Health Care Reform: Benefit Plan Considerations for Employers

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1 .... April 1, 2010 Health Care Reform: Benefit Plan Considerations for Employers The Patient Protection and Affordable Care Act ( PPAC ) was signed into law on March 23, 2010, and the related Health Care and Education Reconciliation Act of 2010 ( HCER ), which modifies certain provisions of PPAC, was signed into law on March 30, These two statutes (together, the PPAC and HCER are referred to in this Alert as the Health Care Reform Law ) make sweeping changes to existing law governing employer-sponsored group health plans, individual health coverage, and governmental health programs. The new provisions affect insured and self-insured employer health plans. The Health Care Reform Law provisions generally are added to the Public Health Service Act ( PHSA ) and are incorporated by reference into the Employee Retirement Income Security Act of 1974, as amended ( ERISA ). Certain changes are also made to the Internal Revenue Code of 1986, as amended ( Code ), and the Fair Labor Standards Act ( FLSA ). Since the Health Care Reform Law implicates a number of different statutes, various governmental agencies will have authority to issue guidance. The Health Care Reform Law clearly is not the final word in this area there are many significant, as yet unanswered, questions regarding various provisions of the Health Care Reform Law (including effective dates, definitions, etc.). Moreover, there will be many related technical and substantive changes, regulations, and judicial interpretations, as well as official guidance, regarding its wide-ranging implications. Nevertheless, certain provisions of the Health Care Reform Law take effect in the near future, and employers need to understand now what changes may impact their benefit plans and when these changes take effect. The following topics are addressed in this Alert and describe some of the more significant changes made by the Health Care Reform Law that affect employers. The topics are followed by some suggested next steps for employers to consider: Grandfathered and Nongrandfathered Plans Employer Health Plan Design Changes Nondiscrimination Retiree Health Plans Other Related Employer Changes Clinical Services Rebate Access Exchanges Individual Mandate Premium Assistance Employer Play or Pay (Free Rider Penalty) Employer Voucher Obligation Wellness Grants Plan Administration Small Business Tax Credits Employer Taxes Other Related Taxes FICA Forms W-2 Forms 1099 MEWA Registration Employer Communications and Reports Next Steps Employer Plan of Action Aon Consulting Alert April 14,

2 This Alert summarizes Aon s current understanding of how certain provisions of the Health Care Reform Law may affect employers (many provisions are not entirely clear). Aon will also be issuing future analyses of the Health Care Reform Law regarding particular issues of importance to our clients. This Alert is intended only for informational purposes. It should not be relied upon as to any legal rights, obligations, or liability that any particular employer may have under the Health Care Reform Law. In addition, and consistent with Treasury Department Circular 230, this Alert was not prepared with the intent of being used, and cannot be used, by any employer for the purpose of (i) avoiding any tax penalties, or (ii) promoting, marketing, or recommending to another party any matter it addresses. Grandfathered and Nongrandfathered Plans Certain provisions of the Health Care Reform Law do not apply to grandfathered plans, and special rules and effective dates, as noted below, will apply to grandfathered plans and to existing health insurance coverage maintained pursuant to one or more collective bargaining agreements ( CBAs ) ratified before 3/23/2010. It is unclear how the special rules applicable to grandfathered plans and CBA coverage will interrelate. Grandfathered Plans. Grandfathered plans (generally, any group or individual health plans that existed on 3/23/2010) are exempt from many of the employer mandates. (Note: It is unclear the extent to which a plan will be considered grandfathered if it is amended significantly, including potentially new plan designs or features, or offered to new categories of employees who previously were ineligible for the plan; until further official guidance is issued, employers should proceed cautiously before modifying their existing health plans.) Family members may be added to coverage, without loss of grandfathered status, if permitted under plan terms as in effect on 3/23/2010. New employees and their eligible family members may enroll after 3/23/2010 without loss of grandfathered status if permitted under plan terms as in effect on 3/23/2010. CBA Coverage. Health insurance coverage maintained pursuant to one or more CBAs ratified before 3/23/2010 is not subject to many of the employer mandates until the date on which the last of the CBAs relating to the coverage terminates. (Note: It is not entirely clear whether this exception also applies to self-insured plans, or how it applies to plans that cover both collectively and noncollectively bargained employees.) Employer Health Plan Design Changes Automatic Enrollment in Health Plans. Employers covered by the FLSA with more than 200 full-time employees and that offer employees enrollment in one or more health plans must automatically enroll all new full-time employees in an employer group health plan (if any) for which they are eligible, and continue the enrollment of current employees. (This provision is applicable to grandfathered and nongrandfathered plans and appears to be effective the later of 3/23/2010 or when specified in regulations to be issued by the U.S. Department of Labor ( DOL ) although this is not entirely clear since the Health Reform Law does not specify an effective date for this requirement.) The automatic enrollment feature is to include the following requirements: Automatic enrollment applies only to new hires. Currently enrolled employees would remain enrolled unless and until they opt out. Automatically enrolled employees can elect to opt out of the plan. Employers need to provide advance notice of opt-out rights. Waiting Periods. Waiting periods cannot exceed 90 days (applies to grandfathered and nongrandfathered plans effective for plan years beginning on or after 1/1/2014; or, if later, when the last of the CBAs relating to CBA coverage terminates, as applicable). Aon Consulting Alert April 14,

