What Employers Need to Know
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| Brown & Brown Insurance Healthcare Reform Update |
During March 2010, Congress enacted two new laws which overhaul the United States health care system. These two laws are often referred to as Health Care Reform. For employers, the new laws represent the most significant changes to their health benefit plan since the passage of ERISA.
Many provisions of Health Care Reform are already in effect. The purpose of this bulletin is to summarize key changes that become effective in 2013, 2014 and 2015. It is based upon federal regulations and other guidance published as of July 29, 2013.
Additional Plan Changes Employers will be required to make several additional changes to their health plans to comply with Health Care Reform. The changes include the following:
1. Limit on Medical FSA Contributions
For plan years beginning in 2013, a participant is not permitted to contribute more than $2,500 to the participant’s medical flexible spending account (FSA) under an employer’s Section 125 cafeteria plan. An employer is required to amend its Section 125 plan to include this limit no later than December 31, 2014.
2. Waiting Period
For plan years beginning in 2014, health plans may not impose a waiting period of longer than 90 days for newly-eligible full-time employees. Because coverage must be effective no later than the employee’s 91st day of employment, a plan provision which permits a full- time employee to become a participant in the health plan on the first day of the month after
90 days of employment will not comply.
3. Automatic Enrollment
Employers with more than 200 full-time employees will be required to automatically enroll newly-eligible individuals and reenroll existing employees. No regulations have been issued regarding this requirement. The requirement will not take effect until after the regulations are issued.
4. Cap on Maximum Out-of-Pocket Limits
For plan years beginning in 2014, the maximum out-of-pocket limits for all nongrandfathered plans cannot exceed the maximum out-of-pocket limits for high deductible health plans offered in connection with an HSA. These limits during 2014 will be $6,350 for single coverage and $12,700 for two-person or family coverage.
5. Nondiscrimination Rules
The Internal Revenue Code has historically imposed nondiscrimination rules on self- insured health plans, but not fully-insured health plans. Health Care Reform extends the nondiscrimination rules to nongrandfathered, fully-insured plans. These rules were supposed to be effective during 2011, but the IRS has not yet published any regulations regarding the new requirements. So the effective date of the new nondiscrimination rules has been delayed until plan years beginning after the regulations are published.
New Participant Notices
Health Care Reform requires employers to provide additional notices to participants in their health plans. These notices include the following:
Summary of Benefits and Coverage
The purpose of the Summary of Benefits and Coverage (SBC) is to provide information in a prescribed format to participants so they can easily compare the information with other plans for which they are eligible, including coverage available on a state exchange. The SBC was originally required during 2012, but must be updated annually. The most recent SBC must be provided to a new participant upon initial eligibility, to all participants at open enrollment, and to a participant upon request.
Notice of Exchange Availability
By October 1, 2013, employers must provide current employees with a notice regarding the availability of the exchanges. New hires must be provided with the notice within 14 days of their start date. This notice must include information regarding the premium credits and cost sharing subsidies available to low income individuals if they enroll in coverage on the exchange. The DOL published model notices during May 2013.
Additional Reporting Requirements
Employers also have additional reporting requirements to governmental agencies. Guidance is expected to be issued regarding when this reporting is to take effect and the form and substance of the reporting. These requirements include the following:
Reporting to Exchanges
Employers will be required to provide information to exchanges regarding an employee’s eligibility for employer group health coverage. This will assist the exchange in administering the potential financial assistance for low income individuals applying for exchange coverage.
Reporting to IRS
Employers with 50 or more full-time employees must report to the IRS whether they offer minimum essential coverage to employees. This information is required for the IRS to administer the play or pay penalty.
New Taxes and Fees
Health Care Reform imposes a series of new taxes and fees on individuals and plans. Here is a summary:
Increased Medicare Taxes
Beginning in 2013, an employer is required to withhold additional Medicare taxes in the amount of 0.9% of the amounts paid to an employee in excess of $200,000 during a year.
The new withholding obligation is "triggered" when the employee’s income from that employer exceeds $200,000. However, the employer is not required to pay additional Medicare taxes.
