Health Care Reform: What Small Employers Can Expect

Health Care Reform: What Small Employers Can Expect THIS OUTLINE WAS PREPARED BASED SOLELY ON THE GUIDANCE ISSUED AND AVAILABLE AS OF October 16, 2012 This written material represents, in part, a compilation of certain client communiqués prepared by the members of the Employee Benefits and Executive Compensation Practice Group of Thorp Reed & Armstrong, LLP Sarah Lockwood Church, Esq. Paul A. Kasicky, Esq. Joni Landy, Esq. Kevin A. Wiggins, Esq. IRS CIRCULAR 230 NOTICE TO ENSURE COMPLIANCE WITH REQUIREMENTS IMPOSED BY THE INTERNAL REVENUE SERVICE, WE INFORM YOU THAT ANY U.S. TAX ADVICE CONTAINED IN THIS COMMUNICATION (OR IN ANY ATTACHMENT) IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF (i) AVOIDING PENALTIES UNDER THE INTERNAL REVENUE CODE OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY TRANSACTION OR MATTER ADDRESSED IN THIS COMMUNICATION (OR IN ANY ATTACHMENT).

Introduction Despite the immense attention devoted to the Health Care Reform 1 passed in 2010, federal (and state) regulation of employer-provided health care coverage is nothing new for employers that maintain a group health care plan ( plan or health plan ) for employees. The regulation of group health plans by the federal government began with the favorable tax treatment of employer-provided health insurance under the Tax Code. 2 Some might say that the enactment of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ( COBRA ), requiring group health care plans to continue coverage for employees and dependents after termination, represented the first modern step toward health care reform. COBRA was followed by other laws, including the Health Insurance Portability and Accountability Act of 1996 (HIPAA). 3 Since HIPAA, Congress has tinkered with employer-sponsored health plans, 4 and various states have passed laws regulating health insurance policies issued in their state. Why Should Employers Care? Penalties for violating the Affordable Care Act can be stiff. Excise taxes of $100.00/day/person apply for violating a group health plan mandate, subject to a maximum. An exception may apply to small employers with insured plans. Depending upon the violation, this excise tax may also be subject to self reporting on the IRS Form 8928. Failure to self report can also subject a plan sponsor to additional penalties and excise taxes. It is also clear that failure to comply may subject a plan sponsor to claims from participants under ERISA s enforcement provisions (i.e. ERISA 502). For plan years beginning on or after January 1, 2014, numerous other provisions of the ACA will first take effect. These include the play or pay individual mandate applicable to individuals, and additional disclosures for the SBCs. The following is a summary of some of the other ACA compliance issues anticipated for 2014. If an employer has not provided a health plan for employees, then the Health Care Act will represent a sea change of governmental control over the employer s benefit offerings. 1 The Patient Protection and Affordable Care Act (P.L. 111-148), or PPACA as amended by the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152) ( Reconciliation Act ). The PPACA and Reconciliation Act may, throughout this outline, collectively be referred to as the Health Care Act, Reform Act, Patient Protection Act, Affordable Care Act, or, simply, the ACA. 2 Today this is known as the Internal Revenue Code of 1986, as amended (the Code ). The favorable tax treatment was first provided in 1918. 3 Throughout the Congressional debates about the Reform Act, there was little discussion about how the portability requirements applicable to group health plans under HIPAA were being used to reduce or even preclude the imposition of preexisting condition limitations. 4 More recently these include, for example, the Genetic Information Nondiscrimination Act, the Paul Wellstone Mental Health Parity Act and the later passed Mental Health Parity and Addiction Equity Act, Michelle s Law, as well as various state mandates regarding dependent coverage. 1

Employers will generally have two choices: play or pay. The first choice is to play by offering employees a health plan. This will subject the employer to all of the rules governing health plans. The second choice is to pay a penalty for not offering employees health benefits. This outline briefly discusses some of the ramifications related to each choice. To understand them, however, it will be helpful to understand the overall framework of the Affordable Care Act. And the key to that framework will be the new health insurance exchanges. Exchanges By January 1, 2014, state insurance exchanges (Exchanges) are required to be in place, permitting individuals and certain small employers to obtain coverage through the purchase of a qualified health plan, or QHP. 5 A state may define a small employer either as an employer with fewer than 50 employees or as an employer with fewer than 100 employees. Thus, the definition of a small employer will vary depending on each state s rules. Note that access to coverage through an Exchange is limited to U.S. citizens and legal immigrants. At a minimum, coverage offered under an Exchange is required to provide essential health benefits, which are discussed in more detail further below. SHOPS In addition, the Exchanges should operate a Small Business Health Options Program or SHOP that offers small businesses and their employees a variety of QHPs. The intent is that the SHOPs will find available QHPs, get information on prices and benefits, enroll employees, and consolidate billing for the employer. Employers can choose what share of the premium cost to cover and, depending on the Exchange available in PA, choose which QHPs to offer employees. Essential Health Benefits Beginning in 2014, non-grandfathered health insurance plans offered in the individual market and the small group market, both inside and outside of an Exchange, are required to offer essential health benefits. Self-insured plans, large group health plans, and grandfathered plans are not required to provide essential health benefits. Small group market includes employers with 100 or fewer employees, but states may cap the number of employees at 50 until 2016. Each state will be permitted to choose what benefits and services must included in a policy as an essential health benefits, subject to guidance issued by the Department of Health and Human Services. In any event, essential health benefits will include items and services within at least the following 10 categories: 1. Ambulatory patient services 5 See: Section 1311(b))1) of the ACA. 2

