Health Care Reform Compliance Looms for EmployersAugust 13, 2012
Now that the U.S. Supreme Court has ruled the "individual mandate" component of the Patient Protection and Affordable Care Act (the "Act") is constitutional, employers that sponsor health plans must prepare to comply with several important Act requirements. Although some of these rules will not go into effect until January, 2014, others become effective much sooner. The following summarizes a number of the Act's most pressing requirements for employers.
Summary of Benefits and Coverage
One of the most urgent health plan compliance issues for employers is the Act's "summary of benefits and coverage" ("SBC") requirement. The SBC must summarize the benefits and coverage available under a group health plan. It is intended to provide straightforward factual information to participants and beneficiaries so they can compare and understand the costs and benefits of health coverage options. The Department of Labor has issued a model SBC template located here. Please be aware that the SBC requirement does not alter or replace the requirement to issue a timely summary plan description.
The SBC must be provided at various times (e.g., at initial, open, and special enrollment; upon a participant's request) by plan administrators (usually, the employers themselves) for self-insured plans, and plan administrators or insurers for insured plans. Plan administrators generally must distribute SBCs to health plan participants and beneficiaries no later than the first day of the first open enrollment period beginning on or after September 23, 2012. For individuals enrolling other than via open enrollment, the requirement applies as of the first day of the first plan year that begins on or after September 23, 2012. All plans (whether insured or self-insured) must comply with the SBC requirement, regardless of whether the plan is grandfathered from other requirements of the Act. Although the SBC requirement does not apply to retiree-only plans, health savings accounts, or stand-alone dental or vision plans, it does apply to certain health flexible spending arrangements ("FSAs") and stand-alone health reimbursement arrangements ("HRAs"). Additionally, the SBC requirement could apply to wellness programs and employee assistance plans ("EAPs") if they pay for or provide health care services.
An SBC must be provided in a uniform format with specified content. It may be provided to participants and beneficiaries in paper form, but it also may be delivered electronically in some circumstances. An SBC must be provided in a "culturally and linguistically appropriate manner." Specifically, if an SBC is mailed to an address in a county where 10% or more of the population is literate in the same non-English language, then it must include a one-sentence statement indicating how the reader can access certain language services (e.g., written translations of the SBC) provided by the plan.
The SBC requirement is very complicated, so employers should review the rules as soon as possible to avoid any compliance concerns. The Departments of Labor, Health and Human Services, and the Treasury will not impose any penalties for the first year of the SBC's requirement, as long as employers are attempting to comply in good faith. Otherwise, each failure to provide an SBC will trigger a penalty of up to $1,000 per participant.
W-2 Health Plan Cost Reporting
Beginning in 2013 (for health plan coverage provided in 2012), employers must include the aggregate value of their annual health plan coverage on employees' W-2s. This is an informational reporting requirement only, so the reporting of the amount on an employee's W-2 does not make it taxable. For additional information regarding W-2 reporting for health plan costs, please see our prior alert on the topic located here.
Health Care FSAs
For tax years beginning on and after January 1, 2013, a $2,500 cap will be placed on employees' annual health care FSA elections. (The limit does not impact dependent care FSA elections.) The new limit will be indexed for inflation for future years. As long as plans are in operational compliance with the limit, employers will have until December 31, 2014 to amend their cafeteria plans to reflect the new requirement.
Outcomes Research Fee
Starting with plan years ending after September 30, 2012, the Act requires employers that sponsor self-insured health plans (and insurers of insured plans) to pay an annual fee based on the number of the covered lives. The annual fee will be used to fund the Patient-Centered Outcomes Research Institute, a non-profit entity created by the Act to focus on medical research. In addition to major medical plans, the annual fee applies to certain health care FSAs and stand-alone HRAs. If the same employer maintains more than one self-insured arrangement (e.g., a major medical plan and an HRA), the arrangements can be treated as a single plan for this purpose if the arrangements have the same plan year. If an FSA or HRA is integrated with an insured plan, the employer (not the insurer) must pay the fee attributable to the FSA or HRA. The fee generally does not apply to stand-alone dental or vision coverage.
