Health Reform Triage for EmployersJonathan A. Segal
(The section about grandfathering has been updated to reflect new grandfathering regulations.)
Most of us are inundated with information on Health-Care Reform (HCR). The potential implications of this 2,000-page law are staggering. It's so big, it's hard to know where to start.
Businesses must do with health-care reform what health-care providers do as a matter of course: Engage in triage. The following is a framework for triaging HCR in terms of what employers need to do in 2010 and 2011 vs. what they should put off (except for planning) until later in the decade.
HCR includes a grandfather provision that applies to plans in effect at the time HCR was enacted (Mar. 23, 2010). As explained in more detail below, if a plan is grandfathered, then some (but not all) of HCR's mandates do not apply to it. The big question is: What changes, if any, can a plan make and still be grandfathered? On June 14, 2010, the Treasury Dept. issued interim regulations on grandfathering.
The interim regulations define broadly the occurrences that may result in loss of grandfather status. In particular, and by way of example only, grandfather status may be lost in the case of:
A change in insurance carrier;
Significantly cut or reduced benefits for a particular condition;
Any increase in the percentage of the co-insurance charge;
Significant increase in co-payment (based on formula);
Significant increase in deductibles (based on formula);
Significant decrease in employer contribution (based on formula);
An added or tightened annual limit.
The regulations also provide guidance on what occurrences will not result in the loss of grandfather status. In particular, and by way of example only, grandfather status will not be lost in the case of:
New employees added to plan;
Additional family members added to plan;
Legal compliance changes.
If a plan is grandfathered, three (3) more key points:
1. Employers must retain indefinitely records that document coverage in effect on Mar. 23, 2010, as well as other documents that establish grandfathered status.
2. In materials provided to workers, employers must include a statement specifying that the plan is grandfathered.
3. Even if a plan is grandfathered, many of health-care reform's mandates still apply, such as:
No lifetime limits on coverage;
No restricted annual limits;
No rescission of coverage because of illness;
No coverage exclusions for children with preexisting conditions;
Coverage for young adults until age 26.
As we now know from the interim grandfathering regulations, many changes will result in the loss of grandfather status. Before making changes now in anticipation of what may happen four or five years from now, consider the countervailing immediate costs, too.
2. Collective Bargaining Agreements
HCR's provisions do not apply to collective bargaining agreements in effect on Mar. 23, 2010. Employers, however, need to consider HCR for initial or renewal contracts that will take effect after Mar. 23, 2010. The most onerous provisions of HCR, as discussed below, go into effect in 2014, so employers may want to consider shorter contracts that expire on or before Dec. 31, 2013 or include re-opener provisions if the contract will continue through 2014.
3. Small Business Tax Credit
Small business tax credits went into effect on Jan. 1, 2010. These credits are available only to small employers (25 or fewer full-time equivalents) where the average wages of those employees do not exceed $50,000.
So far we have the benefit of two revenue rulings that provide some guidance on how the small business tax credit will be calculated:
Rev.Rul.2010-13 outlines the average premium for small group market for determining the small employer health insurance credit. It was published in the May 24, 2010 Internal Revenue Bulletin (IRB 2010-21).
Rev.Rul.2010-44 provides detailed guidance on section 45R (Tax Credit for Employee Health Insurance Expenses of Small Employers) in effect for taxable years beginning before Jan. 1, 2014. It's not yet published in the Internal Revenue Bulletin.
If your head wasn't spinning before you read the revenue rulings, it will be afterward.
4. Retiree Reinsurance
Effective June 21, 2010, a fund is supposed to be established to reimburse employers for some of the costs of retiree health benefits for early retirees ages 55 through 64. See 75 Fed.Reg.24,450 of May 5, 2010 (to be codified at 45 C.F.R. pt. 149).
Generally, employers/plan sponsors may be eligible for reimbursement for up to 80 percent of the cost of claims from $15,000 to $90,000.
Employers will want to move quickly, since funds are limited. The Secretary of HHS issued a press release on May 4, 2010, stating that the application for the program will be available by the end of June 2010.
5. Establishment of Health Insurance Pools for Eligible Individuals with Preexisting Conditions
Contrary to some summaries of HCR, the preexisting condition rules do not become unlawful on June 21, 2010. Instead, effective June 21, 2010, eligible individuals—those with no coverage for 6 months and a preexisting condition—will be able to apply for benefits from a health insurance pool established by the federal government.
So far, 46 states and the District of Columbia have indicated their current intent to participate in a temporary high-risk pool program to provide benefits to eligible individuals with preexisting conditions. Funding should become available on or about July 1, 2010. As soon as the process is determined, employers should (as opposed to must) communicate the process to all their employees so they (or their dependents) may realize the benefit of it.
6. Changes in Coverage for Plan Years Beginning on or After Sept. 23, 2010
HCR reform mandates a number of changes for plan years beginning on or after Sept. 23, 2010. For example, if the plan year begins on January 1, 2011, these new requirements do not go into effect for that plan until January 1, 2011. These changes include but are not limited to:
(a) Elimination of preexisting condition clauses for children;
(b) Elimination of lifetime (but not annual) limits;
(c) Expanding preventive health services so that cost-sharing is eliminated;
(d) Prohibition on rescinding coverage except when an individual committed fraud or misrepresented a material fact;
(e) Renewal generally guaranteed without regard to health status, utilization of health services, or any other related factor;
(f) Coverage for young adults until they turn age 26; and
(g) Creation of a new robust appeals process (discussed in more detail below).
With regard to each of these and other mandated changes, employers should not assume the carrier will automatically make the required changes on a timely basis. Employers should review their insurance agreements, plan documents, and summary plan descriptions to make sure they are consistent with the new legal requirements, and modify and distribute updated documents to their employees.