3 Waiting Periods. Waiting periods cannot exceed 90 days (applies to grandfathered and nongrandfathered plans effective for plan years beginning on or after 1/1/2014; or, if later, when the last of the CBAs relating to CBA coverage terminates, as applicable). Lifetime Maximums. Health plans may not impose any lifetime maximums on the dollar value of benefits for any participant or beneficiary (applies to grandfathered and nongrandfathered plans effective for plan years beginning on or after 9/23/2010; or, if later, when the last of the CBAs relating to CBA coverage terminates, as applicable). Lifetime limits generally may be imposed on specific covered benefits that are not essential health benefits, if otherwise permitted under federal or state law. Annual Limits. Health plans may not impose any annual limits on the dollar value of benefits for any participant or beneficiary (applies to grandfathered and nongrandfathered plans effective for plan years beginning on or after 9/23/2010; or, if later, when the last of the CBAs relating to CBA coverage terminates, as applicable). Restricted annual limits on essential health benefits may be permitted, as determined by the Department of Health and Human Services ( HHS ), for plan years beginning before 1/1/2014. Annual limits generally may be imposed on specific covered benefits that are not essential health benefits, if otherwise permitted under federal or state law. Cost-Sharing Limits. Certain cost-sharing limits will apply under a health plan (except stand-alone dental plans): Annual out-of-pocket limits (indexed for inflation) may not exceed the limits that apply to Health Savings Accounts ( HSAs ) (applies to nongrandfathered plans effective for plan years beginning on or after 1/1/2014). Deductibles cannot exceed $2,000 for single coverage and $4,000 for family coverage (both indexed for inflation) (this limit appears to apply to nongrandfathered group health plans effective for plan years beginning on or after 1/1/2014). Preventive Care. Plans must provide certain preventive care (including child and women s preventive care and screenings) without participant cost-sharing requirements (applies to nongrandfathered plans effective for plan years beginning on or after 9/23/2010; or, if later, when the last of the CBAs relating to CBA coverage terminates, as applicable). Preexisting Conditions. Health plans may not impose any preexisting condition exclusions (applies to grandfathered group health plans and nongrandfathered plans effective for plan years beginning on or after 1/1/2014, except that limitations on preexisting condition exclusions under grandfathered plans for children under age 19 are effective for plan years beginning on or after 9/23/2010; or, if later, when the last of the CBAs relating to CBA coverage terminates, as applicable). Primary Care Provider Selection. Group health plans must permit participants to select their primary care provider or pediatrician from any available participating primary care provider, under plans that require such a designation (applies to nongrandfathered and, apparently, grandfathered plans effective for plan years beginning on or after 9/23/2010, but this will need to be clarified in future guidance). Pre-Authorizations. Participants cannot be required to obtain prior authorization or pay increased cost-sharing for in-network or out-of-network emergency services, or obtain prior authorization or referrals for obstetrical and gynecological care (apparently applies to grandfathered and nongrandfathered plans effective for plan years beginning on or after 9/23/2010, or, if later, when the last of the CBAs relating to CBA coverage terminates, as applicable, but this is not entirely clear). Aon Consulting Alert April 14,

4 Extension of Child Coverage. Health plans that provide for coverage of dependent children must permit continued coverage until attainment of age 26 (generally applies to grandfathered and nongrandfathered plans effective for plan years beginning on or after 9/23/2010, except that for plan years beginning before 1/1/2014, grandfathered plans must cover adult children only if they are ineligible for other employer-sponsored coverage; or, if later, when the last of the CBAs relating to CBA coverage terminates, as applicable). To the extent that presently uncovered dependent children are to be extended coverage, a process will have to be established to add them to the employer s plan. In addition: Full-time student requirements would not apply, and the child can be married. Medical Expense reimbursements under properly amended employer-provided health plans, and apparently any related employer-subsidized coverage, of a child who has not reached age 27 by the last day of the calendar year are not subject to federal income tax (effective 3/23/2010). Employers that currently permit employees to cover children who are over the prior federal age limit for dependents should evaluate the effect of this change on how they currently impute income for such coverage (if the child is under age 27 by 12/31/2010, no imputed income for 2010 federal income tax purposes may be required). It is unclear whether employers may charge employees for the full cost of this extended coverage. Premiums. Premiums may vary under insured plans offered in the individual or small group market (employers with no more than 100 employees in the prior calendar year), or in the large group market (employers with more than 100 employees in the prior calendar year) with respect to states that permit insurers in that market to offer coverage through an Exchange. The Health Care Reform Law identifies the following factors to be considered with respect to determining the applicable premium rate: family status, geography, rating area, age, and tobacco use, subject to certain limitations. The Health Care Reform Law further indicates that such premium rates will vary with respect to a particular plan or coverage only by these factors (applies to nongrandfathered plans effective for plan years beginning on or after 1/1/2014 or, if later, when the last of the CBAs relating to CBA coverage terminates, as applicable). Health Care HSA and Archer MSA Withdrawals. The penalty on withdrawal of HSA funds for non-medical expenses is increased from 10% to 20%, and from 15% to 20% for nonqualified Archer Medical Savings Account ( Archer MSA ) withdrawals (effective for distributions made on or after 1/1/2011). Wellness Program Incentives. The maximum permissible employer wellness program incentive to participants based on an individual s satisfying a standard related to a heath status factor is increased from 20%, as provided under the Health Insurance Portability and Accountability Act of 1996 ( HIPAA ), to 30% of employer and employee plan cost for single or family coverage, depending on who is eligible to participate in the wellness program (applies to nongrandfathered plans effective for plan years beginning on or after 1/1/2014). The maximum may be increased to 50%, subject to HHS, DOL, and Internal Revenue Service ( IRS ) approval. Wellness Program Disclosures. Wellness programs may not require the disclosure or collection of any information regarding, and may not base premiums, rewards, or penalties on, the lawful presence or ownership of firearms (effective for plan years beginning on or after 9/23/2010). Rescissions. Health plans cannot rescind individual or group health coverage once an individual is covered under the plan, except for fraud or intentional misrepresentations; the plan or coverage may be terminated only with prior notice to the participant and only as permitted under sections 2702(c) or 2742(b) of the PHSA (it is not entirely clear how this provision affects the right of an employer to terminate a plan) (applies to grandfathered and nongrandfathered plans effective for plan years beginning on or after 9/23/2010; or, if later, when the last of the CBAs relating to CBA coverage terminates, as applicable). Aon Consulting Alert April 14,