2. Emergency services 3. Hospitalization 4. Maternity and newborn care 5. Mental health and substance use disorder services, including behavioral health treatment 6. Prescription drugs 7. Rehabilitative and habilitative services and devices 8. Laboratory services 9. Preventive and wellness services and chronic disease management, and 10. Pediatric services, including oral and vision care. QHPs and the Premium Tax Credit Beginning in 2014, lower-income individuals may be eligible to receive a refundable tax credit to help pay the premium cost for health insurance. To be eligible, the individual s household income must generally must be at least 100% but not more than 400% of the federal poverty line for the taxpayer s family size for the year. For example, in the lower forty-eight states, for a family of four, the 2012 poverty level is $27,010. Using these numbers, a family of four with income of at least $27,010, but not more than $108,040, would be eligible for the credit. The amount of the credit available to an individual will be based on a formula that will take several factors into account. Generally, the credit available for any month will equal the lesser of (1) the premiums the individual pays for coverage for that month and (2) the price of the second lowest cost silver plan in the relevant, local market reduced by a percentage of the individual s income that increases as the person s income increases within a range of 2% to 9.5%. To qualify for the credit, the individual must enroll in a QHP on an Exchange and cannot be eligible for minimum essential coverage. Generally, the credit will be available for a month only if the individual has coverage for such month. An employer-provided health plan is considered minimum essential coverage only if the plan provides minimum value and is affordable. A plan is considered to provide minimum value if the plan s share of the total allowed costs of benefits provided under the plan is at least sixty percent of such costs. The IRS is working on guidance that will provide different approaches for determining whether a plan provides minimum value. The employer s health plan is considered affordable if the employee s required contribution to the plan does not exceed 9.5 percent of the employee s household income for the taxable year. 3

Reduced Cost Sharing Individuals may also qualify for reduced cost sharing. Cost sharing refers to the amount the individual pays out of pocket for his or her medical care, such as an annual deductibles. Under the Affordable Care Act, individuals with incomes equal to 100% to 400% of the federal poverty level may qualify for the reduced cost sharing. Under the language of the statute, to be eligible, an individual must enroll in a qualified health plan in the silver level of coverage in the individual market offered through an Exchange. Shared Employer Responsibility ( Play or Pay ) Beginning in 2014, some employers may be subject to certain penalties if they do not provide their full-time employees the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan, or minimum essential coverage is made available, but it is either unaffordable or does not provide minimum value. However, an employer that does not have fifty full-time equivalent employees is not subject to the penalties if the employer does not offer coverage. Once an employer passes the fifty full-time equivalent employee benchmark, one of two penalties may apply. Hereafter, an employer with at least 50 full-time equivalent employees will be called a large employer. Penalty for No Coverage. If a large employer does not offer coverage to its employees, and at least one employee receives a premium tax credit or cost sharing subsidy related to purchasing coverage through a state insurance exchange, the employer must pay a penalty for not offering coverage. This penalty is $2,000 a year multiplied by the number of the large employer s fulltime employees minus thirty. This penalty is increased each year based upon the growth of insurance premiums. Penalty if Coverage Provides Less Than Minimum Value or is Not Affordable. If a large employer offers coverage to its employees, there can still be a penalty if either (i) the coverage does not provide minimum value (pay for at least 60% of covered health care expenses for a typical population), and the employee purchases coverage on a state insurance exchange and receives a premium tax credit; or (2) the amount the employee has to pay to get the employer-provided coverage is more than 9.5% of the employee s family income, the employee purchases coverage on a state insurance exchange and receives a premium tax credit. This penalty is $3,000 a year for each full-time employee who receives a tax credit, up to a maximum of $2,000 multiplied by the number of full-time employees minus thirty. This penalty is increased each year based upon the growth of insurance premiums. Tax Credit for Small Businesses Including Certain Tax-Exempt Employers The Affordable Care Act provides a small business tax credit for eligible small employers. This credit was made available for taxable years beginning on or after December 31, 2009. If an eligible small employer or ESE operates on a calendar-year basis, the ESE was entitled to 4

