Health Care Reform Summary: What Employers and Individuals Need to Know

The Patient Protection and Affordable Care Act was signed into law by President Obama on March 23, 2010. The companion bill, the Health Care and Education Reconciliation Act, was signed into law on March 30, 2010. Together, these two laws are commonly referred to as the "Health Care Reform Law." Without question, the Health Care Reform Law constitutes the most significant social reform law in decades, generally covering five different subject areas: (1) Insurance Market Reforms, (2) Employer Responsibilities, (3) Individual Responsibilities, (4) Insurance Exchanges, and (5) Revenue Raisers.

In spite of the breadth of the legislation, the new law left many questions to be answered via regulations to be issued by the Department of Health and Human Services (HHS), the Department of Labor (DOL) and the Internal Revenue Service ("IRS"). These agencies (collectively, the "Agencies") are now beginning to fill in the gaps, with more guidance to come.

Grandfathered Plans

In assessing the impact of the new law, an understanding of the concept of "grandfathering" is important. The genesis of the grandfather rule was the President’s promise during the health care reform debate that Americans who were satisfied with their health insurance coverage would not be forced to change it. While some of the requirements of the new law apply to all health plans, others only apply to plans that are not grandfathered. Generally, a grandfathered group health plan is one that was in existence on March 23, 2010, the date of enactment of the new law. However, in the first few months following enactment, many questions arose concerning the extent to which changes in a plan could be made without losing grandfathered status. The Agencies answered many of these questions in regulations issued June 14, 2010. The regulations provide that any of the following changes will result in a loss of grandfathered status:

  • issuance of a new policy, certificate or contract of insurance (as compared to mere renewal of a policy) after March 23, 2010,
  • elimination of a particular benefit (specifically, all or substantially all benefits to diagnose or treat a particular condition),
  • any increase in coinsurance by any amount above the level at which it was set on March 23, 2010,
  • any increase in a deductible or out-of-pocket maximum by more than medical inflation plus 15 percentage points,
  • any increase in a copayment for any service by more than the greater of (1) $5 (adjusted for medical inflation), or (2) medical inflation plus 15 percentage points,
  • any decrease in employer contributions toward the cost of any tier of coverage (e.g., employee or family) by more than 5%, or
  • a new annual limit on the dollar value of benefits (for plans with no prior limit), an annual limit lower than the prior lifetime limit (for plans with prior lifetime limit but no annual limit), or a decrease in the dollar value of an annual limit (for plans with a prior annual limit).

Insurance Market Reforms

Lifetime/Annual Limits:
Group health plans and insurers may not impose lifetime limits or "restrictive" annual limits on "essential health benefits." (The terms "restrictive" and "essential health benefits" are to be further defined in regulations.) Plans and insurers are required to provide a written notice that the lifetime limit no longer applies and a covered individual is once again eligible, with special enrollment opportunities. Model language published by the DOL for this purpose is available at: http://www.dol.gov/ebsa/lifetimelimitsmodelnotice.doc.

Effective Date: First plan year beginning on or after September 23, 2010 (e.g., January 1, 2011 for calendar year plans)

Applicability: All plans (including grandfathered plans)

Waiting Periods:
Insurers are prohibited from selling policies containing, and self-insured plans are prohibited from imposing, waiting periods in excess of 90 days.

Effective Date: First plan year beginning on or after January 1, 2014

Applicability: All plans (including grandfathered plans)

Pre-Existing Condition Limits:
Group health plans and insurers may not impose any pre-existing condition exclusion with respect to children under age 19, and eventually, pre-existing condition exclusions will be prohibited with regard to all participants.

Effective Date: First plan year beginning on or after September 23, 2010 (e.g., January 1, 2011 for calendar year plans) for children under 19, 2014 for all participants

Applicability: All plans (including grandfathered plans)

Cost-Sharing Limits:
Group health plans are not permitted to impose cost-sharing provisions (deductibles, copayments, etc.) that exceed the limits applicable to HSA-qualified high-deductible health plans.

