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Health Care Reform Overview

Introduction

Patient Protection and Affordable Care Act signed into law on 3/23/2010• Date of enactment• Certain effective dates are based on this date

Health Care and Education Reconciliation Act signed into law on 3/30/10• Amended certain provisions in first bill• We still need a lot of new regulations, guidance, and clarification

from Health and Human Services (HHS), the Department of Labor (DOL), and the Internal Revenue Service (IRS)

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Introduction

For each year, we will look at Health Care Reform in the following categories:

1. Benefits and insurance mandates

2. Employer mandates

3. Tax provisions

4. Other miscellaneous changes

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Acronyms• DOL = Department of Labor• EE = employee • EHB = Essential Health Benefit• FSA = Health Flexible Spending Account• GF = Grandfathered • HHS = Department of Health and Human Services• HIPAA = Health Insurance Portability and Accountability Act• HRA = Health Reimbursement Arrangement• HSA = Health Savings Account• IRS = Internal Revenue Service• OE = Open Enrollment• PPACA = Patient Protection and Affordable Care Act• SBC = Summary of Benefit and Coverage• SPD = Summary Plan Description

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What Is a Grandfathered vs. a New Plan?

Grandfathered Plan = any group health plan that was in existence on 3/23/10

Plan can add new employees and new dependents and maintain Grandfathered Plan status

Affects your plan, whether Grandfathered or not:

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GF

How is Grandfathered Plan status lost?

The following changes from 3/23/10 plan provisions will cause a loss of Grandfathered Plan status:• Elimination of all or substantially all benefits to diagnose or treat a

particular condition• Increase to cost-sharing percentage, such as coinsurance• Increase to fixed-amount cost-sharing components, such as

deductible or out-of-pocket maximum, by a total percentage that is more than medical inflation + 15%

• Increase to co-pay levels by a total percentage that is more than medical inflation + 15% or by medical inflation + $5

• Decrease to employer contribution percentage of total premium by more than 5%

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How is Grandfathered Plan status lost?

The following changes from 3/23/10 plan provisions will cause loss of Grandfathered Plan status, cont’d:• Establishment of new or stricter overall annual limit on the dollar

value of all benefits

Grandfathered Plans must also maintain records of plan terms as of 3/23/10 and distribute a statement to all participants communicating that the plan is intended to be a Grandfathered Plan• Statement must be included with SPD and at OE for as long as plan

remains a Grandfathered Plan

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Plan Years on or after 9/23/2010 – Insurance Market Reforms All New and Grandfathered Group Health Plans must include

the following Insurance Market Reforms:• Adult dependent coverage extended up to age 26

Exception for grandfathered plans – may exclude dependents with access to employer-sponsored coverage

• No rescission of coverage, except in cases of fraud or intentional misrepresentation

• No preexisting condition exclusions for children under age 19• No “restrictive” annual limits on minimum essential benefits• No lifetime limits on minimum essential benefits

Slides 8-19 look at each of these reforms in depth

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GF

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Adult Dependent Coverage Mandate Effective for your first plan year that starts on or after

9/23/2010, medical plans that cover dependents must amend dependent eligibility to make coverage available up to their 26th birthday• May not limit eligibility by financial dependence, full-time student

status, residency, or marital status• Only applies to medical plan – not stand-alone dental or vision• Required for all employer-sponsored health plans that cover

dependents• Some states require fully-insured policies to cover beyond 26th

birthday (e.g., Florida, Ohio, New Jersey, New York)• Exception for Grandfathered plans – may exclude adult dependents

with access to employer-sponsored coverage until 2014

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Tax Treatment of Health Care Benefits Provided to Adult Dependents Eff. 3/30/2010, IRS amended tax code to allow tax-free

health care benefits provided to adult dependents through end of year in which they turn 26• No change to definition of dependent under Sec. 152• Otherwise, employees would have to pay income tax on value of

coverage provided to adult dependents• Regardless of financial dependence, full-time student status,

residency, or marital status• May involve a change to Cafeteria Plan Doc

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Tax Treatment of Health Care Benefits Provided to Adult Dependents, cont’d

Allows tax-free reimbursements under health FSAs and HRAs• NOT required, but many employers will want to sync these benefits

with terms of Medical Plan• Look at FSA and HRA documentation to see how “dependent” is

defined• Plan may amend FSA to cover adult dependents retroactively to

3/30/2010, but must be done no later than 12/31/2010; otherwise, wait until start of Plan Year in 2011