claim a credit beginning with its 2010 tax return if the ESE contributed at least 50% toward the cost of its employees health care coverage. Tax-exempt organizations that otherwise meet the criteria for an eligible small employer, may be eligible to receive the tax credit by applying it against payroll taxes. To qualify for the credit the employer, generally, must have no more than 25 full-time equivalent employees with average annual full-time equivalent wages of $50,000 or less. The IRS has clarified that because the eligibility formula is based upon full-time equivalent employees and not actual employees, many businesses may qualify for this credit, even if they employ more than 25 individual workers. The Code s controlled group rules apply to determine whether the employer is, in fact, an eligible small employer. These rules require that certain related entities be treated as a single employer. In order to determine how many full-time equivalent employees the employer has (and whether the employer qualifies for the credit), there is a formula. Generally, all hours worked by employees during the tax year (up to 2,080 hours per employee) are divided by 2,080. Hours worked by seasonal employees are not counted. In addition, self-employed individuals, partners or sole proprietors are not considered employees for the purpose of determining full time equivalencies. The wage component is determined by looking at the total wages used for FICA taxes, without regard to the wage-base limit and excluding wages paid to seasonal employees, divided by the number of full-time equivalent employees. Until 2013, the amount of the tax credit will equal 35% (25% for tax-exempt entities) of the lesser of (i) the contributions the ESE actually makes toward health care coverage on behalf of its employees and (ii) a benchmark premium rate that is based on the average small-employer premium in the state in which the ESE operates. Beginning in 2014, the 35% multiple will increase to 50% (to 35% for tax-exempt entities), and the benchmark premium rate will be based on the average premium for the market where the employee enrolls for coverage. The credit is NOT available unless the ESE makes a contribution toward coverage equal to at least 50% of the applicable premium. For this purpose, the contributions employees make on a pretax basis through a cafeteria plan are not considered made by the ESE. The contributions must be provided under an arrangement that requires the eligible small employer to make a nonelective contribution on behalf of each employee who enrolls in the employer s qualifying health plan. The credit is available for any tax year beginning in 2010 through tax years beginning in 2013. In 2014 and 2015, a credit will be available for two years if employees purchase coverage through a state insurance exchange. Thus, an eligible small employer could potentially qualify for this credit for six taxable years. The full amount of the credit is available only to an employer who has 10 or fewer full-time equivalent employees and whose employees have average annual full-time equivalent wages of $25,000 or less. If an employer has more than 10 but 25 or fewer full-time equivalency employees, or the employees average wages are between $25,000 and $50,000, then the available tax credit will be reduced based on a sliding scale. 5

Nondiscrimination Rules for Fully-Insured Plans For over 30 years, self-insured health plans have been subject to non-discrimination rules in Internal Revenue Code Section 105(h). Under those rules, generally, if a health plan provides highly compensated employees with benefits that are better than those provided to non-highly compensated employees, the highly compensated employee would be taxed on the benefits. This rule has not received wide-spread attention. Many employers have been unaware of the rule, or they simply reported the employer s share of the premium payments as taxable to the highly compensated employee. Moreover, this rule has not previously applied to fully-insured plans. Thus, the employer could purchase insurance for a select group of executives on a taxfree basis without running afoul of these rules. Under the Affordable Care Act, these non-discrimination rules will apply to fully-insured plans. The penalties for non-compliance could be stiff, up to $100 per day for each employee covered by the plan. Retiree-only plans and certain excepted benefits, such as vision or dental-only plans will be excluded. These new rules will not be enforced until further guidance is issued, which could be as late as 2014 or later. Simple Cafeteria Plans Eligible small businesses may establish a simple cafeteria plan, which provides a safe harbor from the nondiscrimination requirements for cafeteria plans as well as from the nondiscrimination requirements for specified qualified benefits offered under a cafeteria plan. These rules include: Cafeteria plan rules; Group-term life insurance rules; Self-insured medical plan non-discrimination rules; and Dependent care assistance program rules. In addition, it appears that a simple cafeteria plan would automatically satisfy the nondiscrimination rules that will apply to fully-insured plans, though the issue is not clear. An eligible employer that maintains a simple cafeteria plan that satisfies the requirements described below for any year, is treated as meeting the nondiscrimination requirement during the year. For any year, an eligible employer is any employer that employed an average of 100 or fewer employees on business days during either of the two preceding years. If (1) an employer was an eligible employer for any year (a qualified year ), and (e) the employer established a simple cafeteria plan for its employees for that year, then, notwithstanding the fact the employer fails to meet the eligible employer requirements described above for any later year, the employer is treated as an eligible employer for that later year with respect to employees (whether or not employees during a qualified year) of any trade or business which 6

