In March of 2010, the Patient Protection and Affordable Care Act became law. While as a small employer you may be exempt from many of the health care reform mandates, many other mandates will significantly impact you.
Insurance Reform Provisions
Several substantive changes affecting group health plans are mandated under the new health care reform, without regard to employer size. A key distinction with regard to what group health plans will be subject to these changes, however, rests on the determination of whether a plan is “grandfathered” or “non-grandfathered”.
Any plan in existence on March 23, 2010 that qualifies as a grandfathered plan will be shielded from some of the new health care reform provisions discussed in this section. However, under the interim and final regulations for group health plans and health insurance coverage relating to status as a grandfathered health plan under health care reform published in the June 17, 2010 Federal Register, it appears that very few group health plans will qualify as grandfathered plans.
Regardless of whether a plan is considered to be a grandfathered plan, effective for plan years starting on or after September 23, 2010, the following insurance reform provisions, amongst others, will apply to both grandfathered and non-grandfathered plans:
- Certain lifetime and annual limits on “essential health benefits” will be prohibited;
- No preexisting condition exclusions will be permitted for children under age 19; and
- No rescission of enrollee coverage will be permitted except in the case of fraud or intentional misrepresentation.
Further, the following provisions, amongst others, will apply to non-grandfathered plans only:
- Non-discrimination rules of Code Section 105(h) will become applicable to fully insured health plans (previously only applicable to self-insured health plans) (Please note that until further guidance is issued, compliance with this rule will not be required and no excise tax will apply.);
- Mandatory coverage of certain preventative care services without cost-sharing will be instituted;
- Mandatory implementation of internal and external appeals procedures; and
- Requirement to provide participants with certain protections with regard to choice of primary care provider, emergency care benefits and access to obstetrical or gynecological services.
Of particular concern is the imposition of the Code Section 105(h) non-discrimination rules that, up until now, have applied only to self-insured plans. This will prohibit fully insured group health plans from discriminating in favor of highly compensated individuals, a fairly customary practice. This may be reason enough for you to attempt to achieve grandfathered plan status under the new health care reform or to, alternatively, develop different ways to provide increased benefits to highly compensated individuals.
Simple Cafeteria Plans
One intent of the new health care reform legislation is to encourage small employers to provide health insurance coverage benefits to their employees, particularly on a tax-free basis. To accomplish this goal, for years beginning after December 31, 2010, the law provides eligible small employers with the ability to offer a “simple cafeteria plan” under which a safe harbor from the nondiscrimination requirements generally applicable to cafeteria plans is provided. For purposes of the simple cafeteria plan provisions, a small employer is defined as an employer that employed an average of 100 or fewer employees on business days during either of the two preceding tax years.
Despite its advantages, a cafeteria plan is subject to strict rules whereby it may not discriminate in favor of highly compensated participants. A failure to satisfy these non-discrimination rules results in the inclusion of the qualified benefits in the highly compensated participant’s income.
However, under the new health care reform, a simple cafeteria plan provides small employers with a safe harbor from these non-discrimination requirements applicable to cafeteria plans and certain qualified benefits offered under the plan. With relatively minimal required contributions and a broadening of eligibility for the plan, this new health care reform tool may be a great asset to eligible small employers.
Uniform Explanation of Coverage Requirement
The new health care reform provides that by March 12, 2012, a summary of benefits and coverage must be provided to health insurance plan participants prior to enrollment by insurance companies, or alternatively, plan sponsors in the case of self-insured plans, which must be issued no later than March 23, 2011. This new uniform explanation of coverage effectively appears to be a summary of the written plan document and summary plan description already required to be prepared by group health insurance plan sponsors under ERISA. The written plan document and summary plan description requirements still remain in effect and you should evaluate whether such requirements are currently being met. The new uniform explanation of coverage requirement creates an opportunity to ensure that the previously (and still) required written plan document and summary plan description documents and the newly required explanation of coverage documents are appropriately prepared.
Cost of Employer-Sponsored Health Coverage Must Be Disclosed On W-2
For tax years beginning after December 31, 2010, each employee’s W-2 must disclose the aggregate employer cost of an employee’s employer-sponsored health insurance but not included in income. The value to be disclosed must encompass all applicable health-related insurances provided to such employee. We advise you to consult with your tax consultant regarding this new requirement.
New Taxes for Higher Income Taxpayers
For tax years beginning after December 31, 2012, taxpayers (other than regular C-corporations, estates or trusts) will be taxed an additional 0.9% hospital insurance tax on wages in excess of $250,000 for married couples filing a joint return and $200,000 in any other case. This change, however, does not affect the 1.45% hospital insurance tax imposed on employers.
Additionally, for tax years beginning after December 31, 2012, an unearned income Medicare contribution tax will be imposed on individuals, estates and trusts. This tax is in addition to the 0.9% hospital insurance tax on high income employee’s wages discussed above. For an individual, the 3.8% Medicare contribution tax is imposed on the lesser of either net investment income for the taxable year or the excess (if any) of modified adjusted gross income for the taxable year over the threshold amount. For purposes of this provision, the threshold amount is $250,000 for married couples filing a joint return or a surviving spouse, $125,000 for a married individual filing a separate return and $200,000 in any other case.
Health Flexible Spending Account Limit Decreased To $2,500
For tax years beginning after December 31, 2012, employees will be limited in their health flexible spending account salary reduction contributions to $2,500 or less for each plan year. Currently, there is no limit on an employee’s salary reduction contributions to his health flexible spending account. Because employees of small employers rely heavily on benefits such as a flexible spending account, it is likely this provision will place an additional burden on you to find other equivalent benefits for your employees.
The health care reform legislation will result in substantial changes being made to health insurance benefit options for you as a small employer. Moreover, with the new Congress starting its term, additional changes may be on the horizon. As such, it would be prudent to contact your WHP attorney to further understand this new legislation and to stay abreast of upcoming changes.