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Patient Protection and Affordable Care Act (PPACA)


On March 23, 2010, President Barack Obama signed into law the Patient Protection and Affordable Care Act (PPACA). This Act, along with the Health Care and Education Reconciliation Act (signed March 30, 2010), provides many reforms to the existing medical insurance system in the United States. This comprehensive health care reform legislation will be implemented in phases, with some requirements becoming effective on the first plan year beginning on or after September 23, 2010, while many other provisions do not take effect until 2014. The PPACA is designed to help ensure affordable medical insurance coverage, providing a minimum level of benefits set out in the Act, for all Americans and to prevent people from losing or being denied coverage because of their medical conditions. Although there are several new requirements in the Act, there are still a lot of open questions about the actual application of the Act. Employers should expect to see many new regulations being promulgated to interpret and enforce the PPACA. This chapter cannot begin to provide details about every aspect of the PPACA. We recommend consulting with legal counsel to help plan any future coverage changes and ensure compliance with the PPACA. Current Coverage Options for Employers – Grandfathered Plans. Between March 23, 2010, the date that the PPACA was signed, and January 1, 2014, employers still have a broad range of alternatives regarding providing employers with health insurance—including retaining their current coverage options or not offering medical insurance coverage. The PPACA provides that nothing in the Act shall be construed to require that an individual terminate coverage under a group health plan or heath insurance coverage in which such individual was enrolled on March 23, 2010. A group health plan or other health insurance coverage in which an individual was enrolled on March 23, 2010, is referred to as a “grandfathered health plan.” The market reforms and exchange requirements of the PPACA do not apply to grandfathered health plans, with certain exceptions. New employees and their families or the families of existing plan participants may enroll in a grandfathered plan, and the grandfathered health plan terms continue to apply, even if the individual enrolls after March 23, 2010. Effective with the plan year beginning on or after September 23, 2010, grandfathered health plans are subject to certain changes and limitations: 1. No preexisting condition exclusions may be applied to children age 18 or under; 2. Excessive waiting periods (more than 90 days) are prohibited; 3. Lifetime and annual limits on benefits are prohibited; 4. The plan cannot rescind coverage, except for in cases of fraud; 5. Must provide uniform benefits summary information; 6. Must extend benefits to children up to age 26 (without regards to student status or marital status) – prior to January 1, 2014 coverage is only required if dependent is not eligible to enroll in another employer health plan. Post January 1, 2014, coverage required to be extended without regards to other available coverage. Coverage and Reporting Requirements for Other Health Plans. Collectively bargained health care plan agreements ratified prior to March 23, 2010 are grandfathered until the date on which the last of the collective bargaining agreements relating to the coverage terminate. Coverage requirements applicable to other grandfathered plans do not apply to collectively bargained health care plans. Employers may offer health plans other than grandfathered health plans both before and after 2014. All non-grandfathered group health plans, including self-insured plans, are subject to additional coverage improvement and reporting requirements. These include: I. COVERING CERTAIN PREVENTIVE SERVICES, INCLUDING IMMUNIZATIONS, PEDIATRIC PREVENTIVE CARE AND SCREENING, AND WOMEN’S HEALTH PREVENTIVE CARE AND SCREENINGS, WITHOUT COST-SHARING REQUIREMENTS (COPAYS, DEDUCTIBLES, ETC.); II. ANNUAL QUALITY REPORTING TO THE SECRETARY OF HEALTH & HUMAN SERVICES PURSUANT TO REPORTING REQUIREMENTS TO BE DEVELOPED BY DEPARTMENT OF HEALTH & HUMAN SERVICES; III. AN APPEALS PROCESS FOR ALL CLAIMS DENIALS THAT MEETS MINIMUM FEDERAL REQUIREMENTS; AND IV. PROVIDING REBATES TO ENROLLED MEMBERS IF NON-CLAIMS COSTS EXCEED A CERTAIN PERCENTAGE OF THE PLANS TOTAL COSTS. Effective for plan years after January 1, 2014, additional changes will be enforced, including: 1. PROHIBITION ON DISCRIMINATION BASED ON HEALTH STATUS (WITH SOME EXCEPTIONS FOR HEALTH AND WELLNESS PROGRAMS); V. ANNUAL COST-SHARING LIMITATIONS; VI. LIMITATIONS ON VARIATIONS IN HEALTH PREMIUMS BASED ON: A. family structure; B. age (3:1 maximum) C. Tobacco use (1.5:1 maximum); and D. Geographic rating area. VII. NO DENIAL OR TERMINATION OF COVERAGE BASED ON PRE-EXISTING HEALTH CONDITIONS (INDIVIDUALS AGE 19 AND OVER – UNDER 19 EFFECTIVE IN 2010). After January 1, 2014, employer-sponsored health plans will be required to meet minimum essential benefit requirements to qualify under individual and employer “play or pay” provisions. Comprehensive coverage requirements are yet to be established. “Play or Pay” Requirements for Employers. Pursuant to the PPACA, all “large” employers—those