Effective Date: First plan year beginning on or after January 1, 2014

Applicability: Does not apply to grandfathered plans

Adult Child Coverage:
Group health plans that offer dependent coverage must extend eligibility to children of covered employees until age 26, if the child is not eligible for coverage under another plan. Status of the child as a full-time student, unmarried person or "dependent" under the traditional tax code definition is no longer relevant. Children who become eligible as a result of this change are required to have special enrollment rights and must be notified of these rights. Model language published by the DOL for this purpose is available at: http://www.dol.gov/ebsa/dependentsmodelnotice.doc.

Effective Date: First plan year beginning on or after September 23, 2010 (e.g., January 1, 2011 for calendar year plans)

Applicability: All plans (including grandfathered plans)

Preventative Care Coverage:
Group health plans must provide coverage without employee cost-sharing for certain preventative services (e.g., immunizations, well-child services and screenings).

Effective Date: First plan year beginning on or after September 23, 2010 (e.g., January 1, 2011 for calendar year plans)

Applicability: Does not apply to grandfathered plans

Claims Appeals:
Group health plans must implement new internal and external claims review procedures beyond the current ERISA requirement, and states must provide "ombudsman" assistance to claimants.

Effective Date: First plan year beginning on or after September 23, 2010 (e.g., January 1, 2011 for calendar year plans)

Applicability: Does not apply to grandfathered plans (except that ombudsman assistance must be available under all plans as of the date of enactment)

Nondiscrimination Requirements:
Currently, insured plans are not subject to discrimination requirements. Therefore, for example, it is currently permissible for a small business to have a plan that provides family coverage for business owners but only employee coverage for non-owner employees. Under the new law, insured plans must comply with the nondiscrimination rules applicable to self-insured plans, i.e., eligibility and benefits cannot be offered in a manner which favors "highly compensated" individuals.

Effective Date: First plan year beginning on or after September 23, 2010 (e.g., January 1, 2011 for calendar year plans)

Applicability: Does not apply to grandfathered plans

Disclosure Requirements:
Insurers and plan sponsors will be required to provide explanations describing benefits and coverage levels, contact information, etc. to enrolled employees. The explanations must meet certain requirements (limit of 4 pages, 12-pitch or greater font). Penalties of up to $1,000 per employee may apply for failures to provide. HHS is to develop a standard for employer use not later than March 23, 2011.

Effective Date: Not clear, but most likely March 23, 2012 (or sooner depending on when standard is published)

Applicability: All plans (including grandfathered plans)

Employer Responsibilities

Government Subsidies for Small Employers:
A maximum tax credit equal to 35% of premiums paid (25% for tax-exempt employers) for health insurance will be available to employers that meet the following criteria: (a) fewer than 25 full-time equivalent ("FTE") employees, not counting certain business owners, (b) average annual wages less than $50,000 per FTE, and (c) uniform employer contributions of at least 50% of the premium cost for single coverage. The credit is phased out for employers with more than 10 FTEs or average annual wages for FTEs exceeding $25,000. The maximum credit increases to 50% (35% for tax-exempt employers) in 2014.

Effective Date: Immediate (2010 tax years)

Simple Cafeteria Plans for Small Employers:
Currently, cafeteria plans are subject to nondiscrimination testing which limits the benefits provided to highly compensated individuals as compared to the benefits provided to other employees. Under the new law, cafeteria plans maintained by small employers (100 or fewer employees) are deemed to be nondiscriminatory if (a) all employees with at 1,000 hours of service in the prior year are eligible to participate, (b) certain nondiscrimination standards are satisfied, and (c) employer contributions are a uniform percentage (not less than 2%) of compensation, or not less than 6% of compensation or two times the employee contribution amount.

Effective Date: January 1, 2011

Deductible Limits for Small Employers:
Health plans offered in the small employer market may not have a deductible that exceeds $2,000 for single coverage or $4,000 for employee/spouse or family coverage.