7. Appeals Procedure
As noted above, effective for the plan year beginning on or after Sept. 23, 2010, employers must have a more robust appeals procedure for both coverage determinations and claims. Under the new procedures, enrollees have the right to review their files, present evidence and testimony, and receive continued coverage pending outcome of appeal. In other words, there will be a mini-hearing.
Employers need to consider the impact of the new appeals process (which goes beyond what ERISA currently mandates) in conjunction with HCR's broad anti-retaliation provision (discussed below). An appeal may be seen as (or at least argued to be) a complaint within the meaning of the anti-retaliation provision, so that it is vital that a firewall exist between those who hear and resolve appeals and those who manage the employees who may make the appeals.
8. Anti-Retaliation (FLSA Amendment)
Effective immediately, HCR prohibits all employers subject to the FLSA from retaliating against an employee because, among other reasons, the employee has complained about conduct he or she reasonably believes violates HCR. The employee initially files a complaint with OSHA; ultimately, the employee has access to the federal courts with a right to trial by jury.
Employers should consider developing a nonretaliation policy and concomitant complaint procedure and train supervisors on nonretaliation now. While the policy, procedure, and training will not be a defense to retaliation if it exists, it may help prevent retaliation in the first instance, and it also may mitigate damages even if liability is found.
9. Simple Cafeteria Plans
Effective for tax years beginning on or after Jan. 1, 2011, there are rules that make administratively less burdensome the creation and implementation of a cafeteria plan. These rules apply only to small employers (defined here as 100 or fewer employees over the previous two years). We need additional guidance before we can act.
10. Long-Term Care Insurance
Effective Jan. 1, 2011, there will be a voluntary program of long-term care insurance (which is really disability insurance) that will be financed by voluntary payroll deductions by employees. There is no guidance yet on the process, but employers will be the vehicle through which employees will have the opportunity to take advantage of this insurance. As soon as the scope of the coverage is determined, employers will want to compare the coverage and cost with whatever disability benefits they offer. In some cases, it may be advantageous for employers to pay for employee participation in this "public option" rather than buy their own private coverage for their employees, subject to potential restrictions that yet may be imposed on employers in this area.
11. Discrimination Testing
Currently, only self-insured plans are subject to discrimination testing under the Internal Revenue Code. Effective for plan years beginning on or after Sept. 23, 2010, such discrimination testing (for coverage and benefits) will apply to indemnity plans, too (unless the plan is grandfathered). This is a major change that employers must consider when they design their plans. In particular, this change must be considered by employers who may wish to consider eliminating coverage for some but not all employees and paying penalties instead as explained below. The cost of eliminating coverage may be greater than just the penalties if the discrimination rules are violated, too.
Beginning in tax years on or after Jan. 1, 2011, employers must include on an employee's annual W-2 the cost of health insurance coverage. The purpose presumably is to make it easier for the government to conduct discrimination testing. This does not, however, result in additional taxable income to employees.
13. Mandatory Breaks—Expressing Breast Milk (FLSA Amendment)
Effective immediately, HCR requires all employers subject to the FLSA to provide employees, within one year after the birth of a child, reasonable, unpaid break time in a private, secure place (other than a bathroom) to express breast milk. There is a narrow undue hardship exemption for small employers of fewer than 50 employees. The defense is based on the number of employees companywide (and not at a particular location).
Of course, the law does not define what is a reasonable break. The law is clear, however, that it does not preempt state law. For example, even though the break may be unpaid under federal law, state law may require that it be paid, depending on its length. Employers should review the federal requirement in light of applicable state wage and hour and breast-feeding laws. Then employers should develop a policy and plan (including designating secure places) to comply with the federal and, if applicable, state law.
15. Other Changes (2013 or Later)
Many changes will go into effect in 2013, 2014, and 2018. These changes include:
Elimination of the employer deduction for prescription drug plan for retirees;
$5,000 Limitation on Health Care FSA contributions by employees (previously no limit).
Enhanced incentives for wellness programs (but subject to restrictions under HIPAA, ADA, and GINA, among other laws) and a fund to provide grants to small employers;
Penalties for not offering coverage to employees—$2,000 annually for full-time employees not covered but no penalty generally for the first 30 employees;
Penalties for offering "unaffordable" coverage—unaffordable if cost exceeds 9.5 percent of the employee's household income; $3,000 penalty per employee for which coverage is unaffordable;
Exchanges created for small employers (defined here as fewer than 100 employees); states may elect to extend to larger employers in 2017;
Free-choice vouchers offered by employers for employees to use in exchanges; offered to employees whose income is less than 400 percent of poverty level and cost of coverage is more than 8 percent but less than 9.8 percent of household income;
Health insurance companies can base premiums only on age, geography, family size, and tobacco use;
Annual limits eliminated;
Permissible waiting period for coverage no more than 90 days; and
Complete prohibition on preexisting conditions clauses implemented.
High-Cost Plan Excise Tax—40 percent excise tax for high-cost plans.
With regard to these changes, three key thoughts to keep in mind:
One, in the absence of regulations, there are still too many unknowns in many areas to make prudent decisions. Accordingly, employers need to plan but not panic.
Two, some employers may consider discontinuing or cutting back on coverage and paying the penalties instead. While these may be viable options to consider, employers need to be careful not to frighten their employees. If employees fear they may lose their health insurance coverage, they may seek the protection of a union to preserve such coverage.
Third, as noted above, making material (and perhaps any) changes now (except as mandated by law) may result in the loss of grandfather status. Before making changes now in anticipation of what may happen four or five years from now, consider the countervailing immediate costs, too.
Author's Note: This article should not be construed as legal advice or as pertaining to specific factual situations.