For plan years ending on or after October 1, 2012 but before October 1, 2013, the annual fee is $1 times the average number of covered lives under the plan. For plan years ending after September 30, 2013, the annual fee increases to $2 times the average number of covered lives under the plan, and is then subject to cost-of-living adjustments for future years. Proposed regulations offer a few alternatives for employers to use to calculate the average number of covered lives for any given year. The fees will be paid once a year using IRS Form 720.
All employer health plans (including grandfathered plans) with plan years beginning on or after September 23, 2012, and before January 1, 2014, must not have an annual dollar limit on the value of "essential health benefits" that is less than $2 million. Essential health benefits generally include items and services within the following categories: ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance use disorder services, including behavioral health treatment; prescription drugs; rehabilitative and habilitative services and devices; laboratory services; preventive and wellness services and chronic disease management; and pediatric services, including oral and vision care.
For plan years beginning on or after January 1, 2014, no annual limit may apply to essential health benefits.
Starting in 2014, employers may increase the reward or penalty they impose on employees with respect to satisfaction of certain health-related standards (e.g., weight loss, tobacco use, blood pressure reduction) under wellness programs. The Act increases the maximum reward or penalty to 30% of the applicable cost of coverage (including both the employer and employee shares) with the potential to go as high as 50%. (The maximum reward or penalty was previously 20%.) This change allows employers to put more teeth into their wellness initiatives. However, employers must remain cognizant of other legal requirements associated with wellness programs (e.g., the Americans with Disabilities Act general prohibition on involuntary medical examinations).
Another significant concern for some employers will be the application of new nondiscrimination testing requirements to non-grandfathered insured health plans. Similar to the nondiscrimination testing requirements currently applicable to self-insured health plans, these rules are designed to prevent insured plans from discriminating in favor of certain highly paid employees with respect to the plans' eligibility requirements and benefits. Failure to satisfy these tests will trigger excise taxes of $100 per day per person discriminated against, so the consequences of noncompliance can be staggering. The Departments of Labor, Health and Human Services, and the Treasury, which are responsible for implementing this mandate, have recognized there are a significant number of open issues surrounding it. Consequently, these Departments have agreed not to impose the excise tax until additional guidance is issued. Although there is no guarantee, we expect to see that guidance within the next six to nine months.
Beginning in 2014, the Act requires that an employer with 50 or more full-time employee equivalents during the prior calendar year must provide "minimum essential" health plan coverage to full-time employees. Otherwise, the employer must pay a penalty if any full-time employee receives federal premium assistance under a health insurance exchange during any month. The monthly penalty equals $166.67 times the number of the employer's full-time employees (minus 30 employees). A full-time employee generally is one who works an average of at least 30 hours per week, and the full-time employees of certain affiliated employers must be aggregated.
Furthermore, even if an employer does offer minimum essential coverage to its full-time employees, it will be subject to a penalty for a month if the coverage is "unaffordable" and at least one full-time employee declines the coverage and receives federal premium assistance for coverage under an exchange. Under this circumstance, the monthly penalty will be $250 times the number of employees who receive the premium assistance for that month. Coverage is considered "unaffordable" if the employee's share of the premium exceeds 9.5% of his or her household income or the plan's share of the total allowed costs provided under the plan is less than 60%. However, this penalty will not exceed the amount calculated in the immediately preceding paragraph (i.e., the penalty that would have applied if the employer did not provide minimum essential health plan coverage).
Given that most, if not all, of the Act is here to stay, employers should actimmediately to understand their obligations and analyze their options to avoid any compliance problems. The Act is complicated and appropriate planning is essential.
If you have any questions regarding any of the items summarized above or any provisions under the Act, please contact Todd Cleary, Sven Skillrud or any other member of Godfrey & Kahn's Employee Benefits team.