Effective Date: January 1, 2014

Applicability:
All plans (including grandfathered plans)

"Play or Pay" Mandate:
Employers with more than 50 full-time employees can "play" by offering "minimum essential coverage" to full-time employees and their dependents. Those employers that fall within this category but do not provide qualifying coverage must "pay" a monthly assessment equal to $2,000 divided by 12, multiplied by the total number of full-time employees (excluding the first 30 full-time employees) if at least one full-time employee receives coverage through an insurance exchange (described below). Also, if coverage meets the "minimum essential" requirement but is "unaffordable" (i.e., the employee’s share of the premium exceeds 9.5% of income or if the plan has an actuarial value less than 60%), the employer must "pay" a monthly assessment equal to $3,000 divided by 12, multiplied by the total number of full-time employees who receive coverage through an insurance exchange (subject to a limit of the penalty applicable to an employer not providing any coverage).

Effective Date: January 1, 2014

Free-Choice Vouchers:
Employers with more than 50 full-time employees that offer "minimum essential coverage" must give eligible employees the option to receive a voucher to purchase coverage from an insurance exchange. An employee is eligible for a voucher if the employee’s shares of the cost of coverage in the employer plan is between 8% and 9.5% of household income, that income does not exceed 400% of the federal poverty level, and the employee does not participate in the employer plan. The employer is entitled to offset any "play or pay" penalty by the amount of the voucher.

Effective Date: January 1, 2014

Automatic Enrollment:
Employers with more than 200 full-time employees that offer coverage must automatically enroll all new full-time employees in the employer’s plan. As in the case of 401(k) plans with automatic enrollment, an employee must have the opportunity to opt out of coverage.

Effective Date: January 1, 2014 (not definite at this point)

Individual Responsibilities

Coverage Requirement:
Each U.S. citizen and each legal resident is required to have "minimum essential coverage," whether secured through an employer plan, an individual policy or a government program (e.g., Medicare). Tax penalties of $695 per year (up to $2,085 per family) will be phased in through 2016. Exceptions are available in cases of financial hardship and other limited circumstances.

Effective Date: January 1, 2014

Government Subsidy and Medicaid Eligibility:
A government subsidy (and reduced out-of-pocket limits) will be available to each U.S. citizen and each legal resident with income not exceeding 400% of the federal poverty level to purchase insurance through an exchange (described below). In addition, Medicaid eligibility is expanded to all individuals under age 65 with incomes up to 133% of the federal poverty level.

Effective Date: January 1, 2014

Insurance Exchanges:
Individuals (U.S. citizens and legal immigrants) and small employers (100 or fewer employees) may purchase insurance from state-operated exchanges. Five different tiers of coverage (bronze, silver, gold, platinum and catastrophic) will be available.

Effective Date: January 1, 2014

Revenue Raisers

Over-the-Counter Drugs:
Over-the-counter drugs will no longer be reimbursable from a health care flexible spending account (cafeteria plan), health reimbursement account (HRA) or health savings account (HSA) without a prescription. An exception is made for insulin.

Effective Date: January 1, 2011 (without regard to plan year)

HSA Distributions:
The penalty on non-medical distributions from health savings accounts is raised from 10% to 20%.

Effective Date: January 1, 2011 (without regard to plan year)

FSA Contributions:
Employee pre-tax contributions to health flexible spending accounts will be limited to $2,500 per year.

Effective Date: January 1, 2013 (without regard to plan year)

Excise Tax on High-Cost Plans:
A 40% excise tax is imposed on insurers and employers (those with self-insured plans) to the extent that the aggregate annual value of an employee’s health coverage (including HRA, FSA and employer HSA contributions) exceeds $10,200 for single coverage or $27,500 for employee/spouse or family coverage.

