Credit goes to the Employee Benefits Bulletin for the content below:
March 31, 2010 
Health Care Reform – What It Will Mean For You
The President signed the Senate health care reform measure, the Patient Protection and Affordable Care Act
(H.R. 3590), into law on March 23, 2010. Companion legislation, the Health Care and Education Affordability
Reconciliation Act of 2010 (H.R. 4872), was just approved in the Senate by a vote of 56 to 43. Before the
companion bill can be enacted, the House must take a final vote on the legislation, as certain features related
to student loans were struck by the Senate Parliamentarian. The House is expected to move quickly to pass
the revised legislation. It will then go to the President for signature.
Employers and individuals are now seeking to understand what these measures provide and how they will
affect their plans and coverage, both in the short term and on an ongoing basis. For many, especially mid‐size
and larger employers and their employees, it is likely that little will change, at least for the foreseeable future,
and that increased costs will continue to exert significant pressure on plan design and cost‐sharing.
This summary is based on the framework contained in the Senate bill and the House’s companion legislation,
even though the companion bill has not been enacted.
HOW HEALTH CARE REFORM WILL WORK
The combined House and Senate bills undertake a comprehensive overhaul of health care delivery, with a key
goal of providing access to affordable health care for the vast majority of Americans. This objective is
structured around several key components, most of which go into effect in 2014:
The establishment of State Exchanges where individuals and small businesses will be able
to purchase coverage from participating insurers;
A mandate for all Americans to obtain health care coverage;
Financial disincentives for larger employers that do not provide basic levels of
coverage;
Subsidies in the form of tax credits to help small businesses and individuals under 400% of the
Federal Poverty Level (“FPL”) buy coverage under the Exchanges;
Expansion of Medicaid at the State level for the least affluent Americans (under 133%
of FPL), with significant funding support from the Federal government;
The imposition of underwriting requirements on insurers in the individual and group
markets that are aimed at making the coverage cost effective;
Encouragement of wellness initiatives. The bill increases the HIPAA wellness program
rules to permit a health plan to provide for a reward based on a health factor of up to 30% of the cost
of coverage. Further, it provides for an additional increase of up to 50% at the government’s
discretion. Wellness program credits are made available to eligible small groups;
A group of insurance reforms, some of which go into effect fairly quickly and impose
restrictions on or ban several well publicized practices, including pre‐existing condition exclusions,
rescissions of coverage and annual and lifetime maximums; and
A phased-in closing of the Medicare Part D “donut hole,” including an immediate $250
rebate.
To pay for these initiatives, the bills implement a variety of taxes, penalties, and cost savings, including:
A 10% tax on indoor tanning facilities (July 1, 2010);
Changes to health FSAs, HSAs and HRAs to reduce some of the tax protections
afforded to these arrangements (2011 and 2013);
Beginning in 2013, increases in the Medicare payroll tax for high-income individuals
($200,000 of adjusted gross income for a single filer and $250,000/joint) including an increase in the
Hospital Insurance Tax part of FICA from 1.45% to 2.35% and the imposition of a 3.8% tax on passive
investment income;
A 2.3% excise tax on medical device manufacturers (2013);
Limits on the deductibility of compensation of insurance industry executives in excess
of $500,000;
The imposition of significant fees on pharmaceutical companies and insurers (2014);
A 40% tax on the value of excess coverage under certain generous health care plans
(the so called “Cadillac Plan Tax”), which sparked much controversy due to its impact on some
collectively bargained plans and was scaled back by the Sidecar bill and delayed in its implementation
until 2018;
Significant reductions in payments to Medicare Advantage; and
Other cost savings under Medicare.
GUIDING PRINCIPLES
The key concept behind this legislation is that health care coverage can only be affordable for everyone if the
risk that is being insured is spread over the entire population. If not, those with larger populations, such as
larger employers and unions, will be able to spread the cost of their claims experience over their own
populations, and smaller groups and individuals will be charged with higher premiums because they lack the
ability to spread risk and the leverage to negotiate with insurers. This issue is addressed by the key
components of the new law:
The mandate on individuals to have coverage, beginning in 2014, and the financial penalties
for failure to comply;
Insurance reforms aimed at preventing individuals from being denied coverage;
The establishment by 2014 of State-based Exchanges where individuals and small
businesses can purchase coverage;
The financial penalties imposed on mid-size and larger employers that do not provide
basic levels of coverage to their employees, also beginning in 2014; and
Financial help for less affluent individuals and small businesses in purchasing
coverage under the Exchanges.