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Rescissions

Plans are prohibited from rescinding coverage except in cases of fraud or intentional misrepresentation

“Rescission” defined as “a cancellation or discontinuance of coverage that has a retroactive effect”

Rescission not allowed in cases of unintentional omission on the part of the enrollee, nor in cases of administrative error on the part of the plan sponsor• Coverage may be discontinued prospectively, but never retroactively

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Rescissions, cont’d

In cases of fraud or intentional misrepresentation, sponsor/carrier must provide 30 days advance notice so enrollee can appeal or find alternate coverage• Coverage must be maintained pending appeal decision

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Preexisting Condition Exclusions (“PCEs”)

Plans are prohibited from excluding coverage for any preexisting condition for children under the age of 19

For plan years starting 1/1/2014, this prohibition will extend to adults as well

An exclusion for a condition is not considered a PCE if it applies regardless of when the condition arose relative to the effective date of the coverage (i.e., if it applies to everyone equally)

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Annual Limits

Plans are prohibited from imposing annual limits that are considered “restrictive”

HHS has defined “restrictive” in terms of dollar amount limits phased in over 3 years:1. For Plan Years starting on or after 9/23/2010, limits may not be less

than $750,0002. For Plan Years starting on or after 9/23/2011, limits may not be less

than $1.25 million3. For Plan Years starting on or after 9/23/2012, limits may not be less

than $2 million

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Annual Limits, cont’d

For Plan Years starting 1/1/2014, all annual limits on minimum essential benefits are prohibited

For both annual and lifetime limits, only limits that are expressed in terms of dollar amounts are prohibited or restricted• Non-monetary limits such as number of visits or days of treatment

still allowed

Limits apply on individual basis, so if one family member reaches the limit, other family members may continue to receive benefits

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Annual Limits, cont’d

HHS established a waiver program for limited benefit or “mini-med” plans that would otherwise be unable to comply with the annual limit prohibition• Plan must demonstrate that compliance would result in either a

significant decrease in access to benefits (e.g., termination of the plan), or a significant increase in premiums

• Applications only accepted through 9/22/2011• Information can be found at

http://www.hhs.gov/ociio/regulations/annual_limit_waivers.html

These limits do not apply to FSAs or HSAs, which have their own limits, or to retiree-only plans

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Lifetime Limits

Plans are prohibited from imposing lifetime limits on the dollar value of minimum essential benefits

An exclusion of all benefits for a condition will not be considered a prohibited limit

Any plan participant who previously reached the lifetime limit must be allowed to enroll again into any benefit package available to similarly-situated employees at initial enrollment

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Lifetime Limits, cont’d

Sponsors of plans that currently have a lifetime limit must distribute a notice to all employees advising them of the elimination of the limit and the opportunity to reenroll

Notice must be provided on a one-time basis by the first day of the plan year starting on or after 9/23/2010• May be included with Open Enrollment materials, but must remain

prominent

Model Notice is available from your Account Representative

Plan Years on or after 9/23/10 – Patient Protections

All New Plans must include the following Patient Protections:

• Enrollees must have the right to select any Primary Care Physician or Pediatrician that is available and participating

• Emergency services must be provided without authorization and with equal cost-sharing for both in- and out-of-network providers

• OB/GYN services must be available without preauthorization or referral

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Plan Years on or after 9/23/10

For All New Plans:• Provide first-dollar coverage (i.e. no deductibles, co-payments, or

other cost-sharing) for evidence-based preventive care Regs issued 7/14/2010

• Sec. 105(h) Nondiscrimination Rules will now apply to fully-insured plans, prohibiting discrimination with respect to benefits or eligibility based on salary or anything that favors higher-paid employees

Postponed indefinitely until further guidance is issued• Establish internal and external appeals processes

Regs issued 7/23/2010, most requirements postponed to 1/1/2012• Subject to the same transparency requirements as insurance carriers

Postponed until further guidance is issued21

2010 – Small Employer Tax Credit

Tax Credit for Small Employers with New or Grandfathered Plans:

• Must have 25 or fewer employees and average annual wages of less than $50,000

• For 2010 through 2013, tax credit equals up to 35% of the employer’s contribution amount if the employer contributes at least 50% of the total premium cost or 50% of a benchmark premium