5 Claims Appeals. Group health plans and health insurance issuers must implement new claim and coverage appeal provisions (applies to nongrandfathered plans effective for plan years beginning on or after 9/23/2010; or, if later, when the last of the CBAs relating to CBA coverage terminates, as applicable). The new claim and appeal features include: Implementing an internal claims appeal process. Furnishing notices of available internal and external appeal processes (written in a culturally and linguistically appropriate manner) to participants. Granting access to their benefit files. Providing for continuation of benefits during the appeals process. Establishing an external review process. OTC Drugs. Over-the-counter ( OTC ) drugs, except insulin, are no longer eligible for reimbursement under Flexible Spending Accounts ( FSAs ), Heath Reimbursement Accounts ( HRAs ), HSAs, or Archer MSAs, unless prescribed by a physician (effective for amounts paid with respect to taxable years beginning on or after 1/1/2011). Adoption Assistance Programs. The federal income tax exclusion for adoption assistance programs ($12,170 for 2009) is increased by $1,000 (indexed for inflation), and the expiration of such exclusion is extended until 12/31/2011 (effective for taxable years beginning on or after 1/1/2010). Long-Term Care Insurance. A national employee-funded voluntary long term care ( LTC ) insurance program (CLASS Act) is established (effective 1/1/2011). No underwriting restrictions (other than age) on enrollment or rated policies apply. The individual generally must be actively employed to enroll. Five-year vesting is required before benefits are payable to a participant. Lifetime benefit payments are provided (no lifetime or aggregate limits). Employers may offer access through payroll deduction. Employers may automatically enroll employees, with employee opt-out rights. Health Care FSA Limits. Any health care FSA under a cafeteria plan is limited to $2,500 annually (indexed for inflation) per employee (effective for taxable years beginning on or after 1/1/2013). There is no difference for single or family coverage. Clinical Trials. Health plans must cover clinical trials for certain life-threatening diseases (apparently applies only to nongrandfathered plans effective for plan years beginning on or after 1/1/2014). Nondiscrimination Health Factor Nondiscrimination. Group health plans and health insurance issuers may not establish eligibility (or continued eligibility) rules based on various health-related factors, including health status, medical condition, claims experience, receipt of health care, medical history, disability, and genetic information (applies to nongrandfathered plans effective for plan years beginning on or after 1/1/2014; or, if later, when the last of the CBAs relating to CBA coverage terminates, as applicable). Special rules apply to wellness programs, including disease prevention or health promotion. Disease prevention or health promotion programs in existence prior to 3/23/2010 and in compliance with applicable regulations may continue to be offered while such regulations remain in effect. Aon Consulting Alert April 14,