6. PCORI Fee
For plan years ending on or after October 1, 2012 (and beginning before October 1, 2019), a new fee will be assessed to finance comparative clinical effectiveness research through the Patient-Centered Outcomes Research Institute (PCORI). The amount of the fee is based upon the average number of covered lives (including both employees and dependents) under a health plan during the plan year.
The PCORI fee for the first plan year is $1 per covered life. This fee increases to $2 per covered life for the next plan year and will be subsequently increased based upon increases in national health spending. If the employer’s plan is fully-insured, the fee is payable by the insurer. If the employer’s plan is self-funded, the fee is payable by the employer.
The fee is reported on IRS Form 720 and is paid by July 31 of the calendar year immediately following the last day of the plan year for which the fee is owed. As a result, an employer with a calendar year plan will pay its first PCORI fee by July 31, 2013. On the other hand, if the employer’s first plan year ending on or after October 1, 2012 ends on May 31, 2013, the first PCORI fee must be paid by July 31, 2014.
7. Temporary Reinsurance Program
A new fee is imposed on group health plans that provide major medical coverage. The purpose of the fee is to fund reinsurance for insurers in the individual market. This fee is imposed during 2014, 2015 and 2016. The goal is to raise $25 billion.
The fee is front-end loaded. It will raise $12 billion during 2014, $8 billion in 2015 and $5 billion in 2016.
The IRS proposed regulations issued in December 2012 estimate the fee for 2014 to be $63 per covered person (employees and dependents). This fee applies on a calendar year basis even if the plan has a different plan year.
If the employer’s plan is fully-insured, the fee is paid by the insurer. If the employer’s plan is self-insured, the fee is imposed on the plan. It is likely that the fee payable by a self- insured plan will be sent in by the third party administrator of the plan.
Health Care Exchanges
One of the key components of Health Care Reform is the establishment of exchanges to help individuals and groups shop for health coverage in a more efficient and comprehensive manner. It was anticipated that each state would have its own exchange, but most states have declined to establish an exchange. So the federal government will establish and operate the exchange for these states. The exchanges are expected to be in operation during the Fall of 2013 with coverage available as of January 1, 2014.
Health Care Reform also provides that low income individuals will receive premium credits to reduce their cost of purchasing health insurance on the exchange. For this purpose, a premium credit is available if the individual’s household income is between 100% and 400% of the federal poverty level. Not surprisingly, the amount of the premium credit decreases as the household income increases.
Health Care Reform also provides for the expansion of individuals eligible to receive free Medicaid coverage. At the current time, certain individuals with household income of up to 100% of the federal poverty level are eligible. Health Care Reform would have increased this eligibility to all individuals with household income of up to 138% of the federal poverty level. An individual who receives Medicaid coverage does not need to purchase health coverage on an exchange.
But based upon the U.S. Supreme Court case during June 2012, states are not required to expand Medicaid. For states where Medicaid is not expanded, more individuals will be eligible for the premium credit on the exchange. This potentially exposes employers to larger play or pay penalties.
Individual Mandate
A second important component of Health Care Reform is the individual mandate. An individual must obtain health insurance with minimum essential coverage or pay a penalty. The individual mandate and penalty take effect in 2014. This health insurance can be provided through Medicaid, Medicare, other public programs (for example, CHIP or Tricare), the exchange or an employer plan.
The penalty is the greater of a flat dollar amount or a percentage of the household income:
The flat dollar amount is $95 for 2014, $325 for 2015 and $695 for 2016. For later years, the flat dollar amount will be increased for changes in the cost of living.
The percentage of household income is 1% for 2014, 2% for 2015 and 2.5% for 2016 and later years.
Employer Mandate - Play or Pay
A third key component of Health Care Reform is the employer mandate. Under this mandate, large employers will be required to offer health care coverage to full-time employees and their dependents or pay a penalty. The employer mandate was also initially set to apply beginning in
2014. However, in July 2013 the IRS announced a one-year delay in the effective date (until
2015).
Play or Pay Rules Only Apply to Large Employers
Health Care Reform imposes the "play or pay" rules on a "large employer" - an employer that averages at least 50 full-time employees.
