July 5, 2012 NFIB v. Kathleen Sebelius and its Impact on Employers: Healthcare Reform Revisited The Patient Protection and Affordable Care Act (the Affordable Care Act ) imposes new requirements on individuals and employers and sets minimum standards for health insurance coverage while restructuring the group and individual markets. Congress observed that the health conditions suffered by uninsured Americans cost the economy up to $207 billion per year, treating the uninsured cost $43 billion in 2008, and medical expenses factor into 62 percent of personal bankruptcies. Congress believed that the individual mandate to purchase health insurance will lead to millions of new consumers joining the health insurance market, and achieve close to universal insurance coverage by building upon and strengthening the employer-based health insurance system. This, in turn, would minimize adverse selection and broaden the insurance risk pool to include healthy individuals, resulting in lower health insurance premiums for individuals and employers. Historically, employers have not been required to provide health insurance to their employees under federal law. Nevertheless, approximately two-thirds of the United States population under the age of 65 currently benefit from employer-sponsored group health insurance, meaning that close to 170 million people are covered by health plans affected by these changes. The changes enacted in the Affordable Care Act, therefore, will impact most American employers. On June 28, 2012 the U.S. Supreme Court ruled that the Patient Protection and Affordable Care Act (the Affordable Care Act ), including its requirement that almost all Americans buy health insurance, is constitutional. [1] I. Impact on Employers For those employers implementing the Affordable Care Act's provisions and planning to comply with its various obligations before many of the more well-known mandates [1] National Federation of Independent Business v. Sebelius, Nos. 11-393, 11-398 and, 11-400, 2012 BL 160004 (U.S. June 28, 2012).
kick-in or legally take effect in 2014 there shouldn t be much to be concerned with based upon the Court s ruling, according to Benjamin Lupin, Director of Compliance for Corporate Synergies Group, LLC. But for those employers waiting for the Court s decision before taking the actions needed to comply with the law, the time is now to get into gear and think about 2012 requirements and the approaching 2013 and 2014 requirements. Several of these requirements are described below. A. In 2012 After September of 2012, employer-sponsored group health plans must compile and provide summary of benefits and explanations of coverage to beneficiaries along with notice of modifications. And employers are required to report the aggregate cost of employer-sponsored health coverage on employees Form W-2, beginning with the 2012 W-2 forms to be distributed by employers in 2013. B. In 2013 In 2013, health flexible spending arrangements (health FSAs ) offered as a part of a cafeteria plan must limit contributions through salary reductions to an annual amount of $2,500. For tax years beginning after December 31, 2012, the threshold to claim an itemized deduction for unreimbursed medical expenses is increased from 7.5 percent of adjusted gross income ( AGI ) to 10 percent of AGI for regular income tax purposes. An additional 0.9 percent Medicare tax is imposed on the wages and self-employment income of certain high-income taxpayers received with respect to employment. And a 3.8 percent Medicare tax is imposed on the lesser of an individual's net investment income for the tax year or modified AGI in excess of $200,000 ($250,000 in the case of joint filers and surviving spouses, and $125,000 in the case of a married taxpayer filing separately). C. In 2014 Beginning in 2014, citizens and legal residents, other than those falling within specified exceptions, are required to have qualifying health coverage, meaning every applicable individual must obtain minimum essential coverage for each month or make a shared responsibility payment as part of the taxpayer s annual tax return. An applicable individual is any individual except one who qualifies for a religious exemption, who is not a United States citizen, national, or an alien lawfully present in the United States, or who is incarcerated. Exemptions will also be granted for those with incomes below the tax filing threshold and for whom the lowest cost plan option exceeds 8 percent of an individual s income.