6 Provider Nondiscrimination. Group health plans and health insurance issuers may not discriminate against providers acting within the scope of their license or certification, but can vary reimbursement rates based on quality or performance measures, and are not required to contract with any willing provider (applies to nongrandfathered plans effective for plan years beginning on or after 1/1/2014; or, if later, when the last of the CBAs relating to CBA coverage terminates, as applicable). Highly Compensated Individuals. Insured health plans may not discriminate in favor of highly compensated individuals, and will be subject to similar nondiscrimination testing rules that currently apply to self-insured medical reimbursement plans (apparently, rules applicable to insured health plans will be administered by HHS, while rules applicable to self-insured plans under Code section 105(h) will continue to be administered by the IRS) (appears to apply only to nongrandfathered plans effective for plan years beginning on or after 9/23/2010). Small Employer Cafeteria Plan Safe Harbor Rules. Small employers (averaging no more than 100 employees during either of the 2 prior full years) are exempt from the nondiscrimination requirements applicable to cafeteria plans and certain component benefit plans (including group term life insurance, self-insured medical reimbursement plans, and dependent care assistance programs), if their cafeteria plan satisfies certain requirements (effective for taxable years beginning on or after 1/1/2011). All nonexcludable employees must be eligible to participate. Certain minimum contribution requirements apply for nonhighly compensated and non-key employees. Retiree Health Plans The extent to which the changes made by the Health Care Reform Law apply to retiree health plans is not entirely clear. In the absence of official guidance, employers should determine whether all such changes apply to grandfathered and/or nongrandfathered retiree plans, as applicable. In any case, the following additional provisions relate to retiree medical plans. Reinsurance of Certain Early Retirees. HHS will establish a temporary reinsurance program to reimburse employers for a portion of their early retiree health program costs (by 6/21/2010 and continuing through 12/31/2013 or, if earlier, when the current funding limit of $5 billion is exhausted). The program applies only to retirees who are age 55 or older (and their spouses and dependents) and are not eligible for Medicare. Self-funded and insured plans can participate, including plans sponsored by private entities, state and local governments, nonprofit organizations, religious entities, and unions. The program will reimburse the plan for 80% of costs (less negotiated price concessions) for health benefits that are between $15,000 and $90,000 for a retiree (and his spouse and dependents). Includes retiree cost-sharing (deductible, copayments, or coinsurance). Includes medical, surgical, hospital, and prescription drug claims, and other benefits determined by HHS. Employers must apply for this program, document claims, and implement programs and procedures to meet minimum requirements that generate cost savings for participants with chronic and high-cost conditions. The reinsurance payments are not treated as taxable income to the employer. Aon Consulting Alert April 14,

7 Amounts paid to an employment-based plan (sponsored by an employer or multiemployer plan) must be used to lower costs for the plan, and cannot be used as general revenues for the employer or the multiemployer plan (as applicable). Reimbursement payments may be used to reduce premium costs for the employer or multiemployer plan (as applicable) or reduce retiree premium contributions, copays, deductibles, etc. (Note: The White House has issued a Fact Sheet which states that plans must use these proceeds to lower health costs for enrollees, e.g., premium contributions, copayments, deductibles, etc.) Medicare Part D Donut Hole. The Health Care Reform Law makes various changes related to the so-called Medicare Part D donut hole (applies effective 3/23/2010, except as otherwise noted). Pharmaceutical manufacturers will provide a 50% discount on brand drugs that fall into the donut hole beginning 1/1/2011 for applicable beneficiaries. Federal subsidies for generic prescriptions filled in the Medicare Part D coverage gap are phased in beginning 1/1/2011. HHS will provide a $250 rebate to Medicare beneficiaries who reach the Medicare Part D coverage gap in There is a reduced subsidy for high income participants (similar to Medicare Part B). Reduced generic drug coinsurance will be paid by the Part D beneficiary beginning 1/1/2011. Reduced brand drug coinsurance will be paid by the Part D beneficiary beginning 1/1/2013. The donut hole is effectively eliminated by 1/1/2020, when the beneficiary coverage amount reaches the standard 25% beneficiary coinsurance level. Retiree Drug Subsidy Tax Exclusion. The Part D subsidy to employers will, in effect, no longer be deductible (applies to grandfathered and nongrandfathered plans for taxable years beginning on or after 1/1/2013). This change may have significant current accounting implications for an employer. Independent Medicare (Payment) Advisory Board. An Independent Medicare (Payment) Advisory Board is established that can make certain binding Medicare recommendations and non-binding private sector recommendations to reduce the per capita rate of growth in Medicare spending (effective 3/23/2010). Other Related Employer Changes Maternal-Related Breaks. Employers covered by the FLSA are required to furnish nonexempt employees with reasonable unpaid breaks (some states may require breaks to be paid), and a private space (other than a restroom), for mothers to express breast milk for their infants up to age one (appears to be effective 3/23/10, but this is not entirely clear). Employers employing fewer than 50 employees will not be subject to this requirement if it would impose an undue hardship. Clinical Services Rebate Clinical Services. Insurers of insured health plans must provide annual rebates to participants for premiums spent on clinical services and health care quality that are less than 85% for plans in the large group market, or 80% for plans in the individual and small group markets, of total plan revenue (subject to certain exclusions) (applies to grandfathered and nongrandfathered plans by 1/1/2011). Aon Consulting Alert April 14,