This determination is separately made for each plan year based upon the average number of full-time employees during the prior year.
For this purpose, full-time means at least 30 hours a week.
The number of full-time employees is based upon full-time equivalents (FTEs).
To convert the number of part-time employees to FTEs, determine the total hours worked during each month of the prior year by the employees who average less than 30 hours per week during the month and divide by 120. After making this calculation, it is necessary to divide by 12 to determine the average FTEs for months during the year.
In determining the total hours of these part-time employees, the employer cannot count more than 120 hours in a month for any employee.
If companies are under common ownership, they are treated as a single employer for purposes of determining whether there are 50 FTEs. So an employer cannot avoid the rules by dividing its company into multiple companies.
8. The Potential Tax Penalties
Health Care Reform has two separate penalties that may apply to a large employer under the play or pay rules:
The $2,000 Penalty The first penalty is a tax equal to $2,000 multiplied by the employer’s full-time employees (less the first 30 full-time employees). For example, if this penalty applies and the employer has 200 full-time employees, the tax is equal to $2,000 x 170 employees (200 - 30 = 170), or $340,000. This tax applies if two requirements are satisfied:
- The employer fails to offer minimum essential health coverage to substantially all (at least 95%) of the employer’s full-time employees, and
- The employer has at least one full-time employee who enrolls in health insurance coverage through an exchange and receives a premium credit.
Here are some other important rules relating to this tax penalty:
In addition to the full-time employee, health coverage must also be offered to the employee’s dependent children.
If there is more than one company under common ownership, the tax penalties are determined separately for each company. However, in calculating the $2,000 tax, the "30 employees" that are subtracted in calculating the tax are allocated among the companies that are commonly owned in proportion to the number of their full-time employees. Each company is not permitted to subtract 30 employees in calculating the tax penalty.
The $3,000 Penalty The second penalty is a tax equal to $3,000 multiplied by the number of an employer’s full-time employees who enroll in health insurance coverage through an exchange and receive a premium credit. This tax applies if:
The employer’s health plan doesn’t provide minimum value. This occurs if the plan pays less than 60% of the total cost of benefits provided under the plan; or
The employer’s health plan isn’t affordable to the employee. For this purpose, a plan is not affordable if the cost of employee-only coverage is more than 9.5% of the employee’s household income.
o Because an employer doesn’t know an employee’s household income, the proposed regulations provide a series of safe harbors that can be used to determine whether a plan is affordable. The safe harbor that may be most helpful to employers is based upon the employee’s rate of pay at the beginning of the year. The monthly premium is affordable if it does not exceed 9.5% of the employee’s hourly rate of pay at the beginning of the year multiplied by 130.
o There are special rules for wellness incentives. A premium surcharge for tobacco users is disregarded in determining whether coverage is affordable, but premium surcharges for other reasons (for example, cholesterol or blood pressure) are counted.
The $3,000 penalty also could apply if the full-time employee isn’t offered coverage under the employer’s plan and instead enrolls in health insurance coverage through an exchange and receives a premium credit. This could occur, for example, if the full-time employee was part of the less than 5% of full-time employees who are not offered coverage.
Although $3,000 is more than $2,000, this tax is likely to be smaller because it only applies based upon the number of the employer’s full-time employees who purchase health insurance coverage through the exchange and receive a premium credit. It is not based upon the total number of the employer’s full-time employees, as is the situation for the $2,000 tax.
9. Identifying Full-Time Employees
For purposes of the play or pay rules, an employee is full-time if the employee averages 30 or more hours of service per week. An "hour of service" includes all hours for which an employee is paid (not the actual number of hours worked by the employee). IRS regulations treat 130 hours of service during a month as the equivalent of 30 hours of service per week.
In many situations, an employer can readily determine whether a new employee is full- time. If the employer reasonably expects the new employee to work an average of 30 hours per week, the employee should be treated as full-time. The employer can then avoid any play or pay penalty for the new full-time employee by offering health coverage within 90 days after the employee begins employment.