Also starting in 2014, certain large employers that fail to offer minimum essential coverage to their employees will be liable for an assessment, or financial penalty. The Act s shared responsibility for employers section regulates the level and quality of healthcare coverage or insurance that large employers make available to their employees, providing that if an applicable large employer fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan for any month and at least one full-time employee receives a premium tax credit or cost-sharing reduction through a Health Benefit Exchange, then a fine or assessment is imposed on the employer. An applicable large employer is one who employs fifty or more full-time employees on average over a calendar year. These shared responsibility requirements and penalties are often referred to as individual and employer mandates. And, while employers are not required to provide health insurance coverage, automatic enrollment in health insurance plans sponsored by large employers is mandated. Employers that offer coverage will be required to provide a free choice voucher to employees with incomes less than 400 percent of the federal poverty level if their share of the premiums exceeds certain levels. Employers providing free choice vouchers will not be subject to penalties for employees that receive premium credits in the new statebased Exchange. Refundable and advanceable premium credits will be available to eligible individuals and families below certain income levels, and certain small employers are provided with a tax credit. Effective in 2014, state-based American Health Benefit Exchanges ( Exchanges ) must be established through which individuals and small businesses with up to 100 employees can purchase qualified coverage. Also effective in 2014, an essential health benefits package is established, based on the current benefits provided by the typical employer plan that provides a comprehensive set of services while limiting annual cost-sharing. [2] [2] An employer who serves as the insurer for its employees is providing health insurance to people formed as a group for employment purposes. As the health insurance plan sponsor, employers often attempt to control the cost of providing such group insurance by self-insuring the plan so that the employer pays only the cost of claims plus an administrative fee to a third party administrator. Under self-insurance, then, the employer itself bears the risk for covering medical expenses. With a fully insured plan, the private insurer bears the insurance risk, meaning the insurer is responsible for paying the applicable costs associated with the covered benefits. Self-insured plans are exempt from most State insurance laws, such as laws mandating that certain benefits be covered. This provides an employer with the flexibility necessary to design its health plan to control costs while also meeting the needs of its employees. Although mostly large employers have selfinsured their health plans, more small employers may be considering self-funding as an alternative.
II. Significant Provisions Several of the more significant of these provisions are described in greater detail. A. The Individual Mandate - Penalty for Failing to Carry Health Insurance Beginning in 2014, the individual mandate generally requires most taxpayers with income exceeding their tax filing threshold to have or obtain minimum essential coverage for themselves and their dependents or pay a penalty. Such minimum essential coverage is defined as any individual or group plan offered through a state market, along with certain government plans, i.e. Medicare, Medicaid, Children's Health Insurance Program. The penalty amount increases annually until 2016, when it is set to equal the greater of: Percent of the amount by which the taxpayer s household income exceeds the taxpayer s filing threshold for that year (for example, in 2010 the filing thresholds were $9,350 for single filers and $18,700 for married couples filing jointly); or $695 per uninsured household member, limited to 300 percent of this amount, or $2,085. The total household penalty amount for the calendar year is also limited and cannot exceed the national average annual premium for a bronze level health plan offered through an Exchange that year for the household size. Bronze level health plans are designed to provide benefits that are actuarially equivalent to 60 percent of the full actuarial value of the benefits provided under the essential benefits package. And, although assessable and collectible under the Code, the Internal Revenue Service ( IRS ) authority to use certain collection methods is limited. Specifically, the filing of notices of liens and levies otherwise authorized for collection of taxes does not apply to the collection of this penalty. In addition, the Affordable Care Act waives criminal penalties for non-compliance with the requirement to maintain minimum essential coverage. Individuals who cannot afford coverage because their required contribution for employer-sponsored coverage or the lowest cost bronze plan in the local Exchange exceeds 8 percent of household income for the year are exempt from the penalty. In years after 2014, the 8 percent exemption is increased by the amount by which premium growth exceeds income growth. For employees, and individuals who are eligible for minimum essential coverage through an employer by reason of a relationship to an employee, the determination of whether coverage is affordable to the employee and any such individual is made by reference to the required contribution of the employee for