was covered by the plan during any qualified year. However, this provision ceases to apply if the employer employs an average of 200 or more employees on business days during any year preceding any such later year. A simple cafeteria plan is a cafeteria plan that: (1) is established and maintained by an eligible employer, (2) meets prescribed contribution requirements, and (3) meets prescribed eligibility and participation requirements. The minimum eligibility and participation requirements are met with respect to any year if, under the plan, (i) all employees who have at least 1,000 hours of service for the preceding plan year are eligible to participate, and (i) each employee eligible to participate in the plan may, subject to terms and conditions applicable to all participants, elect any benefit available under the plan. However, an employer may exclude: (1) employees under 21, (2) Employees with less than one year of service, (3) union employees, and (4) nonresident aliens with no U.S. income. The employer must make a contribution to provide qualified benefits under the plan on behalf of each qualified employee (not counting salary reductions) equal to (i) at least 2% of the employee's compensation or (ii) the lesser 6% of the employee's compensation or two times the employee s salary reduction contribution. A qualified employee is any employee who is not a highly compensated employee or a key employee, and who is eligible to participate in the plan. The matching contribution requirement described in item (ii) above is not met if, under the plan, the rate of contributions with respect to any salary reduction contribution of a highly compensated or key employee, at any rate of contribution, is greater than the rate for an employee who is not a highly compensated or key employee. However, an employer may otherwise make contributions to provide qualified benefits under the plan in addition to the required contributions described above. Coverage for Children Up to Age 26 Under the Affordable Care Act, if a health plan covers children, it must now cover children until they turn 26 years old, even if they are married, not living with the parent, attending school, not financially dependent on the parent, and eligible to enroll in his or her own plan. There is one temporary exception. Until 2014, grandfathered group plans do not have to offer dependent coverage up to age 26 if the child is eligible for group coverage outside his or her parent s plan. 7

The plan is required to provide a 30-day period no later than the first day of the plan s next plan year or policy year that begins on or after September 23, 2010 to allow the adult child to enroll. Plans were required to notify participants of this enrollment opportunity in writing. If a participant enrolls an adult child during this 30-day enrollment period, the plan must cover the adult child from the first day of that plan year or policy year. No Pre-existing Condition Exclusions Under the Affordable Care Act, health plans cannot limit or deny benefits or deny coverage for a child younger than age 19 due to the child s pre-existing condition. For plans years beginning on or after January 1, 2014, no health care plan or policy will be able to impose any pre-existing condition limitation. This will extend the current limitation on pre-existing conditions applicable to individuals under age 19 to everyone. No Lifetime Limits Plans can no longer impose lifetime limits on essential health benefits. Annual Limits Under the Affordable Care Act, beginning in 2014, plans will not be permitted to impose annual limits on essential health benefits. Prior to 2014, plans can impose restricted annual limits on the dollar value of essential health benefits per covered individual. For plan years beginning on or after September 23, 2012 but before January 1, 2014, the restricted annual limit is $2 million. For plan years beginning on or after January 1, 2014, no annual limits may be placed on essential health benefits. Until regulations have been issued implementing the statutory provisions related to essential health benefits, the agencies responsible for ACA enforcement (Treasury, Department of Labor, and HHS, hereafter Agencies ) will look at whether the plan sponsor has made a good faith effort to comply with a reasonable interpretation of that term, so long as that interpretation has been consistently applied throughout the plan to all participants. Note that self-insured group health plans, health insurance coverage offered in the large group market, and grandfathered plans are not required to cover essential health benefits. 6 These types of arrangement must, however, make certain they do not impose any lifetime or annual limits on essential health benefits. Annual limitations do not apply to health flexible spending accounts, medical savings accounts, health savings accounts, or certain health reimbursement accounts (HRAs integrated with an otherwise compliant group health plan or retiree-only health reimbursement accounts). In guidance issued on August 19, 2011, the Center for Consumer Information and Insurance Oversight exempts as a class all HRAs, including free-standing HRAs from the annual limitation 6 See: Essential Health Benefits Bulletin, Center for Consumer Information and Insurance Oversight, December 16, 2011, footnote 1. 8

requirements of Section 2711 of the PHS Act, if they were in effect before September 23, 2010, for plan years beginning before January 1, 2014. Prohibitions on Rescinding Coverage The Affordable Care Act limits the ability of a health plan to cancel coverage retroactively. Generally, coverage can now be cancelled retroactively only due to fraud, misrepresentation, or a failure to pay premiums. For example, if an employer accidentally enrolls an employee, the employee s coverage can only be cancelled prospectively. Wellness Incentives For plan years beginning on or after January 1, 2014, results-based wellness incentives can be increased from 20% to 30% under the non-discrimination provisions of HIPAA, as amended by the ACA. Grandfathered Status What s Important for 2013? The first open enrollment season under the ACA required employers to decide whether their plans would be grandfathered, provide plan participants with new required notices and disclosures, and amend plan documents to provide new mandated benefits. Going forward, employers will still be restricted in the changes they can make to the cost and coverage under grandfathered plans in order to maintain their grandfathered status. To the extent an employer maintains a grandfathered plan, this issue should be reviewed any time there is a change to the program. Generally, changes are made and effective at the beginning of each plan year. Notice to Employees State Insurance Exchange The ACA also made amendments to the Fair Labor Standards Act. One of those changes requires plans to provide participants with a notice of the availability of health care coverage through an Exchange. These notices are required to be given to employees by no later than March 1, 2013. This notice requirement will apply to both insured and self-insured plans, regardless of their grandfathered status. The notice will be required to advise employees of premium tax credits that may be available to them and whether the share of plan coverage paid by the plan sponsor is less than 60% of total benefits. Regulations governing these notices have not been issued. Another Benefits Acronym: The SBC The most challenging compliance issue facing employers for their 2013 enrollment season is the requirement to produce and distribute the Summary of Benefit Coverage or SBC before or in 9

