April 2010

On March 21, 2010, the House of Representatives passed two legislative measures that have held the focal point of the nation: the Patient Protection and Affordable Care Act (H.R. 3590) and the Health Care and Education Affordability Reconciliation Act of 2010 (H.R. 4872). In general, the reform legislation provides health insurance to an additional 32 million people, creates state-based health insurance exchanges, and provides federal government subsidies to help lower-income individuals purchase health insurance. We have received many inquiries from our clients regarding the legislation's impact on employers. The fact is employers need to be aware of the legislation's immediate and future changes to the health insurance system as well as the specific "employer responsibility" requirements contained therein.

Immediate Reforms to Health Insurance Plans:

Several provisions in the reform legislation will have an immediate impact on employers by subjecting health insurance plans to the following requirements and limitations:

• Restricts annual limits on health care coverage (Note: A ban on annual limits will go into effect in 2014)
• Prohibits lifetime limits on coverage
• Prohibits rescissions in coverage in most instances
• Requires certain plans to provide coverage for dependent children until they turn 26 years old
• Limits excessive waiting periods
• Prohibits preexisting condition exclusions for children (Note: A ban on preexisting condition exclusions for all persons will go into effect in 2014)

Future Reforms to Health Insurance Plans:

The reform legislation also contains many provisions that will go into effect in the next 1 to 8 years, including:

• Requires certain employers to provide qualified employees with free choice vouchers to be used to purchase qualified health care plans in a state-based health insurance exchange
• Limits distributions for qualified medicine under health savings accounts (HSAs), Archer medical savings accounts (MSAs), health flexible spending arrangements (FSAs), and health reimbursement arrangements (HRAs) to prescription drugs and insulin (effective 2011)
• Increases the additional tax on distributions from HSAs and Archer MSAs that are not used for qualified medical expenses to 20% of the disbursed amount (effective 2011)
• Requires employers to report the cost of employer-sponsored health coverage on W-2 forms
• Requires certain large employers to report the health insurance coverage they offer on a return
• If an employer with more than 200 full-time employees offers one or more health care plans, the reform legislation requires the employer to automatically enroll employees in one of the plans they offer
• Eliminates the tax deduction for expense resulting from the Medicare Part D subsidy (effective 2013)
• Limits annual contributions to health flexible spending arrangements under cafeteria plans (effective 2013)
• Prohibits annual limits on health insurance coverage (effective 2014)
• Prohibits preexisting condition exclusions (effective 2014)

Employer Responsibility Requirements:

Aside from the changes being made to health insurance plans, specific "employer responsibility" requirements will likely have the most significant impact on employers. While employers are not required to provide or maintain health insurance under the reform legislation, employers with 50 or more employees that choose not to provide such insurance or offer insurance that is deemed unaffordable or inadequate will face a penalty to help offset the cost of health insurance that is acquired from the health insurance exchange. Starting in 2014, the penalty for an unaffordable or inadequate health insurance plan will be the lesser of $3,000 per full-time employee who obtains a tax credit or $750 times the total number of full-time employees. Starting in 2014, the penalty for failing to offer health insurance will be the lesser of $3,000 per full-time employee who obtains a tax credit or $2,000 times the total number of full-time employees. It is important to note that the Reconciliation Act exempts the first 30 employees from the penalty calculation. For example, employers that choose not to offer health insurance would have to pay a penalty of $2,000 times the number of employees minus 30. Employers that offer high-cost "Cadillac" health insurance plans will be taxed, starting in 2018, at a rate of 40% for amounts above $10,200 for single coverage, $27,500 for family coverage, $11,850 for retirees, and $30,950 for employees in high risk professions. On a lighter note, small businesses with fewer than 25 employees will receive tax credits under certain circumstances to aid them in offering health insurance to their employees.

Reforms made to health insurance plans and the penalties for failing to offer health insurance or offering unsatisfactory health insurance put a lot of the heavy cost of this legislative overhaul on the backs of employers. Employers are now faced with the question of whether or not the current health care reform legislation will reduce the increasing expense of health care. While there is no immediate answer to this question, employers should take the initiative and consider the effect the new reforms will have on the cost of health care and their bottom lines. Employers will then have to evaluate whether it makes more business sense to offer health care to their employees or face the penalties of non-compliance.

Questions? For questions or comments concerning this topic, please contact an experienced Wessels Sherman attorney.  Contact Us