self-only coverage. Taxpayers with income below the income tax filing threshold shall also be exempt from the penalty for failure to maintain minimum essential coverage. B. The Employer Mandate - Shared Responsibility for Employers Regarding Health Coverage The Affordable Care Act does not require employers to provide health insurance to their employees, but the Act imposes a non-deductible penalty on large employers that fail to offer minimum essential coverage to their employees and their dependents. The term minimum essential coverage does not require the employer to provide certain types of coverage or maintain certain cost-sharing limits, such as would apply to an essential health benefits plan eligible for certification by an Exchange as a qualified health plan. Minimum essential coverage merely needs to be a group health plan offered by an employer. A "large employer" is defined as having more than 50 full-time employees. The number of full-time employees (defined as an employee who works an average of at least 30 hours per week) is determined on an average basis over the preceding year. If a group of employers is treated as a single employer under the qualified retirement plan group rules, then the group will be treated as one employer for purposes of determining the number of employees under the Affordable Act. The tax penalty assessed on applicable large employers that do not offer minimum essential coverage actually involves separate penalties for the two distinct circumstances resulting in employer liability. The initial question in determining which penalty, if any, is applicable is whether the employer offers the opportunity to enroll in minimum essential coverage to its employees and their dependents. For any month in which an applicable large employer fails to offer the opportunity to enroll in minimum essential coverage, and the employer has at least one full-time employee certified to the employer as having enrolled for that month in a qualified health plan offered through an Exchange and who also receives a premium tax credit, the employer will be assessed a penalty equal to the product of the number of the employer's full-time employees (over a 30-employee threshold) multiplied by one-twelfth of $2,000 (or $166.67). The second penalty addresses so-called "offering" employers. An applicable large employer offering coverage will be subject to a penalty in any month in which the employer does offer the opportunity to enroll in minimum essential coverage, but has at least one full-time employee who has been certified to the employer as having enrolled for that month in a qualified health plan offered through an Exchange who receives a premium tax credit. It must therefore be determined whether the employer contributes to 60 percent or more of the plan costs. If not, then the employee will be eligible for the premium tax credit if his or her income falls between 100 percent and 400 percent of the federal poverty level. If the employer does contribute to 60 percent or more of the plan costs, it
must be determined whether such coverage is "unaffordable" for the employee. Unaffordable is defined as coverage with a premium required to be paid by the employee that is 9.5 percent or more of the employee's household income and his or her income falls between 100 percent and 400 percent of the federal poverty line for the applicable family size, but that is based on self-only coverage, meaning that affordability is to be defined only in relation to the cost of individual coverage, thereby rendering affordable family coverage that nonetheless significantly exceeds the 9.5 percent threshold, as long as coverage of the individual is considered affordable. Thus, the statutory language specifies that for both employees and others who are eligible to enroll in employer-sponsored coverage by reason of their relationship to an employee, the coverage is unaffordable if the required contribution for self-only coverage, as opposed to family coverage or other coverage applicable to multiple individuals, exceeds 9.5 percent of household income. [3] Consistent with these statutory provisions, the proposed regulations provide that an employer-sponsored plan also is affordable for a related individual for purposes of the statutory language if the employee's required contribution for self-only coverage under the plan does not exceed 9.5 percent of the applicable taxpayer's household income for the taxable year, even if the employee's required contribution for the family coverage does exceed 9.5 percent of the applicable taxpayer's household income for the year. The penalty applicable to an employer who does offer coverage, but because such coverage is "unaffordable" has at least one employee receiving the premium tax credit, equals the product of the number of employees receiving premium assistance credits for such month multiplied by one-twelfth of $3,000 (or $250). However, this penalty is capped at an amount equal to the product of $166.67 and the total number of full-time employees for that month. Thus, the penalty imposed on an "offering" employer can never exceed the penalty imposed on a non-offering employer with the same number of employees. Companies should note that even though they may meet the full-time employee threshold to be a "large employer," they will not be considered one under these penalty provisions unless they have at least one full-time employee who is enrolled in a health plan through an insurance exchange and receives a premium assistance tax credit or cost-sharing reduction. In other words, even though a company may meet the full-time employee threshold to be a "large employer," it will not be penalized for failing to offer its employees affordable health insurance unless it has at least one full-time employee [3] See Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 111th Congress, JCS-2-11 (March 2011) at 265 (stating that, for purposes of the premium tax credit provisions of the Act, [u]naffordable is defined as coverage with a premium required to be paid by the employee that is more than 9.5 percent of the employee's household income, based on the self-only coverage ).