connection with the first open enrollment season beginning on or after September 23, 2012. This is especially true if plan sponsors waited for the Supreme Court ruling to move forward in planning for this requirement. The SBC requirement carries with it a very stiff penalty for noncompliance. What is a Summary of Benefits and Coverage, or SBC? A Summary of Benefits and Coverage, or SBC, is a document written in plain language that contains specific information about the group health care coverage available to your employees. 7 There are prescribed formats that must be used, specific content requirements and the SBC must be printed in 12-point font. This disclosure document must be no longer than four pages (front and back). The SBC can be its own stand-alone document or can be combined with your plan s Summary Plan Description or SPD so long as it is prominently displayed at the beginning of the SPD. In addition to the actual SBC, access must be provided to a Glossary of Health Insurance and Medical Terms (Glossary). Just as with the actual SBC, the agencies 8 have also provided the specific language and format for the standardized glossary. What is the purpose behind the SBC distribution requirement? According to the preambles in regulatory guidance, issuance of the SBC will enable consumers, both individuals and employers, to better understand the [group health care] coverage they have and make better coverage decisions, based on their preferences with respect to benefit design, level of financial protection, and cost. 9 When do employers have to comply with the requirement to provide eligible employees with an SBC? The SBC requirement applies to group health plans the first open enrollment period beginning on or after September 23, 2012. For calendar-year plans, this means the SBCs must be provided this fall (unless, of course, your open enrollment season begins before September 23, 2012). Distribution of SBCs is an ongoing obligation that must be satisfied when an employee is first eligible for coverage, during open enrollment for a new plan year, upon request and when there is a change that affects a previously distributed SBC. 7 Note that you will not need to provide an SBC with respect to excepted benefits under the Health Insurance Portability and Accountability Act (HIPAA), such as dental and vision care benefits that are offered under separate contracts. While a separate SBC may not be necessary, the impact of a medical flexible spending account or health reimbursement plan that is integrated with a group health care plan must be reflected in some of the SBC scenarios. 8 There are three agencies responsible for issuing regulations and other guidance with respect to the SBC: Treasury, the Department of Labor and Health and Human Services. These may sometimes be referred to as the Agencies. 9 See: Preamble to Final Regulations issued on February 14, 2012. 10

If an employer has several group health plan options available, does the employer have to provide an SBC for each option during open enrollment? If an employer has multiple health coverage options, an employee must automatically receive an SBC for the health plan option in which he or she is enrolled immediately prior to the open enrollment period. SBCs for coverage options for which the employee is eligible, but not enrolled, must only be provided on request within 7 business days. However, employees who are newly eligible at the time of open enrollment, and presumably employees who have been eligible but not enrolled at the time of open enrollment, will need to be provided with SBCs for each health coverage option for which they are eligible. Is it possible for us to combine certain group health plan options together into one SBC? It is possible in some instances to combine the required SBC content into one document. For example, where the only difference in the benefit package is the participant s ability to elect a level of deductible, copayments and/or co-insurance. In addition, if a group health plan has certain carve out arrangements or add-ons to coverage, it may be possible to combine these or reflect these arrangements in the SBC for the basic health plan option. 10 However, because of the size and formatting limitations, as well as a requirement that the SBC be understandable to the average person, it may be easier just to prepare a separate SBC for each option. How do employers distribute the SBC? In general, the SBCs will need to be provided by paper unless the Department of Labor rules for electronic distribution (including online posting) are first satisfied. The good news is that the rules for providing SBCs electronically (including posting them online) are more relaxed than the rules for providing SPDs electronically. More specific guidance about acceptable methods of delivery appear in the final regulatory guidance as well as in the Department of Labor s FAQs noted in footnote 11. How do employers make the glossary available? The requirement to provide the uniform glossary can be satisfied by including in each SBC an Internet address where an individual may review and obtain the uniform glossary, a contact phone number to obtain a paper copy of the uniform glossary, and a disclosure that paper copies are available upon request. The Internet address may be a place where the document can be found on the plan s or issuer s web site, or the web site of either the Department of Labor or Health and Human Services. However, a plan or issuer must make a paper copy of the glossary available within seven (7) business days upon request. 10 See: Parts VIII and IX of the FAQs About Affordable Care Act Implementation, issued jointly by the Departments of Labor, Health and Human Services and Treasury. 11