with 50 or more employees—must provide health care coverage that meets minimum essential benefits requirements to all full time employees or pay penalties. “Employee” is either an employee who works 30 or more hours per week or can be “full time equivalent” employees, who are counted by dividing the total number of monthly part time hours by 120. Large employers could face two types of penalties, depending on whether or not they choose to offer health care coverage to employees. Large employers who do not offer coverage and have at least one full time employee receiving a premium tax credit from the government must pay a penalty of $2,000 per full time employee (excluding the first 30 full time employees). Large employers who do offer coverage but have at least one full time employee receiving a premium tax credit because the employer offered coverage is not adequate or affordable (meaning the plan covers less than 60% of costs or the employee’s contribution to the plan costs is grater than 9.5% of household income) must pay the lesser of $3,000 per employee receiving a premium credit or $2,000 per full time employee. Large employers will need to examine their options and determine whether it is better to offer coverage or to pay a penalty and allow employees to seek insurance through an Exchange. Effective January 14, 2014, employers with more than 50 employees that offer health insurance coverage must provide a “free choice voucher” to those employees who meet the following requirements: (1) an income less than 400 percent of the federal poverty level; (2) share of the premium exceeds 8 percent but is less than 9.8 percent of income; and (3) choose to enroll in the exchange. The voucher amount must be equal to what the employer would have paid if the employee had chosen the employer’s plan. Employers will not be subject to fines for such an employee’s participation in the exchange. Small employers, those with fewer than 50 employees, are not subject to the penalties. In order to encourage small employers to offer medical insurance, the PPACA provides tax credits to qualifying small employers. To be eligible for a credit, the employer must pay at least 50% of employee health care coverage. Additionally, a small employer must have no more than 25 full time equivalent employees and pay an average wage of less than $50,000 per year. However, the maximum credit will only be available to employers that have 10 or fewer full time equivalent employees and pay an average wage of less than $25,000 per year. The tax credits for small employers are divided up into two phases. Phase 1 covers 2011 through 2013 while Phase 2 becomes effective in 2014. The only difference in the two phases is the amount of credit. Phase 1 provides a credit of 35% while Phase 2 provides a credit of 50%. “Play or Pay” Requirements for Individuals. Pursuant to the PPACA, by 2014 all individuals must have acceptable medical coverage from either: 2. AN EMPLOYER SPONSORED HEALTH PLAN; 3. AN INDIVIDUAL INSURANCE POLICY PURCHASED THROUGH AN EXCHANGE OR PRIVATE INSURER; OR 4. A GOVERNMENT PROGRAM, SUCH AS MEDICARE, MEDICAID, MILITARY OR VETERAN, OR CHIP Individuals who do not have acceptable coverage will be required to pay a penalty. The penalty amounts will be determined by household income, and can be waived for certain lower income individuals. Penalties will begin in 2014 and be phased in, but by 2016 the penalty can be up to the greater of $695(indexed for inflation) per individual (one-half that for dependents age 18 or under) or 2.5% of the household income. The total penalty for a family is capped at 300% of the individual penalty. The penalties will be paid on an individual’s income tax return and will be administered by the IRS. There are exceptions to the individual “play or pay” requirements. Not all Americans will be subject to penalties for not having adequate coverage. There are exemptions for: 5. INDIVIDUALS WHO CANNOT AFFORD COVERAGE. THESE ARE PEOPLE WHOSE REQUIRED CONTRIBUTION WOULD BE IN EXCESS OF 8% OF HOUSEHOLD INCOME. 6. LOW INCOME TAXPAYERS. THESE ARE INDIVIDUALS WHO DO NOT NEED TO FILE A FORM 1040 BECAUSE THEY DO NOT EARN ENOUGH MONEY. 7. INDIVIDUALS WHO EXPERIENCE SHORT COVERAGE GAPS. THESE ARE INDIVIDUALS WHO WERE NOT COVERED BY MINIMUM ESSENTIAL COVERAGE FOR A CONTINUOUS PERIOD OF LESS THAN 3 MONTHS. 8. MEMBERS OF INDIAN TRIBES. Automatic Enrollment of Employees into Employer-Sponsored Plans Effective for the 2014 plan year, large employers (200+ employees) that offer a group health plan must automatically enroll new, full-time employees in the group health plan offered by the employer with the lowest employee premium. The employer must provide advance notice of its auto enrollment and provide an opportunity for the employee to opt out of coverage. Health Care Exchanges. The PPACA provides for the creation of the American Health Benefit Exchanges and Small Business Options Program Exchanges. Each state must create an Exchange by 2014, which will act as a marketplace of health insurance issuers that will offer qualified health plans to individuals and small businesses (up to 100 employees). Large businesses may be eligible to participate in Exchanges beginning in 2017. All issuers participating in an Exchange must be rated by the Exchange. There will be several