Here are some key details:
Individual Mandate
Effective January 1, 2014, all U.S. citizens and legal residents must have health insurance coverage or pay a
penalty. The penalty will be phased in according to the following schedule:
In 2014, the greater of $95 or 1% of taxable income;
In 2015, the greater of $325 or 2% of taxable income; and
In 2016, the greater of $695 or 2.5% of taxable income. After 2016, the penalty amount
will be indexed for inflation.
Certain exemptions apply, including, but not limited to:
Financial hardship;
Individuals with income below the tax filing threshold;
Individuals without coverage for less than 3 months; and
Religious objection.
Employer Responsibility
Penalties
Effective January 1, 2014, employers with 50 or more employees (*1) who do not provide health insurance
coverage to full‐time employees (FTE) (*2) will face a $2,000 per FTE penalty should one or more FTEs receive
government assistance to purchase health insurance coverage through an Exchange. In calculating this
assessment, the first 30 FTEs are excluded.
Employers with 50 or more employees who do provide health insurance coverage to FTEs will face a penalty if
one FTE receives government assistance to purchase coverage through an Exchange. The penalty is the lesser
of $3,000 per FTE receiving government assistance or $750 multiplied by the number of FTEs. Employers will
avoid these penalties if they provide “Free Choice Vouchers” to subsidy‐eligible employees, as described
below.
(*1) There is inconsistency in the statute as to who is a large employer for purposes of the penalty. As defined, the term applicable
large employer means, with respect to a calendar year, an employer who employed on average at least 50 full‐time employees on
business days during the preceding calendar year. Sec. 1513. Elsewhere, language indicates the penalties apply to employers with
more than 50 employees. For purposes of this summary, it is assumed that the penalty applies to employers with 50 or more
employees.
Clarification is needed. (*2) The statute defines a full‐time employee as an employee who is employed on average at least 30 hours
per week.
These penalties do not apply to small employers (fewer than 50 employees).
Free Choice Voucher
Effective January 1, 2014, certain qualified employees of an employer may, in lieu of participating in the
employer‐sponsored coverage, receive the employer contribution toward health plan coverage in the form of
a voucher that may be used to purchase coverage through the Exchange.
A qualified employee is an employee who:
· Has income not greater than 400% of FPL;
· Must pay toward the cost of the employer coverage a contribution that exceeds 8% but is not more
than 9.8% of their household income; and
· Does not participate in the employer plan.
Automatic Enrollment
Also beginning in 2014, employers with more than 200 employees must automatically enroll new fulltime
employees in coverage and provide notice and an opportunity for the employee to opt‐out.
Other Requirements
Group health plan sponsors will be required to provide notice to employees of the
existence of the Exchange (2014);
Certain plan information will need to be reported by the employer to the IRS and participants
regarding the coverage provided by the group health plan (2014);
A new summary of benefits will need to be provided to participants, effective one year
from date of enactment (2011).
Small Employers
Premium subsidies are available to small employers. A small employer for purposes of government assistance
has no more than 25 full‐time equivalent employees and an average full‐time annual wage of less than
$50,000.
Initially (2010‐2013), the government will provide for a tax credit of up to 35% of the employer’s contribution
toward health insurance coverage if the employer contributes at least 50% toward the cost. For tax‐exempt
entities, the tax credit is 25%.
Once the Exchanges are operational in 2014, a small employer who purchases health insurance coverage for
employees through the Exchange may receive up to a 50% tax credit of the employer’s contribution
(assuming the employer contributes at least 50%). For tax‐exempt entities the tax‐credit is 35%. This credit is
available for two years.
Exchanges
Individuals and small employers will be able to purchase insurance coverage through state‐based Exchanges
beginning in 2014. Initially, these Exchanges will be open to individuals and employer groups of 1‐100
employees (however, some states may restrict access to the Exchange to employer groups with 1‐50
employees through 2016).
Private carriers and Co‐Ops will be allowed to sell coverage through these Exchanges.
Coverage will be required to meet certain requirements prescribed by the statute (discussed below) and by
Health and Human Services.