Effective Date: January 1, 2018 (without regard to plan year)

Health Law Reform Timeline

Another way to become familiar with how the Health Care Reform will impact your business and your employees is to take a look at Reform components chronologically:

March 23, 2010

  • The Patient Protection and Affordable Care Act was signed into law

March 30, 2010

  • The Health Care and Education Reconciliation Act was signed into law
  • Government Subsidies for Small Employers take effect for 2010 tax years

September 23, 2010 (for plan years beginning after this date)

  • Group health plans and insurers may not impose lifetime limits or "restrictive" annual limits on "essential health benefits"
  • Group health plans and insurers may not impose any pre-existing condition exclusion with respect to children under age 19
  • Group health plans that offer dependent coverage must extend eligibility to children of covered employees until age 26, if the child is not eligible for coverage under another plan
  • Non-grandfathered group health plans must provide coverage without employee cost-sharing for certain preventative services
  • Non-grandfathered group health plans must implement new internal and external claims review procedures beyond the current ERISA requirement; and states must provide "ombudsman" assistance to claimants for all plans (including grandfathered plans)
  • Non-grandfathered insured plans must comply with the nondiscrimination rules applicable to self-insured plans, i.e., eligibility and benefits cannot be offered in a manner which favors "highly compensated" individuals

January 1, 2011

  • Cafeteria plans maintained by small employers are deemed to be nondiscriminatory if (a) all employees with at 1,000 hours of service in the prior year are eligible to participate, (b) certain nondiscrimination standards are satisfied, and (c) employer contributions are a uniform percentage (not less than 2%) of compensation, or not less than 6% of compensation or two times the employee contribution amount
  • Over-the-counter drugs will no longer be reimbursable from a health care flexible spending account (cafeteria plan), health reimbursement account (HRA) or health savings account (HSA) without a prescription
  • The penalty on non-medical distributions from health savings accounts is raised from 10% to 20%

March 23, 2012

  • Insurers and plan sponsors will be required to provide explanations describing benefits and coverage levels, contact information, etc. to enrolled employees

January 1, 2013

  • Employee pre-tax contributions to health flexible spending accounts will be limited to $2,500 per year

January 1, 2014

  • Insurers are prohibited from selling policies containing, and self-insured plans are prohibited from imposing, waiting periods in excess of 90 days.
  • Group health plans and insurers may not impose any pre-existing condition exclusion for all participants
  • Non-grandfathered group health plans are not permitted to impose cost-sharing provisions (deductibles, copayments, etc.) that exceed the limits applicable to HSA-qualified high-deductible health plans
  • Health plans offered in the small employer market may not have a deductible that exceeds $2,000 for single coverage or $4,000 for employee/spouse or family coverage
  • Employers with more than 50 full-time employees must offer "minimum essential coverage" to full-time employees and their dependents or pay a monthly assessment, the employer must also pay a monthly assessment if coverage meets the "minimum essential" requirement, but is unaffordable
  • Employers with more than 50 full-time employees that offer "minimum essential coverage" must give eligible employees the option to receive a voucher to purchase coverage from an insurance exchange
  • Employers with more than 200 full-time employees that offer coverage must automatically enroll all new full-time employees in the employer’s plan
  • Each U.S. citizen and each legal resident is required to have "minimum essential coverage," whether secured through an employer plan, an individual policy or a government program
  • Agovernment subsidy (and reduced out-of-pocket limits) will be available to each U.S. citizen and each legal resident with income not exceeding 400% of the federal poverty level to purchase insurance through an exchange
  • Individuals (U.S. citizens and legal immigrants) and small employers (100 or fewer employees) may purchase insurance from state-operated exchanges. Five different tiers of coverage (bronze, silver, gold, platinum and catastrophic) will be available

January 1, 2018

  • A 40% excise tax is imposed on insurers and employers (those with self-insured plans) to the extent that the aggregate annual value of an employee’s health coverage exceeds $10,200 for single coverage or $27,500 for employee/spouse or family coverage