Health Reform in a Nutshell

Last night the House of Representatives approved legislation which would make sweeping changes to the American healthcare system. Senate approval of the final reconciliation bill appears likely, and President Obama will sign one or both of the final bills in the next few days.

Many employees will look to their employers for an explanation of the immediate and long-term impact of the legislation, and will want to know how (and when) their employer-provided benefits may change. Employers should craft their communications carefully to avoid making any promises which could trigger ERISA liability in the future.

Here is a short Q&A which describes the key elements of the final bills:

(1) What is the current status of the legislation?

Last night, the House adopted two bills – the main healthcare bill the Senate had already passed last December, and a separate “budget reconciliation bill,” which makes a number of changes to the Senate bill. President Obama will sign the main bill into law tomorrow, and the Senate is expected to consider the budget reconciliation bill later this week. We have assumed for purposes of this summary that the Senate will pass the budget reconciliation bill.

(2) What are the “exchanges” described in the final bills?

The bills require each state to set up an “exchange” – a marketplace for the purchase of health insurance coverage. The basic coverage option in each exchange is expected to cover roughly 60% of medical costs. Other options will cover between 70% and 90% of costs, and low-cost catastrophic coverage will be available to individuals under 30. For people whose income is below 400 percent of the federal poverty level, the federal government will subsidize a portion of the cost of purchasing individual coverage through the exchanges. Individuals and small employers may purchase coverage on the exchanges beginning in 2014. In addition, employers with more than 100 employees will be able to purchase insurance coverage for their employees through the exchanges starting in 2017.

(3) Will employers be required to offer health insurance coverage to their employees?

No. However, employers with more than 50 employees who do not offer coverage will owe a penalty of $2,000 for each full-time employee (exempting the first 30 employees) if any employee purchases subsidized coverage through an exchange.

(4) Can employers avoid penalties by continuing to offer coverage for their employees?

Not necessarily. In many cases employers will be assessed a $3,000 penalty for each employee who declines employer coverage and instead purchases subsidized individual coverage through an exchange. The total penalty may not exceed the penalty for failing to provide coverage. In lieu of the penalty, employers may provide vouchers — equal to what the employer would have paid under the company’s plan — to enable certain low and middle income employees to purchase individual coverage through the exchanges.

(5) Will individuals be required to obtain health insurance coverage?

Yes, although there are exceptions for low-income individuals. Individuals who do not have health insurance will be required to pay a penalty, which will vary based on income levels and will be phased in over three years from 2014 through 2016. In 2016, the minimum penalty will be $695, and the maximum penalty will be $2,085.

(6) What are some of the new requirements for group health plans (including employer-based plans)?

-         Beginning with the first plan year which begins at least six months after the date of enactment, all group health plans will be prohibited from placing lifetime dollar limits on coverage, and will be required to offer coverage for non-dependent children up to age 26 (subject to certain exceptions until 2014).

-         Beginning with the 2010 plan year, insured group health plans will be required to disclose the percentage of revenue spent on medical claims. Beginning with the 2011 plan year, insured plans will be required to spend between 80 and 85 percent of their revenue on medical claims, or provide rebates to participants.

-         Beginning with the 2014 plan year, group health plans will be prohibited from (a) denying coverage based on pre-existing health conditions, (b) placing annual dollar limits on coverage, or (c) requiring waiting periods of more than 90 days before coverage takes effect.

(7) Will the federal government subsidize retiree medical coverage?

Yes. Until the exchanges take effect in 2014, the federal government will cover 80% of the cost of a retiree’s medical claims, to the extent that claims exceed $15,000 but are less than $90,000 for any given year. The subsidy will be paid to the employer or insurer and should reduce the cost of retiree medical coverage for both employers and employees. This subsidy will end when the exchanges take effect in 2014.

(8) Will employers be permitted to deduct the Medicare Part D retiree drug subsidies they receive from the federal government?

Not anymore. The federal government provides a 28% subsidy for employers who provide prescription drug coverage to their retirees. Under the new law, the employer's deduction for retiree medical expenses is reduced by the amount of the subsidy. This change is effective in 2013. This would significantly increase the cost of providing prescription drug coverage to retirees. In addition, even though this change does not take effect until 2013, it may have an immediate impact on companies’ financial statements.

(9) How do the final bills impact healthcare flexible spending accounts (health FSAs)?

Beginning in 2013, health FSA contributions, which enable employees to pay certain healthcare expenses on a pre-tax basis, will be limited to a maximum of $2,500 per year (indexed for inflation). There is no statutory limit under current law, but many employers currently impose limits which are higher than $2,500.

(10) Who pays the excise tax on so-called “Cadillac plans”?

Beginning in 2018, the insurer for any employer-sponsored health plan (i.e., the employer for self-insured plans) will owe a 40% excise tax to the extent the cost of coverage exceeds certain dollar thresholds, generally $10,200 for individuals and $27,500 for families. FSA, HRA and HSA contributions generally will be counted towards the thresholds, but dental and vision coverage will not. The thresholds are indexed for inflation, but because medical premiums have risen faster than inflation in recent years, it is possible that over time, more and more plans will either become subject to the tax or modify the terms of coverage to avoid the tax. Insurers may increase deductibles, co-pays and other participant expenses, or reduce coverage levels, in order to avoid the tax.

(11) Will there be a tax increase for individual taxpayers?

Yes, in two principal ways, which may raise practical concerns for payroll administration.

-         The Medicare portion of the FICA tax will increase from 1.45% to 2.35%, for wages in excess of $200,000 ($250,000 for married couples). The tax increase will apply only to the employee portion of the FICA tax and will take effect in 2013.

-         Individuals whose total income exceeds $200,000 ($250,000 for married couples) will be subject to an additional 3.8% tax on investment income (e.g., capital gains, dividends, interest, and other similar items). This tax increase also will take effect in 2013.

The final bills include hundreds of other provisions, including significant changes to Medicare and Medicaid, a new federal program providing long-term care insurance, and incentives to encourage participation in workplace wellness programs. Feel free to raise additional questions with your Ivins employee benefits contacts.