8 Access High Risk Pools. Individuals with preexisting conditions have access to temporary national high-risk pools established by HHS (by 6/21/2010, and ending 1/1/2014). Employers who provide financial incentives to individuals with pre-existing conditions to disenroll from an employer group health plan before enrolling in the pool must reimburse the pool for medical expenses incurred by the pool for such individuals. Guaranteed Access and Renewals. Health insurance issuers in a state must accept every employer and individual in that state who applies during open or special enrollment periods, and must agree to renew coverage (effective for plan years beginning on or after 1/1/2014). Exchanges Each state will establish a health Exchange through which qualified individuals and businesses can elect to purchase qualified health plan insurance that provides an essential health benefits package (by 1/1/2014). Essential Health Benefits Package. An essential health benefits package must provide certain benefits, to be determined by HHS based on the scope of benefits provided under a typical employer plan. The package must generally provide at least four specified levels of coverage ( bronze, silver, gold, or platinum levels) or, in certain cases, a catastrophic plan. Essential health benefits generally include ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance use disorder services, including behavioral health treatment; prescription drugs; rehabilitative and habilitative services and devices; laboratory services; preventive and wellness services and chronic disease management; and pediatric services, including oral and vision care. Employers. States may allow all employers to participate effective 1/1/2017; before then, only employers with no more than 100 employees in the prior calendar year may participate (for plans years beginning before 1/1/2016, states may limit access to employers with no more than 50 employees). Cafeteria Plans. Qualified employers may permit eligible employees to pay the employee s share of premiums for Exchange coverage offered by the employer with pre-tax contributions under the employer s cafeteria plan. Individual Mandate Health Insurance Mandate. All individuals (subject to certain exemptions) and their eligible dependents are required to maintain minimum essential coverage or pay certain tax penalties (this should have no direct impact on employers; however, employers may want to provide coverage that satisfies the individual mandate) (applies to nongrandfathered plans effective for taxable years ending after 12/31/2013). Minimum essential coverage includes certain services and supplies under public programs, individual policies, and employer-sponsored plans (including grandfathered plans). Premium Assistance Premium Assistance Tax Credits. Individuals with income that exceeds 100%, but does not exceed 400%, of the federal poverty level ( FPL ) will be eligible for refundable federal tax credits to help pay for essential health benefits coverage purchased through an Exchange (effective for taxable years ending after 12/31/2013). Aon Consulting Alert April 14,

9 Employees offered employer-provided minimum essential coverage are ineligible for the credits, unless the employee declines to enroll in that coverage and the employer-paid share of the total allowed costs of plan benefits is less than 60% or the employee s share of premiums is more than 9.5% of the employee s income (based on the type of coverage applicable). Cost-Sharing Reductions. Individuals who are eligible for the tax credit will also be eligible for a cost-sharing reduction (subsidy) to purchase essential health benefits coverage through an Exchange (effective 3/23/2010). Employer Play or Pay (Free Rider Penalty) Annual Assessment for Employers that Do Not Offer Minimum Essential Coverage. Employers that employ an average of at least 50 full-time employees (work more than an average of 30 hours per week, on a monthly basis) during the prior calendar year and do not offer minimum essential coverage to full-time employees are subject to an annual nondeductible federal tax assessment for any month in which any full-time employee is enrolled in a qualified health plan and receives the federal premium tax credit or cost-sharing reduction (applies to nongrandfathered plans effective for months beginning on or after 1/1/2014). The assessment is equal to $2,000 annually (indexed for inflation) times the total number of all full-time employees, excluding the first 30 employees, and is determined on a monthly basis. Special allocation rules apply to controlled group entities. Part-time employees, on a full-time equivalent basis, are included when determining if an employer has 50 employees. Annual Assessment for Employers that Offer Minimum Essential Coverage. Employers that employ an average of at least 50 full-time employees (work more than an average of 30 hours per week, on a monthly basis) during the prior calendar year and offer minimum essential coverage are subject to an annual nondeductible federal income tax assessment for any month in which any full-time employee is enrolled in a qualified health plan and receives the federal premium tax credit or cost-sharing reduction (applies to nongrandfathered plans effective for months beginning on or after 1/1/2014). The employee must qualify for a premium tax credit or cost-sharing reduction because the employee s share of the premium exceeds 9.5% of income, or the actuarial value of the coverage is less than 60% (in effect, the employer coverage is unaffordable). The assessment is equal to the lesser of $3,000 annually times the number of full-time employees receiving the tax credit/reduction, or $2,000 annually times the total number of all full-time employees (both indexed for inflation), excluding the first 30 employees, and is determined on a monthly basis. Special allocation rules apply to controlled group entities. No assessment is imposed with respect to employees who receive vouchers. Part-time employees, on a full-time equivalent basis, are included when determining if an employer has 50 employees. Employer Voucher Obligation Vouchers. Employers that offer, and subsidize any portion of, minimum essential coverage must provide free-choice vouchers to qualified employees to be used toward the cost of alternate health coverage the employees purchase through an Exchange (applies to grandfathered and nongrandfathered plans effective for taxable years beginning on or after 1/1/2014). Aon Consulting Alert April 14,