Who is responsible for preparing and providing the SBC? If a group health plan is fully-insured, then the insurance carrier is required to prepare SBCs. If an employer has a self-insured plan, the employer must determine if its third-party administrator or TPA will prepare or assist in preparing the SBCs. Complications may arise if employers maintain any separate program that is not administered by its TPA that is subject to the SBC requirement. In some cases those types of programs may be integrated within the SBC prepared by the TPA. In any case, employers will need to ensure that the SBCs are properly prepared and timely distributed. The responsibility for providing the SBC is on both the plan and insurance carrier, even if the plan is fully-insured; and on the plan sponsor or designated plan administrator if the plan is self-insured. What are the penalties for non-compliance with the SBC distribution requirement? Penalties of up to $1,000 day per employee apply for failures, but government regulators say they do not intend impose penalties for this first compliance year if there is a good faith effort to comply with the SBC distribution rules. NOTE: As soon as an employer is required to provide an SBC to plan participants, any material change to the plan that impacts the SBC must be provided to employees at least 60 days before the change becomes effective. 12

The Medical Loss Ratio Rebate Under the Affordable Care Act, employer sponsors of insured group health plans may have received a rebate check in the mail from the insurance company sometime in August. The rebate check relates to the ACA s medical loss ratio requirement, or MLR. The purpose of the MLR is to require insurance companies to limit amounts spent on administrative expenses, including executive salaries, overhead and marketing, and spend a certain target percentage of premiums for medical care and improving quality of care. 11 If the applicable target percentage isn t met, the insurer must send rebates to the policyholder. The first rebates were due to policyholders in August 2012. Note, however, that applicable state law may allow carriers to offer policyholders a premium holiday instead of paying rebates. 12 Since the receipt of this rebate may relate to plan assets, how the rebate is used raises an important question involving ERISA fiduciary duties. As with similar rebates and refunds, the Department of Labor provided some ground rules under a DOL Technical Release. 13 Health insurers who issue rebates must provide notice and information about the rebate to the policyholder and plan participants. In addition, the notice is required to include a statement regarding policyholder fiduciary obligations related to the rebates and contact information for questions about the rebate. Employers should be prepared for questions from employees on whether they will be getting their own check or otherwise how the rebate will be allocated. In addition to the guidance from the DOL, the IRS issued FAQs, 14 addressing the tax treatment of any rebates. In general, tax treatment of the rebates varies depending on what employees receive the rebate and whether the employee paid for his portion of the premium cost on a pre-tax or after-tax basis. Reduction in Maximum Health Flexible Spending Account (FSA) Contributions. If employers offer their employees the right to make pre-tax contributions to a health flexible spending account or FSA, the maximum amount will be reduced to $2,500. For calendar-year plans, the effective date of will be January 1, 2013. Recent guidance by the IRS has clarified the effective date for programs that operate on a non-calendar year basis. 15 Cafeteria arrangements should be modified to reflect this limitation. 11 For the large group market (generally, covering over 100 employees)this percentage is 85%, and for the small group market, the percentage is reduced to 80%. 12 See: CCIO Technical Guidance (CCIIO 2012-002): Questions and Answers Regarding the Medical Loss Ratio Requirements. 13 Technical Release No. 2011-04- Guidance on Rebates for Group Health Plans Paid Pursuant to the Medical Loss Ratio Requirements of the Public Health Service Act. http://www.dol.gov/ebsa/newsroom/tr11-04.html 14 FAQs were issued by the IRS regarding the tax impact of the rebates. See Medical Loss Ratio (MLR) FAQs http://www.irs.gov/newsroom/article/0,,id=256167,00.html 15 See: IRS Notice 2012-40 13

Reporting the Cost of Group Health Insurance Coverage on Forms W-2. Informational reporting of the cost of group health insurance coverage was optional for coverage in 2011. For calendar year 2012, employers will be required to issue Forms W-2 containing the aggregate cost of employer-sponsored coverage, determined under rules similar to the rules used to determine the cost of COBRA coverage. There is some transition relief for certain types of employers. For example, any employer that issued fewer than 250 Forms W-2 for 2011, will not be required to comply with the Form W-2 reporting requirement for 2012. In addition, no reporting is required for certain types of health care coverage, including excepted benefits under HIPAA, 16 (such as dental and vision benefits), salary reduction contributions to a medical flexible spending account (FSA), contributions to Health Savings Accounts (HSA), and contributions related to a health reimbursement account (HRA). The rules, including transition relief and exemptions from the reporting requirement appear primarily in three notices issued by the IRS. 17 Employers should make certain their payroll departments or payroll providers are prepared for this new reporting requirement. Comparative Effectiveness or Patient-Centered Outcome Fees Note that the guidance provided in this section of the outline is based upon Proposed Treasury Regulations issued on April 17, 2012. Therefore, final regulations could significantly modify this analysis. What are the Patient-Centered Outcome Research Trust Fund Fees? The ACA added Sections 4375, 4376 and 4377 to the Internal Revenue Code of 1986 (Code). These new Code sections impose fees on issuers of certain health insurance policies (each called a specified health insurance policy ) and on plan sponsors of certain self-insured plans (each called an applicable self-insured health plan ). While the fees on fully-insured arrangements are imposed on the issuers of the underlying group health insurance policies, it is anticipated that these fees will be passed on to the policyholder (employer). Plan sponsors of self-insured plans will need to determine how many applicable self-insured health plan it offers that will be subject to the fee. These fees will be used to fund a Patient-Centered Outcome Research Trust Fund (Trust). What is the purpose of the Trust? The Trust will be used to fund a private, nonprofit corporation called the Patient-Centered Outcomes Research Institute (Institute). The Institute will assist, through research, patients, clinicians, purchasers, and policy-makers in making informed health decisions by advancing the 16 Health Insurance Portability and Accountability Act of 1996. 17 See: IRS Notice 2012-9, IRS Notice 2011-28 and IRS Notice 2010-69. 14