The determination of whether a newly-hired employee is full-time may be more difficult if the employee works variable hours or is seasonal. If the employer cannot reasonably determine when the employee is hired whether the employee will average 30 hours of service per week, the employer may use a safe harbor approach to determine over a period of time whether the employee is, in fact, a full-time employee under the Health Care Reform standard.
Under this safe harbor, the employer can determine whether the new employee averages at least 30 hours of service per week during a "measurement period" that lasts from 3 to 12 months (as determined by the employer). If the employee averages at least 30 hours of service per week during the measurement period, the employee is then treated as a full-time employee for a subsequent period of time called the "stability period." The stability period must be a period of 6 to 12 months after the initial measurement period. However, the stability period can’t be shorter than the measurement period.
Further, the employer is permitted to have an administrative period between the measurement period and stability period. The purpose of the administrative period is to determine whether the employee satisfied the requirements to be a full-time employee and, if so, to offer coverage to the employee that will become effective at the beginning of the stability period.
On the other hand, if the newly-hired part-time or seasonal employee does not average at least 30 hours of service per week during the measurement period, the employer is not required to offer health coverage to the employee during the stability period.
For example, assume an employee is hired on May 15, 2015 and the employer cannot reasonably determine at that time whether the employee is likely to average 30 hours of service per week. The employer could use a measurement period for this new employee from May 15, 2015 through May 14, 2016. If the employee averaged at least 30 hours of service per week during this measurement period, the employee would be eligible for health coverage for the stability period from July 1, 2016 through June 30, 2017. (The period from May 15, 2016 through June 30, 2016 is the administrative period.) However, if the employee did not average at least 30 hours of service per week during the May 15, 2015 through May 14, 2016 measurement period, the employer would not be required to offer health coverage to the employee during the July 1, 2016 through June 30, 2017 stability period.
This approach can also be used for ongoing employees. For example, if an employer’s health plan operates on a calendar year basis, the employer could use the period from October 15 through the following October 14 as a measurement period that can be used to determine whether an employee is full-time. If the employee is full-time during the measurement period, the employee would be offered health insurance coverage during the next plan year. But if the employee did not average 30 hours of service per week during the measurement period, the employee would be ineligible for health coverage during the next plan year.
10. Considerations Before Discontinuing Health Insurance Coverage for Your Employees
Some employers may prefer to "pay" instead of trying to comply with the many new requirements of Health Care Reform. However, before an employer makes this decision, the employer should consider the following:
The tax equal to $2,000 per full-time employee (less 30 employees) is not tax deductible.
It still is important for an employer to attract and retain good employees. If an employer discontinues health insurance coverage, will the employer pay additional compensation to assist employees in purchasing health insurance coverage on the exchange? If so, here are some issues for the employer to consider:
The premium subsidy for purchasing insurance on the exchange depends on the household income and "phases-out" if household income exceeds four times the federal poverty level (the federal poverty level depends on the number of people in the family).
o The additional compensation paid to the employee to purchase health insurance coverage will reduce the amount of premium credit available to the employee because the employee’s household income will be larger.
o The employer’s executives will likely be paying the full cost of coverage on the exchange.
The cost of other pay-related taxes (such as FICA) and pay related benefits (such as disability insurance and life insurance) will increase.
Will the employees be happy with the coverage that is available on the exchange?
11. How to Modify an Employer’s Health Plan to Minimize the Risk of Taxes Under the
Play or Pay Rules
An employer may want to take action during 2014 to minimize the risk that the play or pay penalties will apply to the employer beginning in 2015. Here are some actions that should be considered by the employer:
The employer should make sure that coverage is offered to at least 95% of its full– time employees. If the employer employs variable hour or seasonal employees, the employer may need to establish measurement periods and stability periods to make sure that health coverage is offered to all full–time employees. The employer should also make sure that no individuals who are providing services to the employer as independent contractors are actually employees.
The employer should make sure that coverage under its health plan is affordable. This is important in avoiding the $3,000 tax, discussed above. Because affordability is based upon the cost of employee-only coverage, an employer may want to consider adding a low cost employee-only option to its health plan.
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