10 Exchanges will credit the amount of the voucher to the monthly premium of coverage in the Exchange, and the employer must pay the credited voucher amount to the Exchange. A qualified employee is any employee during a plan year: Who does not participate in the employer s health plan; Whose contribution towards minimum essential coverage under the employer plan is more than 8.0%, but not more than 9.8% (indexed for inflation) of the employee s annual household income during the taxable year (it appears that this upper limit of 9.8%, as stated in the Health Care Reform Law, is intended to be 9.5%; if so, a technical correction to the Health Care Reform Law would appear to be necessary); and Whose household income does not exceed 400% of FPL for a family of the size involved. The voucher amount is equal to the employer s monthly subsidy towards the cost of the plan which would have been paid by the employer if the employee were covered, based on the employee s coverage (e.g., individual or family coverage), to which the employer pays the largest portion of the cost. The voucher value is excludable from the employee s federal taxable income to the extent it does not exceed the amount paid for qualified health plan coverage, and the employer deduct the amount of the voucher for federal income tax purposes. If the cost of Exchange coverage is less than the voucher, the difference is paid to the employee and includible in income as wages. Voucher recipients are ineligible for tax credits or cost-sharing reductions through an Exchange. Employers are not subject to the free rider penalty/assessment for voucher recipients. Wellness Grants Small Employers. Employers (including nonprofit employers) with fewer than 100 employees who work 25 hours or more per week that do not have wellness programs on 3/23/2010 are eligible for federal grants for up to 5 years if they establish an eligible wellness program (effective for federal fiscal years 2011 through 2015, or ending earlier if the current funding limit of $200 million is exhausted). Plan Administration Electronic Transaction Standards. Health plans must adopt a uniform set of operating rules and standards for the electronic exchange of information under HIPAA (generally effective 3/23/2010). Rules for eligibility and claims status transaction (must be adopted by 7/1/2011 and effective by 1/1/2013). Rules for electronic funds transfers and health care payment and remittance (must be adopted by 7/1/2012 and effective by 1/1/2014). Rules for health claims, enrollment and disenrollment, premium payments, and referral certification and authorization transactions (must be adopted by 7/1/2014, effective not later than 1/1/2016). Small Business Tax Credits Credit. Employers with no more than 25 full-time equivalent employees and average annual wages below $50,000 (adjusted for inflation for taxable years beginning in 2014 or later calendar years) that provide qualified health plan coverage for employees are eligible to receive a health insurance federal tax credit (applies to taxable years beginning on or after 1/1/2010). Aon Consulting Alert April 14,

11 The tax credit is up to 35% (50%, for taxable years beginning on or after 1/1/2014) for taxable eligible small employers, or 25% (35%, for taxable years beginning on or after 1/1/2014) for tax-exempt eligible small employers, of the lesser of the employer s contribution to health insurance coverage, or the amount of contributions that the employer would have made during the taxable year if each employee had enrolled in coverage with a certain benchmark premium (if the employer contributes a uniform percentage that is at least 50% of the total cost). The full amount of the credit is available only to an employer with 10 or fewer full-time equivalent employees and average annual wages below $25,000 the credit is reduced for employers with more than 10, but not more than 25, such employees, and for an employer for whom the average wages per employee is between $25,000 and $50,000. For taxable years beginning after 2013, the credit is available only if the qualified small employer purchases coverage through an Exchange, and is available only for 2 consecutive years thereafter. Employer Taxes High-Cost Plans. A 40% excise tax is imposed on group health plans (excluding LTC, insured and, apparently, self-insured stand-alone dental or vision plans, and certain other excepted benefits), whose annual cost exceeds certain amounts (applies to grandfathered and nongrandfathered plans for plan years beginning on or after 1/1/2018). The group health plan benefits that are considered in determining the applicability of the excise tax include any group health plan made available to an employee by an employer that would be excludable from the employee s gross income under Code section 106, or would be excludable if it was employer-provided coverage. Therefore, in addition to traditional group health plans, coverages would include any supplemental group health plan, health care FSA, or HSA contributions. Threshold amounts in 2018 are $10,200 for single coverage and $27,500 for non-single coverage (indexed for inflation), calculated monthly. The cost includes employer- and employee-paid portions (based on a methodology similar to that used under COBRA). Higher initial thresholds apply to non-medicare retirees and certain high-risk professions. The threshold amounts are subject to adjustment for plans that have higher-than-average costs due to the age or gender of covered employees, or if in a high-cost state. The (higher) family threshold amount applies to both single and family coverage offered under a multiemployer plan. The tax is paid by the insurance company (if the plan is insured) or plan administrator (if the plan is self-insured). Comparative Effectiveness Research Fee. Sponsors of any self-insured accident or health plan (other than certain excepted benefits including on-site medical clinics, workers compensation, etc.) and health insurers for each plan year are assessed a federal tax of $2 ($1, for plan years ending during 2013) (indexed for inflation), times the average number of covered lives, for federal comparative clinical effectiveness research (applies to grandfathered and nongrandfathered plans for plan years ending after 9/30/2012 and before 10/1/2019). Other Related Taxes Health-Related Providers. New taxes will be imposed on health insurance companies (excluding certain nonprofit entities and VEBAs established by nonemployers), pharmaceutical manufacturers, and medical device manufacturers (effective for calendar years beginning on or after 1/1/2011, or later depending on the industry). Aon Consulting Alert April 14,

