On March 23, 2010, the President signed into law the "Patient Protection and Affordable Care Act (P.L. 111-148)" (called "PPACA"), which is the major part of the health care reform initiative.  Moreover, just last week, the President signed into law the first technical modifications and immediate revisions to key parts of the PPACA.  

This Advisory highlights some of the more important components of the PPACA, as amended, that will directly affect employers and their employees.

What Does Health Care Reform Mean to Employers?

In many respects, the significant parts of PPACA generally will not be effective until 2013-2014.  That's good news and means there is not necessarily reason for haste or panic, yet.  For the most part, there is ample time ahead in which to study and plan.  

Many more developments will occur.  These will be in the form of legislative, regulatory and interpretive refinements.  It is certain, however, that the delivery of health and medical benefits coverage in the workplace will need to change in order to adapt to this significant shift in philosophy and direction.  There is more to come.

What's Important to Know for the Next 12 months?

Nevertheless, employers and their employees should be aware of some key provisions right now.  Many of these will require employers to amend and modify their health and medical benefit plans and change some current administrative practices.  

Within the next 12 months or less, employers should be prepared to manage these key changes:

  • Medical Flex Plans:  Health care flexible spending accounts (FSAs) will be altered in two key ways:  first, over the counter drugs will not be eligible for reimbursement as an eligible medical expense, unless supported by a prescription (begins for tax years after 12/31/10); and, second, a $2,500 cap will be imposed on the pre-tax dollars that can be set aside through salary reductions for these FSAs (begins for tax years after 12/31/12).
  • Definition of Dependent for Medical Care:  Dependent adult children up to age 26 must be eligible to be covered dependents for group health plans offering coverage for dependent children (begins for tax years after 9/23/10).
  • No Lifetime Limits:  Lifetime dollar limits on the value of "essential" health benefits must be eliminated under group health plans and insurance programs (begins for tax years after 9/23/10).
  • No Restrictions on Pre-existing Conditions (Minors):  Pre-existing conditions exclusions must be eliminated for enrolled children under the age of 19 under group health plans and insurance programs (begins for tax years after 9/23/10).
  • Retiree Reinsurance:  A temporary reinsurance program will be available for health/medical coverage for early retirees over age 55 who are not eligible for Medicare (begins after 6/23/10 and ends 12/31/13).
  • Expansion of Non-discrimination Rules to Insured Benefits:  The "non-discrimination" rules (presently only applicable to self-insured medical programs under Code Sec. 105(h)) will now extend to insured health/medical plans, such that insured medical programs will no longer be allowed to favor high paid/owner employees in areas of eligibility for participation and available benefits (begins for tax years after 9/23/10).
  • Appeals of Denied Medical Claims:  An opportunity for personal testimony must be given whenever there's an appeal of a denied medical claim (begins for tax years after 9/23/10).  Furthermore, all self insured medical plans that deny a claim for benefits must offer an opportunity for external third party review of such denied claims in a way that meets standards set by the Department of Health and Human Services (begins for tax years after 9/23/10).
What Happens After the Next Year or So?

  • Loss of Deductions for Retiree Drug Costs:  There will no longer be a deduction for the subsidy cost for employers who maintain prescription drug plans for their Medicare Part D eligible retirees (begins for tax years after 12/31/12).
  • Required Statement of Benefits:  Prior to enrollment (or re-enrollment), all participants in insured and self-insured group health plans must receive a "summary of benefits" (SOB).  This new document is independent of the traditional SPD and must be four pages or less.  Strict printing and content specifications apply.  Material modifications of the SOB must be furnished at least 60 days in advance.  Penalties of up to $1,000 per violation may be applicable if there is a willful failure to deliver this new SOB (begins for tax years after 3/23/12).
What Lies Ahead in Later Future Years?

Several years from now, the major changes in national health care policy will come into play.  Employers will be forced to evaluate how they provide health and medical benefits to employees.  These key changes do not become effective until 2013-2014.  Nonetheless, a general awareness now of what lies ahead will aid in the eventual planning process.

Starting in 2013-2014, the following is generally how things will be different for employers and employees in the workplace:

  • Individual Mandate for Health Coverage:  With very limited exceptions, all individuals will be required to have a minimum qualifying level of health/medical coverage either through an employer/employee arrangement or through individual coverage from a health coverage exchange (see below) or otherwise there is a tax penalty for anyone without individual coverage (begins for tax years after 12/31/13).
  • Employer's Delivery of Health Coverage:  Employers will have the choice between delivering at least "minimum essential health care coverage" to their employees or paying a stated fixed dollar penalty tax per employee per year, if they do not provide minimum coverage.  Even where an employer offers minimal essential medical coverage, however, another lesser penalty tax will be imposed where one or more employees choose to take their own subsidized coverage under a health coverage exchange (see below), instead of taking employer coverage.  Automatic enrollment will be required for larger employers (begins for tax years after 12/31/13).
  • Health Coverage Exchanges — Purchasing System:  Beginning in 2014, states will receive federal funding in order to set up "health benefit exchanges" through which small employers and individuals will be able to acquire health insurance coverage.  From 2017 and on, employers will be required to notify employees about the health benefit exchanges and explain how some employees might be able to get subsidized (reduced cost) coverage if they opt for standard, qualified medical coverage through a health benefit exchange (in which case their employer will pay a penalty tax) (begins for tax years after 12/31/13; and after 12/31/16).
  • Employer's Design of Health Coverage:  Health and medical plans that provide rich or generous benefits (so-called "Cadillac Health Plans") will be subject to an excise tax of 40 percent on the value of the excess benefits.  This tax will be paid by the insurance coverage provider — namely the employer (self-insured) or insurance company (insured) or other person (administrator) (begins for tax years after 12/31/13).
  • Medicare Tax Increases:  The Medicare tax rate on annual wages (unlimited) is increased such that a higher rate of 2.35 percent will be paid on taxable earnings over $200,000 (single individual) and over $250,000 (married filing jointly)  (begins for tax years after 12/31/12).
  • Pre-existing Conditions Exclusions or Limitations (Non-Minors):  Pre-existing conditions exclusions must be eliminated for all enrolled non-minor individuals under all group health plans and insurance programs (begins for tax years after 12/31/13).  Prior to this change, pre-existing conditions limits are removed for minor individuals (see above).
There Will Be More to Come, More to Study

The new law under PPACA, as amended, is a massive undertaking.  This Advisory is only a very general summary of parts of the new law.  Much more will develop and will need to be analyzed as time passes.