who is enrolled in a health plan through an insurance exchange and receives a premium assistance tax credit or cost-sharing reduction. And, as described above, individuals who are eligible for employer-sponsored coverage can only obtain premium credits for exchange plans if their income is between 100 to 400 percent of the federal poverty level and (1) if the employee s required premium contribution for self-only, individual coverage exceeds 9.5 percent of the employee s household income or (2) if the plan offered by the employer pays for less than 60 percent of covered health care expenses. The percentage of income that is considered unaffordable is indexed in the same manner as the percentage of income is indexed for purposes of determining eligibility for the credit. The employee must seek an affordability waiver from the State exchange and provide information as to family income and the lowest cost employer option offered to them. The State exchange then provides the waiver to the employee. Generally, then, if an employee is offered minimum essential coverage by his or her employer that is either unaffordable or that consists of a plan under which the plan s share of the total allowed cost of benefits is less than 60 percent, the employee is eligible for a premium tax credit, but only if the employee declines to enroll in the coverage and purchases coverage through the Exchange instead. If an employee is offered affordable minimum essential coverage under an employer-sponsored plan, the individual is ineligible for a premium assistance credit for health insurance purchased through a state Exchange. The Affordable Care Act thus essentially provides that an employee waives his or her eligibility for the premium assistance credit by enrolling in an employer plan, even if the plan is unaffordable. Accordingly, proposed regulations provided that employees eligible for employer-sponsored coverage may not decline the coverage and seek enrollment in the Exchange with such premium credits unless the coverage is unaffordable. In any case, whether a large employer offers health insurance to its employees or not, it will only be required to pay a financial penalty if at least one of its full-time employees obtains health insurance through an Exchange and receives a premium credit for the purchase of health insurance through the Exchange. If a large employer does not offer coverage, but no full-time employee receives a premium credit, no penalty would be assessed. The Secretary of the Treasury is informed of the name and employer identification number of every employer that has one or more employees receiving a premium tax credit. An employer must be notified if one of its employees is determined to be eligible for a premium assistance credit because the employer does not provide minimal essential coverage through an employer-sponsored plan, or the employer does offer such coverage but it is not affordable. The notice must include information about the
employer's potential liability for payments and that terminating or discriminating against an employee because he or she received a credit or subsidy is in violation of the Fair Labor Standards Act. C. Uniform Standards for Health Plan Summary of Benefits and Coverage Beginning on the first day of the first open enrollment period that begins on or after September 23, 2012, employers must provide a summary of benefits and a coverage explanation ( SBC ) to all participants at the time of enrollment and each subsequent year during annual enrollment. The Affordable Care Act imposes a 4 page length limit on the new summary of benefits and coverage. Also, the new document is to be presented in a uniform format that does not include print smaller than 12-point fonts and is to be presented in a culturally and linguistically appropriate manner. The document must use terminology that is understandable by the average plan enrollee. Despite the page limitations, the summary must include the following: Uniform definitions of standard insurance and medical terms (consistent with definitions to be developed by the HHS Secretary) so that health plan consumers can compare coverage and understand the coverage terms and any exceptions to the coverage terms; A coverage description, including cost sharing for (1) each of the categories of essential health benefits and (2) other benefits identified by the HHS Secretary; Coverage exceptions, reductions, and limitations; Cost-sharing provisions, including descriptions of deductibles, coinsurance, and co-pays; Renewability and coverage continuation provisions; A coverage facts label that includes examples illustrating common benefit scenarios, such as pregnancy or chronic medical conditions, as well as any related cost-sharing (all based on recognized clinical practice guidelines); A statement as to whether the plan (1) provides minimum essential coverage and (2) ensures that its share of the total allowed benefit cost under the plan is no less than 60 percent of those costs; A statement that the outline is a policy summary and that consumers should consult the plan s coverage document to determine the plan s governing contractual provisions; and
A contact number for additional questions and an Internet website where actual plan policies and certificates can be reviewed and obtained by consumers. Employers may provide the summary in paper or electronic form. D. Inclusion of Cost of Employer-Sponsored Health Coverage on Form W-2 Employers will be required to report the aggregate cost of employer-sponsored health coverage on employees Form W-2, beginning with the 2012 W-2 forms to be distributed by employers in 2013. This means the W-2 sent to an employee in January 2013 must include information regarding employer-sponsored health coverage provided for that employee during 2012. The amounts reported will be for information purposes only, and will not be included in employees taxable wages. The health coverage that will need to be reported will generally include any group health plan coverage made available by an employer to its employees. Employers that file