12 These taxes do not apply directly to self-insured plans; however, an insurer s administrative fees are included in the allocation determination. Taxes are likely to increase the underlying cost of health services, which will result in escalating costs to employer plans. FICA Medicare Taxes. Certain additional Medicare taxes are assessed (effective for remuneration received, and taxable years beginning, on or after 1/1/2013). An additional Medicare tax of 0.9% (from 1.45% to 2.35%) applies to wages in excess of $200,000 annually ($250,000 joint return). Applicable only to the employee portion of FICA (no matching employer payment). An additional Medicare tax of 3.8% on net investment income applies to individuals with adjusted gross incomes above $200,000 annually ($250,000 joint return). Investment income includes interest, dividends, annuities, royalties, rents, net gains from sale of property, and certain other income, but excludes distributions from a plan that satisfies Code sections 401(a), 403(a), 403(b), 408, 408A, or 457(b). Additional taxable income limited to the amount the individual s adjusted gross income exceeds the $200,000 (or $250,000) threshold. Forms W-2 Nontaxable Health Benefits. Employers must include on annual Forms W-2 the aggregate cost (based on a methodology similar to that used under COBRA) of group health plan benefits (excluding FSA, HSA, or Archer MSA contributions, or the cost of LTC, stand-alone dental or vision plans, and certain other excepted benefits) provided to employees (applies to grandfathered and nongrandfathered plans effective for taxable years beginning on or after 1/1/2011 i.e., Forms W-2 issued in 2012 for 2011 wages, and issued thereafter for subsequent years). Forms 1099 Corporate Service Providers. Employers must provide Forms 1099 for all corporate service providers that receive more than $600 per year (applies to payments made on or after 1/1/2012). MEWA Registration Registration Forms. Multiple employer welfare arrangements ( MEWAs ) must register with the U.S. Department of Labor before the MEWA can operate in any state. Employer Communications and Reports Uniform Summary of Benefits. Sponsors of self-insured plans and insurers must provide participants (before any enrollment restriction applies), at initial and annual enrollment, with a uniform summary of benefits and coverage explanation that includes certain standardized information and is written in a culturally and linguistically appropriate manner; this is in addition to any summary plan descriptions ( SPDs ) or other enrollment material that may be provided. (Although these rules appear to apply to grandfathered plans effective for plan years beginning on or after 3/23/2010 and to nongrandfathered plans effective for plan years beginning on or after 9/23/2010, summaries must be provided to participants not later than 3/23/2012, based Aon Consulting Alert April 14,

13 on guidance to be issued by HHS by 3/23/2011; or, if later, when the last of the CBAs relating to CBA coverage terminates, as applicable.) Material Modifications. Group health plans must give at least 60 days prior written notice if there are any material modifications; this apparently is in addition to any summary of material modifications ( SMM ) that may be required under ERISA (applies to grandfathered plans effective for plan years beginning on or after 3/23/2010 and to nongrandfathered plans effective for plan years beginning on or after 9/23/2010; or, if later, when the last of the CBAs relating to CBA coverage terminates, as applicable). Exchange Programs. Employers covered by the FLSA must provide employees with certain information related to available Exchange programs and subsidies (applies to grandfathered and nongrandfathered plans effective 3/1/2013). Transparency. Group health plans and health insurance issuers must provide certain disclosures to HHS and (if the plan is offered through an Exchange) the public regarding claims procedures, enrollment information, financial information, out-of-network coverages, etc. (apparently applies to nongrandfathered and, possibly, grandfathered plans effective 1/1/2014, although the effective date of this requirement is not entirely clear). Quality of Care Reports. Group health plans and health insurance issuers must provide annual reports to HHS and participants regarding plan benefits that improve health outcomes (by 3/23/2012, based on guidance to be issued by HHS; or, if later, when last of the CBAs relating to CBA coverage terminates, as applicable). Coverage Reports. Employers that are subject to the play or pay requirements (see page 9), or that provide subsidized minimum essential coverage through an eligible employer-sponsored plan with employee contributions exceeding 8% of wages (as indexed for inflation), must file annual reports with the IRS and participants regarding certain coverage and related information (effective 1/1/2014). HIPAA Compliance Statements. Health plans must file a statement with HHS certifying compliance with new, required administrative simplification standards under HIPAA (no later than the effective date of the particular standard). Next Steps Health care reform will have a significant impact on employers, their health plans, and related administration both in the short-term and for years to come. Clearly, a substantial amount of regulatory guidance is expected, and it will be difficult for employers to make final decisions until certain issues are resolved. Nevertheless, employers should now begin carefully to review the Health Care Reform Law and how it affects their employee and executive health benefit plans. In particular, employers should: Inventory all health plans and arrangements and determine which of their health plans or arrangements may qualify as grandfathered plans and consider how future design changes or modifications may affect such plans. Identify the particular plan year applicable to each health plan for purposes of complying with the Health Care Reform Law. Confirm which changes must be made to their existing plans and when those changes must be made, based on the particular plan year and type of plan involved. Consider modeling the potential cost impact of the Health Care Reform Law. Before adopting any new employee health benefit plan, merging any plans, or making any changes to existing plans, ensure that all applicable requirements are timely satisfied and consider any possible Aon Consulting Alert April 14,

14 impact of such action on the grandfathered status of existing plans under the Health Care Reform Law. Evaluate the impact of Health Care Reform Law on: Plan documents. Wellness programs. New disclosure requirements (including the new uniform summary of benefits). Information contained in SPDs. Enrollment materials. Employee notices and other communications. Reports to the government (including Forms W-2 and 1099). Internal administrative procedures. Third-party administrative and business associate agreements. Nondiscrimination testing. Controlled group issues. Update all documentation (although employers may consider issuing summaries of material modifications to information contained in existing SPDs rather than updating their SPDs, it may be preferable to update SPDs for changes made by the Health Care Reform Law, given its wide-ranging changes). Determine what action needs to be taken to satisfy the new coverage summary disclosure and reporting obligations. Consider conducting a health care compliance review to assess compliance by their health plans with existing regulatory requirements and the changes that will be necessary to ensure compliance with the Health Care Reform Law. If you have any questions regarding any specific provision of the Health Care Reform Law or related issue, please contact your Aon representative or any of the following individuals: David Alpert at david_alpert@aon.com or Tony Andrews at tony_andrews@aon.com or Richard Asensio at richard_asensio@aon.com or Tom Meagher at thomas_meagher@aon.com or Aon Consulting, Inc. About Aon Consulting. Aon Consulting is among the top global human capital consulting firms, with 2008 revenues of $1.358 billion and more than 6,300 professionals in 229 offices worldwide. Aon Consulting works with organizations to improve business performance and shape the workplace of the future through employee benefits, talent management, and rewards strategies and solutions. Aon Consulting was named the best employee benefit consulting firm by the readers of Business Insurance magazine in 2006, 2007, 2008, and For more information on Aon Consulting or Alert, visit our Web site: To subscribe to Alert, please send an to aon_consulting_alert@aon.com with subscribe in the subject line. Aon Consulting Alert April 14,