quality and relevance of evidence-based medicine through the synthesis and dissemination of comparative clinical effectiveness research findings. 18 When will these fees be due and how are they paid? The fees are treated as taxes under the Code and will be imposed for each policy or plan year ending on or after October 1, 2012. The fees will not be imposed for policy or plan years ending after September 30, 2019. 19 For calendar-year policies and plans, the fees will be due for calendar year 2012 and must be filed on or before July 31, 2013, using IRS Form 720, which is the Quarterly Federal Excise Tax Return. 20 How much are these fees? The fees are $2 for the first plan year ending after September 30, 2013 (indexed thereafter) multiplied by the average number of covered lives under specified health insurance policy and/or applicable self-insured health plan; provided that for the first year the fee is only $1 multiplied by the average number of covered lives. What plans are subject to the fees? Group health plans, such as medical plans, are subject to the fees if they are insured or selfinsured. However, certain other group health plans will not be treated as either a specified health insurance policy or applicable self-insured health plan if substantially all of the coverage provided consists of excepted benefits and described in Code Section 9832(c). 21 These excepted benefits generally include dental and vision care programs issued under separate policies. The Preamble to the Proposed Treasury Regulations acknowledges that certain other programs that are not treated as excepted benefits under Code Section 9832(c) should be exempt from these taxes, including employee assistance programs (EAPs), disease management programs, and wellness programs. 22 Therefore, under the current guidance, those programs will not be treated as applicable self-insured plans requiring payment of a separate fee. 23 Although exempt for other ACA purposes, the proposed Treasury Regulations do not appear to exempt retiree-only medical plans from the fee. 18 See: Preamble to Proposed Treasury Regulations, Fed. Reg. Vol. 77, No. 74, issued April 17, 2012, at p. 22692. 19 See: Code Section 4375(a) and (e) and Code Section 4376 (a) and (e). 20 See: Proposed Treasury Regulation 40.6011(a)-1. 21 The so-called retiree-only plans are exempt from most provisions of the ACA under Code Section 9831(b) and are therefore, not exempt from the fees imposed under Code Sections 4375 and 4376. 22 Id., at p.22695. 23 See: Proposed Treasury Regulation 46.4376-1(b)(ii)(B). 15

Health reimbursement arrangements (HRAs), which are always self-insured, will be an applicable self-insured health plan and subject to a separate fee unless it is integrated with another applicable self-insured health plan. A medical flexible spending arrangement or FSA, which is also always self-insured, will be an applicable self-insured health plan, subject to a separate fee, unless it is integrated with another applicable self-insured health plan or otherwise is an excepted benefit under Code Section 9832(c). This means that if an employer maintains a group health plan through a fully-insured arrangement, the specified health insurance policy providing group health benefits will be subject to the fee (which will more than likely be passed on to the employer) and the employer will be required to pay a fee on any self-insured FSA or HRA that it provides to its employees. The fee does not apply to stop-loss policies. Who has to be counted for determining a policy or plan s average number of covered lives? For most programs, covered lives will include both the employee and any dependents who are covered by the specified health insurance policy or applicable self-insured health plan. However, with respect to certain types of arrangements, such as an FSA or HRA, only the employee with such accounts are treated as a covered life if they do not participate in any other self-insured program maintained by the same employer that, together with an FSA or HRA will be treated as just one plan. 24 How are the average number of covered lives determined? The Proposed Regulations will permit the insurer to calculate average number of covered lives under a specified health insurance policy using one of four methods. These methods include using an actual count method, a snapshot method, a member months method and a state form method. While the carrier can change its method from year-to-year, it must use the same method for all policies for which a fee is due for any policy year. 25 Plan sponsors of applicable self-insured plans can use one of three methods: an actual count method, a snapshot dates method, and a Form 5500 method. Again, while a plan sponsor can change its method from year-to-year, the plan sponsor must use the same method for all plans for which a fee is due for any plan year. 26 Expansion of Preventive Care Benefits for Women Plans that are not grandfathered are required to provide coverage with no cost sharing 24 See: Proposed Treasury Regulation 46.4376-1(c)(6). 25 See: Proposed Treasury Regulation 46.4375-1(c)(2). 26 See: Proposed Treasury Regulation 46.4376-1(c)(2). 16