• The full credit is available to employers with 10 or fewer employees and average annual wages less than $25,000; credit amount phases out as employer size and average wage increase

• Tax-exempt small employers meeting these requirements are eligible for a tax credit of up to 25% of the employer’s contribution amount

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2010 – Early Retiree Reinsurance Program

Effective 6/1/10, a $5 billion fund was created to reinsure employer-sponsored health care provided to early retirees age 55 to 64 and their dependents • Reimburses 80% of the cost of such care per enrollee between

$15,000 and $90,000• Sponsor must use funds to lower costs for the plan and/or

participants• Available until funds are exhausted or 2014, whichever comes first• Applications and information found at www.errp.gov• HHS will not accept any new applications after 5/5/2011

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2010 – Pre-Existing Condition Insurance Plan

Effective 7/1/2010, temporary national high-risk pool, called the Pre-Existing Condition Insurance Plan, established to provide coverage for those with preexisting conditions who have been without health insurance for at least 6 months• Cost-sharing may not exceed the levels in place for HSAs• Disappears when exchanges open in 2014• Penalty for employers who push employees off group health plan

and into pool• Information found at www.pcip.gov

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2011 – Medical Loss Ratios (MLRs)

• Carriers must maintain a medical loss ratio of not less than 80% for small plans (defined as 50 or fewer employees) and 85% for large plans• Applies to fully-insured policies only• Figures based on insurer’s book of business in a region• Insurers must submit a report to HHS disclosing their loss ratio

figures by June 1• Insurers must provide rebates for coverage that does not loss ratios

to policyholders or subscribers in the form of cash payment or reduced future premiums, by August 1

• For first year only, insurers must distribute notice when MLR is met• Final regs issued 12/2/2011

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2011 – Cafeteria Plans

Tax Provisions that Affect Employers with New or Grandfathered Plans:

• Effective 1/1/11, the definition of qualified medical expenses for FSAs, HSAs and HRAs will be conformed to a single definition

OTC drugs will only qualify for reimbursement with a prescription

• Small employers can establish Simple Cafeteria Plans to fund coverage on a pre-tax basis

“Small” = 100 or fewer employees during either of two preceding years Exemption from Sec. 125 nondiscrimination testing requirements

applicable to highly-compensated and key employees

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2011 – Medicare Part D and HSAs

Other Changes:

• Medicare Part D beneficiaries are eligible for a 50% discount on all brand-name and authorized generic drugs purchased in the “donut hole” coverage gap

Discounts increase until the gap is completely phased out by 2020

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• Effective 1/1/11, the tax on withdrawals from HSAs prior to age 65 that are not for qualified medical expenses will double from 10% to 20%

2012 – Benefit Disclosure to HHS

For All Employers with New or Grandfathered Plans:

• Effective 3/1/12, sponsors must annually report to HHS and to beneficiaries at open enrollment information on benefits that improve health, such as case management, disease management, and wellness programs

HHS must develop the reporting standards first Penalties for failure to provide

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2012 – Summaries of Benefits and Coverage

Insurers, administrators, and employers must distribute a Summary of Benefits and Coverage (SBC) to all employees and beneficiaries at both initial enrollment and annually at open enrollment• Effective for OE starting on or after 9/23/12• May be provided as stand-alone or with SPD• Must conform to template published by HHS • Notice of Modification must be distributed at least 60 days before

any mid-year plan changes take effect• Plans must also make Uniform Glossary of Terms available• See Technical Monograph No. 107

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2012 – Patient-Centered Outcomes Research Institute (PCORI) Fees

Insurers for fully-insured policies and plan sponsors of self-funded plans must pay a fee starting for Plan Years ending

after 9/30/2012

• Fee equals $1 per covered life in the medical plan for the first year and $2 per covered life each year thereafter

• Payment ends for the Plan Year ending after 9/30/2019• Covered lives can be calculated using a number of approved

methods, including averaged snapshots from each quarter and the Form 5500 reported figure

• Fee is due with Form 720, Federal Excise Tax Return, by the following July 31

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GF

2012 – Form W-2 Reporting

Employers must report the total value of health insurance coverage on their employees’ W-2s• Applies to ALL employers, regardless of size, self- vs. fully-insured,

church or government plan sponsor, or GF status• Applies to W-2s issued to each employee, incl. full-time, part-time,

terminated, and seasonal• Originally required for 2011 W-2s, but IRS postponed compliance:

Until January 2013 for full 2012 tax year for employers who filed 250+ W-2s for 2011

Until further guidance is published for employers who filed fewer than 250 W-2s for 2011 and for self-funded plans not subject to federal COBRA

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2012 – Form W-2 Reporting, cont’d

Total value = COBRA-equivalent rate minus 2% admin fee, includes the following types of coverage:• Major medical• Any FSA value in excess of EE’s own election amount• Pre-tax or employer-paid hospital indemnity or illness coverage• EAPs, on-site clinics, and wellness programs that are subject to

COBRA

Following coverage types are not reportable:• EE-only FSA elections• All HSA contributions• After-tax EE-paid hospital indemnity or illness coverage

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2012 – Form W-2 Reporting, cont’d

Following coverage types are optional to report and subject to change in future guidance:• Stand-alone dental or vision coverage• HRA contributions• EAPs, on-site clinics, and wellness programs that are not subject to

COBRA• Self-funded plans not subject to federal COBRA• Third-party sick-pay

Value is not taxable

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2013 – Tax Provisions

Effective 1/1/13, annual contribution amounts for FSAs will be capped at $2,500• Increased annually for inflation• No change in $5,000 annual cap for Dependent Care accounts

Effective 1/1/13, the tax exclusion for the federal subsidy paid to employers that maintain prescription drug plans for Medicare Part D-eligible retirees is eliminated

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2013 – Tax Provisions, cont’d

Employees with wage income in excess of $200,000 (single) or $250,000 (joint) are subject to an additional 0.9% Medicare tax• No change to employer Medicare tax• Employers must withhold additional tax if EE makes more than

$200,000 from that particular employer; not required to consider spouse’s income

• Employers who fail to withhold are subject to penalties; EE must remit unpaid tax

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2014 – Essential Health Benefits (EHBs)

Non-Grandfathered small group health plans must include following 10 categories of benefits:• Ambulatory patient services• Emergency services• Hospitalization• Maternity and newborn care• Mental health, behavioral health, and substance abuse• Prescription drugs• Rehabilitative and habilitative services and devices• Laboratory services• Preventive and wellness services and chronic disease management• Pediatric services, including oral and vision care

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2014 – EHBs, cont’d

In departure from original plan, each state will develop own list of EHBs• According to 12/16/11 HHS bulletin, states must choose single

benchmark plan based on 4 alternatives:1. the largest plan by enrollment in any of the three largest small group

insurance products in the State’s small group market2. any of the largest three State employee health benefit plans by

enrollment3. any of the largest three national FEHBP options by enrollment; or4. the largest insured commercial non-Medicaid Health Maintenance

Organization

What about state mandates?

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2014 – EHBs, cont’d

What about large plans, self-insured plans, and GF plans?• For 2014 and 2015, each state may choose to define “small” as

either having 50 or fewer EEs or having 100 or fewer EEs Starting in 2016, “small” will be defined as having 100 or fewer EEs

• Large, self-insured, and GF plans may not impose lifetime limits or annual limits on EHBs Will satisfy requirement if they use same definition of EHBs as

benchmark plan Federal government will use enforcement discretion as long as plans

make “good faith effort” to comply

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Plan Years beginning in 2014 – More Insurance Market Reforms

All New and Grandfathered Group Health Plans must include the following:

• Adult dependent coverage available up to age 26 regardless of availability of other employer-sponsored coverage

• No preexisting condition exclusions for adults

• No annual limits on minimum essential benefits

• No eligibility waiting periods lasting longer than 90 days

• Coverage despite participation in a clinical trial

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Plan Years beginning in 2014 – Cost-Sharing

For All New Group Health Plans:

• Plans may not impose cost-sharing limits (i.e., deductibles and out-of-pocket maximums) greater than those in effect for HSAs

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2014? – Nondiscrimination Rules

Non-Grandfathered fully-insured group health plans will have to pass Nondiscrimination Rules found in IRC Sec. 105(h)• Rules already apply to all self-insured plans• Prohibits discrimination with respect to benefits or eligibility based

on age, years or service, or compensation• Penalty for non-compliance is $100 excise tax per day per affected

individual IRS Notice issued 1/10/2011 does not require compliance

until after further guidance or regs are issued• Anticipated before 2014

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2014 – Wellness Programs

For All New and Grandfathered Group Health Plans:

• HIPAA Nondiscrimination Rules for Wellness Programs are codified, and the maximum incentive amount for plan participants that achieve a health status target is raised from 20% of the premium to 30%

Option for HHS to raise to 50%

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2014 – Free Rider Penalties

Applies to employers with 50+ full-time equivalent employees• Full-time is defined as working 30 hours/week• IRS intends to issue proposed regs re: determining full-time status

and prorating part-time EEs

Penalties generally incurred for 2 reasons:1. Employer does not offer full-time EEs and their dependents the

opportunity to enroll in minimum essential coverage2. Employer offers minimum essential coverage, but the coverage is

deemed “unaffordable” or does not provide “minimum value”

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2014 – Free Choice Vouchers

Effective 2014, PPACA gave certain qualifying employees of employers that provide coverage and make contributions the option of either participating in the group health plan or taking the employer contribution in the form of a voucher and finding coverage on the Exchanges

In the federal funding deal signed by President on 4/15/2011, Free Choice Vouchers were eliminated

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2014? – More Form W-2 Reporting

Effective for the 2014 tax year, employers must begin reporting additional information about their group health plan on each employee's W-2, including: • whether they offer EEs and their dependents the opportunity to

enroll in minimum essential benefits• the length of any applicable eligibility waiting period• the lowest cost option in each enrollment category under the plan• the employer's share of total allowed costs of benefits under the

plan

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2014 – Small Employer Tax Credit

Tax Credit for Small Employers with New or Grandfathered Plans:

• Applies to employers with 25 or fewer EEs and average annual wages of less than $50,000

• Amount of full tax credit available to qualifying small employers increases from 35% to 50% of the employer's contribution amount

• Amount of full tax credit available to qualifying tax-exempt small employers increases from 25% to 35% of the employer's contribution amount

• Available for 2 years

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2014 – State Insurance Exchanges

States must create insurance Exchanges where individuals and employers can buy insurance• The Exchanges must include "bronze," "silver," "gold," and

"platinum" actuarially-valued levels of benefits• Participation limited to individuals and small employers under 100

EEs before 2017• Federal subsidies for the Exchanges will be available on a sliding

scale for those earning between 133% and 400% of the Federal Poverty Level Individuals with incomes below 133% of the Federal Poverty Level will

be entitled to Medicaid

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2014 – Individual Mandate

Individuals must obtain coverage or pay an income tax penalty equal to (1) the greater of $95 or 1% of income in 2014, (2) the greater of $325 or 2% of income in 2015, and (3) the greater of $695 or 2.5% of income in 2016• Individuals making less than the tax filing threshold are exempt from

the mandate• Challenged in federal court; Supreme Court has agreed to hear case

in Spring 2012

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2015? – Auto-Enrollment

Employers with 200+ full-time employees must auto-enroll all full-time employees into the group health plan, subject to any applicable and permissible eligibility waiting period• Employers must provide adequate notice, including information

about the Exchanges, and give employees the opportunity to opt-out of the automatic coverage and elect another option or opt-out of the plan altogether

• No effective date published for auto-enrollment – becomes effective once HHS publishes regulations

In IRS Notice 2012-17, published 2/9/12, DOL indicated guidance would not be ready in time for 2014 implementation

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2018 – “Cadillac Plan” Tax

Plans must pay a 40% excise tax on the value of any health plan that exceeds the threshold of $10,200 for single coverage and $27,500 for family coverage• If, by 2018, health care inflation is increasing at a higher rate than

expected, the thresholds will be automatically adjusted upwards The tax will apply to both self-insured and fully-insured

group plans and will be calculated based on the amount of the premium that exceeds the threshold

The threshold amounts will be indexed for inflation at CPI-U + 1% for 2019; in 2020 and beyond, the threshold will be indexed at general inflation only

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2018 – “Cadillac Plan” Tax, cont’d

A higher threshold of $11,850 for singles and $30,950 for families apply to retirees age 55 and up and to individuals in high-risk professions

Plans with higher costs due to the age or gender demographics of their employees may value coverage using the age and gender demographics of the national risk pool

Stand-alone dental and vision coverage is excluded from the total value of coverage

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Thank you!

Mollie Sledd, GBA

C. T. Hellmuth & Associates, Inc.