fewer than 250 Forms W-2 for the previous year are not required to report for 2012 and later years unless and until the IRS issues future guidance. Failure to comply can result in a penalty of $200 per Form W-2, up to a maximum of $3 million. Aggregate cost is the total cost of coverage under all applicable employer-sponsored coverage. Aggregate cost is determined according to the general rules used to determine the applicable premium for COBRA continuation coverage. It includes amounts paid by the employer and the employee, regardless of whether these amounts are paid through pre-tax or post-tax contributions. The aggregate cost also includes the cost of coverage that is taxable to the employee (such as coverage for a domestic partner or for a dependent who is older than 27 by the end of the taxable year). E. Automatic Enrollment for Employees of Large Employers Most likely to take effect after 2014, employers who have more than 200 full-time employees, and provide one or more health benefits plans or options, will be required to automatically enroll full-time employees in one of the employer s health benefits plans or options and to continue the enrollment of current employees in such a plan or option. Employers also will be required to give adequate notice to employees of the automatic enrollment protocol and an opportunity to opt out of such coverage. New full-time employees will automatically be enrolled in one of the plans (subject to any waiting period authorized by law) and current employees will continue to be enrolled. The law does not supersede any state law which establishes, implements, or continues in effect any standard or requirement relating to employers in connection with payroll unless the state law would prevent an employer from instituting the automatic enrollment program. The automatic enrollment program must provide the opportunity for an employee to
opt out of any coverage the individual or employee was automatically enrolled in and include written notice at the time of hiring, and for current employees not later than March 1, 2013, although it is unlikely that this will be enforced until a later date. Covered employers must notify employees of the existence of an Exchange, which facilitates the purchase of qualified health plans. III. Other Plan Reforms Impacting Employers Additional provisions that impact an employer's group health plan include the following, many of which have already taken effect: No Lifetime or Annual Coverage Limits - In general, group health plans or health insurance issuers offering group or individual plans may not impose a lifetime or annual dollar limit on benefits for any individual, except on specific covered benefits that are not "essential health benefits"; Prohibition on Rescission - A group health plan or health insurance issuer must not rescind coverage unless the individual, or a person seeking coverage on behalf of the individual performs an act, practice, or omission that constitutes fraud, or unless the individual makes an intentional misrepresentation of material fact, as prohibited by the terms of the plan or coverage; Extension of Dependent Coverage - Requires group health plans and health insurers offering group or individual health insurance with dependent child coverage to provide optional coverage for the enrollee s adult children who are younger than age 26, regardless of marital status of the adult child. It requires plans and issuers that offer dependent coverage to make the coverage available until a child reaches the age of 26; Claims Appeal Process - Requires group health plans and health insurers to implement an effective process for appeals of coverage determinations and claims, including an internal claims appeal process and employee notification; Preexisting Condition Exclusion Prohibits group health plans and health insurance issuers offering group or individual health insurance from imposing any preexisting condition exclusion for children who are under age 19 for plan years beginning on or after September 23, 2010. For individuals age 19 and over, this provision applies for plan years beginning on or after January 1, 2014. An in-depth explanation of these and other provisions in the Affordable Care Act is provided in the Council s summary of the federal healthcare reform legislation enacted in 2010. The summary is available at: http://www.newenglandcouncil.com/assets/affordable-care-act-final-summary.pdf.
This Policy Update provides general information and not legal advice or opinions on specific facts [1] National Federation of Independent Business v. Sebelius, Nos. 11-393, 11-398 and, 11-400, 2012 BL 160004 (U.S. June 28, 2012). 2 An employer who serves as the insurer for its employees is providing health insurance to people formed as a group for employment purposes. As the health insurance plan sponsor, employers often attempt to control the cost of providing such group insurance by selfinsuring the plan so that the employer pays only the cost of claims plus an administrative fee to a third party administrator. Under self-insurance, then, the employer itself bears the risk for covering medical expenses. With a fully insured plan, the private insurer bears the insurance risk, meaning the insurer is responsible for paying the applicable costs associated with the covered benefits. Self-insured plans are exempt from most State insurance laws, such as laws mandating that certain benefits be covered. This provides an employer with the flexibility necessary to design its health plan to control costs while also meeting the needs of its employees. Although mostly large employers have self-insured their health plans, more small employers may be considering self-funding as an alternative. 3 See Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 111th Congress, JCS-2-11 (March 2011) at 265 (stating that, for purposes of the premium tax credit provisions of the Act, [u]naffordable is defined as coverage with a premium required to be paid by the employee that is more than 9.5 percent of the employee's household income, based on the self-only coverage ).