(sometimes called first-dollar coverage) for certain evidence-based preventive services, routine vaccinations, as well as preventive care for children and women (Preventive Care Benefits). The Preventive Care Benefits are based on recommendations made by a number of different groups. 27 Guidelines for Preventive Care Benefits are regularly updated to reflect new scientific and medical advances. As new services are approved, non-grandfathered health plans will be required to cover them on a first-dollar basis beginning in the plan year that begins on or after the date that is one year after the new guideline goes into effect. Guidelines developed by doctors, nurses, and scientists were issued effective August 1, 2011 requiring plans to provide new Preventive Care Benefits for women the first plan year beginning on or after August 1, 2012. 28 For calendar-year plans, this is January 1, 2013. These new Preventive Care Benefits include coverage for contraceptives and contraceptive counseling, breastfeeding support, supplies and counseling, and screening for domestic violence. The first-dollar coverage requirement for Preventive Care Benefits is not absolute. Importantly, first-dollar coverage will not apply if the individual seeks treatment from an out-of-network provider. In addition, depending upon the nature of the encounter with the service provider, a group health plan may have to provide first-dollar coverage only for the Preventive Care Benefit itself (and not the doctor s visit). Certification of Compliance to HHS Section 1104 of the ACA amended certain Administrative Simplification Provisions of HIPAA. Specifically Section 1104(b)(b)(h) of the ACA requires health plans to file a certification statement with HHS no later than December 31, 2013, certifying that the data and information systems for the plan are in compliance with the standards and operating rules for health plan eligibility, electronic funds transfer (EFT), health claim status, health care payments and remittance advice transactions. The effective date for compliance with operating rules for eligibility for health plans and health claims status transactions will be January 1, 2013. This means that plan sponsors should be communicating now with their carriers and third-party administrators to confirm that, effective as of January 1, 2013, the plan is in compliance with these HIPAA electronic standard transaction and operating rules. Regulations related to the form of the certification have not yet been issued. This certification requirement applies to all plans, regardless of their grandfathered status. Plans should confirm that this certification will be made by their carriers (insured arrangements) and/or third-party administrators (selfinsured arrangements). Certifications of compliance with other standards and operating rules will be required at the end of 2015. These rules could also apply to the plan sponsor s own administration of a self-insured plan or program that is covered by HIPAA s Administrative Simplification Rules. 27 This includes the U.S. Preventative Services Task Force, Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention and Health Resources and Services Administration. 28 Group health plans sponsored by certain religious employers and group health insurance coverage issued in connection with such plans are exempt from the requirement to cover contraceptive services. 17

Additional Withholding Requirements Medicare Taxes The ACA will impose an additional Medicare tax on wages over $200,000. This additional tax only applies to the employee and there is no employer matching component. This will, however, require employers to withhold 2.35% on wages over $200,000 in 2013. The 1.45% rate (including the employer s matching portion) that has applied in the past to all wages will continue to apply to an employee s wages under $200,000. Medicare Part D Subsidy Employers who receive subsidies from the federal government for providing prescription drug coverage to retired former employees eligible for Medicare Part D will only be eligible to deduct costs in excess of the subsidy. In the past, the receipt of a subsidy did not reduce the deduction. Waiting Periods Effective in 2014, plans will not longer be permitted to impose a waiting period for coverage eligibility longer than 90 days. 29 Informal guidance on the 90-day waiting period appears in IRS Notice 2012-17, in the form of frequently asked questions, and in IRS Notice 2012-59, providing specific examples of how the 90-day waiting period limitation under the ACA will be enforced. Employers are permitted to rely on the guidance issued in IRS Notice 2012-59 at least through the end of 2014. For purpose of HIPAA s waiting period provisions, the Departments of Labor, Health and Human Services and the Treasury (Agencies) have defined a waiting period to mean the period that must pass before coverage for an employee or dependent who is otherwise eligible to enroll under the terms of a group health plan can become effective. 30 IRS Notice 2012-17 indicates that the requirement for large employers to provide coverage to full-time employees for purposes of 4980H, and the standards related to 4980H, do not coordinate with the requirements of PHS Section 2708 which imposes a 90-day limitation on waiting periods. PHS Act Section 2708 does not require the employer to offer coverage to any particular employee or class of employees, including part-time employees. PHS Act Section 2708 merely prohibits requiring an otherwise eligible employee to wait more than 90 days before coverage is effective. 31 Therefore, while eligibility provisions such as full-time status or a bona fide job category are acceptable for this purpose, any eligibility conditions that are based solely on a lapse of a time period would be permissible for no more than 90 days. 32 Eligibility conditions 29 Section 2708 of the Public Health Service (PHS) Act. The ACA also added Section 715(a)(1) to ERISA and Section 9815(a)(1) to the Code, incorporating various provisions of the PHS Act into the Code and ERISA, including Section 2708 of the PHS. 30 See: 26 CFR 54.9801-3(a)(3)(iii), 29 CFR 2590.701 3(a)(3)(iii), 45 CFR 146.111(a)(3)(iii). 31 See: IRS Notice 2012-17, Q&A 6. 32 See: IRS Notice 2012-17, Q&A 7. 18