15 Employer Plan of Action Employers need to understand the many changes that the Health Care Reform Law makes to their employee benefit program. The following highlights some timing issues that apply to health plans (different rules may apply depending on whether any particular plan is sponsored by a small or large employer): Before First Plan Year Beginning on or after 9/23/2010 (as of Applicable Effective Date) Perform cost analysis (including accounting implications) of employer health program alternatives that comply with Health Care Reform Law. Assess applicable effective dates for grandfathered and nongrandfathered collectively bargained and noncollectively bargained plans. Determine applicability of Health Care Reform Law provisions to retiree plans. Perform nondiscrimination testing to ensure compliance with current and new nondiscrimination requirements applicable to certain welfare benefits. Redesign employee benefit programs to satisfy new plan design changes for all nongrandfathered plans and, to extent applicable, grandfathered plans that are applicable as of first day of such plan year. Implement appeals process for denied claims. Develop effective and compliant employee communications program. Apply for federal reinsurance program if employer maintains retiree health program. Establish procedure for reporting required health plan-related information to applicable governmental agencies. Before 1/1/2011 (as of Applicable Effective Date) Address accounting issues relating to elimination of federal tax deductions for Medicare Part D subsidies beginning Prohibit reimbursement of OTC drugs (except insulin) through HRAs, FSAs, HSAs, or Archer MSAs, unless prescribed by physicians. Apply for federal grants for establishment of wellness programs by small employers. Establish procedures for large employers (more than 200 employees) automatically to enroll employees into health insurance plans and provide employees with opt-out rights. Revise applicable Plan documents, SPDs, enrollment materials, etc., for plan years beginning on or after 1/1/2011. Before 7/1/2011 Adopt single set of electronic transaction standards for eligibility verification and claims status. Issue applicable SMMs for prior plan (calendar) year. Before 1/1/2012 (as of Applicable Effective Date) Revise wage reporting procedures to ensure that Forms W-2 report nontaxable health benefits for wages paid in 2011 and later years. Develop uniform summary of benefits and coverage explanation to provide to participants not later than 3/23/2012. Aon Consulting Alert April 14,

16 Before 7/1/2012 Adopt single set of electronic transaction standards for electronic funds transfers and health care payment and remittance. Before 1/1/2013 (as of Applicable Effective Date) Establish procedures to ensure that Health FSAs under cafeteria plans are limited to $2,500 per year (subject to increase in CPI). Increase Medicare Part A (HI) tax rate (from 1.45% to 2.35%) effective 1/1/2013 on earnings over $200,000 for individual taxpayers and $250,000 for married couples filing jointly. Revise applicable Plan documents, SPDs, and employee communications for plan years beginning on or after 1/1/2013. Revise third party payments reporting procedures to ensure that expanded Forms 1099 corporate information reporting requirements are satisfied for amounts paid in 2012 and later years. Before 1/1/2014 (as of Applicable Effective Date) Review health plans to determine if they offer essential health benefits package. Ensure that required provisions for nongrandfathered plans (e.g., out-of-pocket limits, limit on deductibles of $2,000 for individuals and $4,000 for families, waiting periods limited to 90 days) apply effective 1/1/2014. Communicate insurance reform changes to all employees, including individual coverage mandate/tax penalties and phase-in of excise taxes for individuals without coverage. Determine applicability of federal tax assessment and voucher requirements (depending on whether group health plan provides minimum essential coverage). Establish procedures that ensure qualified health plan meets new operating standards and reporting requirements. Determine whether to offer employees rewards of up to 30% (increasing to 50%) of coverage costs for participating in wellness program and meeting certain health-related standards. Determine whether eligible small employer (up to 50 or 100 employees, as applicable) should purchase coverage through Exchange. Revise applicable Plan documents, SPDs, enrollment materials, etc., for plan years beginning on or after 1/1/2014. Before 7/1/2014 Adopt single set of electronic transaction standards for health claims, enrollment and disenrollment in health plan, health plan premium payments, and referral certification and authorization. Before 1/1/2016 Determine whether small employer (up to 100 employees) should purchase coverage through Exchange. Before 1/1/2017 Determine whether eligible large employer (over 100 employees) should purchase coverage through Exchange. Before 1/1/2018 Assess whether any health plan is considered high-cost plan subject to new excise tax. * * * * * Aon Consulting Alert April 14,