-2, supplement information already reported on annual Form 5500 reports, and pay a per-plan-participant fee to the government for research purposes.

In addition to imposing requirements and restrictions on employers and employer-sponsored group health plans, the law requires individuals to purchase health coverage or pay a tax penalty (the “individual mandate”) and increases the Federal Income Contributions Act (“FICA”) tax on individuals with compensation in excess of $200,000 by 62 percent.
With the constitutionality of the ACA now settled, regulatory agencies will continue to issue guidance on the various provisions as their effective dates arrive. Pending regulations that will be particularly important to employers include: requirements under the pay or play employer mandate, the definition of a full-time employee, the employer’s obligation to offer automatic health coverage enrollment for employees, and the application of the nondiscrimination rules to insured plans. Additionally, it is important to recognize that a significant portion of the formal guidance has been issued on an “interim” basis and final changes may be forthcoming.

Based on the recent Supreme Court decision, all of the mandates set forth in the ACA that impact employer-provided group health plans will officially take effect as scheduled unless Congress takes further action.