tiers of plans, rated based on quality and price. All plans will cover “essential benefits,” which includes preventive care, maternity & newborn care, emergency services, hospitalization, mental health and substance abuse, and prescription medications. States may require additional benefits. Different plans will provide different levels of coverage--bronze, silver, gold, or platinum level of benefits (i.e., benefits that are actuarially equivalent to 60%, 70%, 80%, or 90%, respectively, of the full actuarial value of the benefits provided under the plan). For all plans, the out-of-pocket expenses are limited to $5,950 per individual or $11,900 per family per year. The PPACA provides various subsidies to “modest income” individuals—those making less than 400% of the national poverty level—in order to help them pay for qualifying medical coverage. At the current federal poverty level, 400% of the federal poverty level is $43,320 for one person, $58,280 for a family of two, $73,240 for a family of three, and $88,200 for a family of four. There are three types of subsidies available for modest income individuals with coverage through Exchanges: (1) premium limits, (2) cost sharing limits (deductibles, copays and co-insurance), and (3) out-of-pocket spending limits. Exchange Notice Requirements Effective March 1, 2013, all employers who are subject to the federal Fair Labor Standards Act must provide written notice to current and former employees regarding the health care Exchanges. The notice must identify the Exchange for the state and how to contact it. If the employer-sponsored plan does not meet certain requirements, the employer must notify its current and new employees of the availability of premium subsidies and cost-sharing reductions. The notice must also inform the employee whether if the employee enrolls in an exchange plan, then the employee may lose any employer subsidy in the employer-sponsored health plan. Excise Tax on Cadillac Plans Effective in 2018, employer-sponsored plans that are considered “too rich” will be subject to an excise tax equal to 40% of the “excess benefit” per covered employee. The tax will be paid by the insurance company (or the employer is self-insured). The idea is that individuals with too good of insurance will over utilize health care services, and thus drive up the cost of health care. An excess benefit is defined as the aggregate cost of the benefit in excess of $10,200 for single-only coverage and $27,500 for family coverage. These figures will be adjusted for inflation. There are exceptions from this excise tax for certain individuals in high-risk jobs and for qualified retirees. Tax on High Income Individuals Beginning in 2013, the PPACA imposes new taxes on high-income individuals. If an individual’s wages exceed $200,000 ($250,000 married filing jointly), the health insurance portion of FICA taxes increases from 1.45% to 2.35% increases on that portion of the wages that exceed this minimum. The same rule will apply to SECA taxes for self-employed individuals. An additional 3.8% tax will be imposed on the lesser of an individual’s net investment income or the modified adjusted gross income in excess of $200,000 ($250,000 for a joint return). Temporary Retiree Reinsurance The federal government has dedicated $5 billion between 2010 and 2013 to encouraging employers to establish or continue retiree health coverage. Employers may be eligible for a reimbursement of 80% of the annual costs of coverage (including amounts paid by the retiree) between $15,000 and $90,000 per retiree. To qualify for the reimbursement, the retiree must be 55 or older and not eligible for Medicare. Amounts reimbursed must be used to lower the cost of the plan. The drawbacks of this provision are that it only runs through the end of 2013 and is supported by only $5 billion in funding. Changes to FSAs and HSAs The PPACA makes several changes to health flexible spending accounts and to health savings accounts. Health FSAs will be limited to $2,500 in annual contributions, beginning in 2013. Eligible reimbursements for health FSAs and HSAs will be narrowed so that over-the-counter medications will no longer be eligible for reimbursement. HSA accounts can currently be used to reimburse medical expenses on a tax-free basis and to reimburse other expenses on a taxable basis. Currently, if an HSA distribution is made for non-medical purposes prior to age 65, a 10% excise tax is imposed. Beginning in 2011, the excise tax for HSA distributions for non-medical purposes will increase to 20%. Conclusion Employers should start planning now for the future. Employers should look for regulatory guidance from the Department of Health and Human Services, the IRS, and the Department of Labor. Start to consider budgets, and whether it would make more sense to discontinue offering group health plans and pay the penalty for employees to obtain health insurance through an Exchange. Talk to the company’s current insurer if the company’s intends to continue to provide a grandfathered plan to ensure that the plan is modified to comply with new requirements. It is difficult to predict how each element of the PPACA will play out, but employers need to stay informed and stay ahead of the requirements.

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April 09, 2010