The specific levels of coverage have been established and include:
Bronze – Covers 60% of actuarial value of covered benefits;
Silver – Covers 70% of actuarial value of covered benefits;
Gold – Covers 80% of actuarial value of covered benefits;
Platinum – Covers 90% of actuarial value of covered benefits; and
Catastrophic – available to young adults (up to age 30) or those exempt from the
individual mandate.
In 2017, Exchanges may open to employer groups over 100 employees.
Details as to what benefits will need to be provided by the policies issued under the Exchanges will likely be
the subject of extensive regulations.
Coverage/Design Requirements
Reform Rules
Requirements that apply to all group health plans for the first plan year following 6 months from the date of
enactment include:
No lifetime limitations on essential benefits (*3);
Restrictions on annual limitations; and
Coverage for adult children until age 26, unless the adult child is eligible to enroll in
other employer‐sponsored health plan coverage. There appears to be some confusion under the bills
over this extension of coverage – specifically, as to whether the extension is up until the attainment of
age 26, or through age 26, which would effectively take the coverage to the 27th birthday. We expect
further clarification on this issue.
Requirements that apply to all group health plans for the first plan year on or after January 1, 2014:
No pre-existing condition exclusions;
No annual limitations on essential benefits;
Waiting periods cannot exceed 90 days; and
Coverage must be provided to all adult children up to age 26, regardless of other employer
sponsored coverage.
The definition of a tax dependent under 105(b) is expanded to include adult children to age 27 – thus
apparently alleviating some of the burden on an employer to determine tax status and imputed income for
eligible adult children.
(*3) Defined under Section 1302 of the Patient Protection and Affordable Care Act and in regulations from HHS
that have yet to be issued.
Benefit Requirements
Effective January 1, 2014, the following requirements generally apply to non‐grandfathered group health
plans:
Out-of-pocket limitations cannot exceed the limitations imposed on HSA qualified highdeductible
health plans ($5,950/single, $11,900/family for 2010);
In the small group market, deductibles cannot exceed $2,000/individual,
$4,000/family;
No cost-sharing for preventive care services; and
No discrimination in favor of highly compensated individuals as to eligibility under the group health
plan.
Grandfathered Plans
Plans that are in existence as of the date of enactment are considered “grandfathered” under the health
reform bill. Such plans will not be required to comply with the benefit requirements listed above. However,
grandfathered plans are required to comply with the reform rules, described above. Plans will lose their
“grandfathered status” when any change is made to the plan (e.g. deductibles, co‐pays, benefit design, carrier
change). Mere enrollment changes (e.g. new hires, adding a spouse or dependent) will not remove a plan
from “grandfathered status.”
OTHER CHANGES
High Cost Plans
Beginning in 2018, a 40% excise tax will be assessed on the value of health coverage that exceeds certain
prescribed thresholds (the “Cadillac Plan” tax).
These thresholds are:
$10,200 for single coverage (adjusted for inflation);
$27,500 for family coverage (adjusted for inflation);
Increased for group health plans that cover retirees and high-risk professions;
Increased for seventeen high-cost states to be determined by the Secretary of Health and
Human Services; and
Increased if the cost of health care rises unexpectedly between now and 2018.
Health insurance, health FSA, HRA and HSA contributions, EAPs, and wellness programs must all be counted
in determining whether the total value of health coverage exceeds the prescribed thresholds. Dental
coverage, vision benefits, life and disability insurance are not included.
It appears that the carrier in an insured arrangement and the administrator (who may be the TPA or
employer) in a self‐insured plan will be responsible for paying the excise tax. The employer will need to
appropriately apportion the correct amounts to the relevant vendors and may face penalties for improper
reporting.
We expect carriers to pass on the cost of any such tax in the form of rate increases.
W‐2 Reporting
Effective January 1, 2011, employers will be required to disclose the value of health coverage provided to the
employee on the employee’s W‐2. This dollar amount does not include dental and vision benefits or health
FSA contributions.
Health FSA Limitation
The annual health FSA contribution limit will be capped at $2,500 (adjusted for inflation) beginning in 2013.
Over‐the‐Counter Expenses and Tax‐Favored Accounts
Beginning in 2011, over‐the‐counter products may not be reimbursed through a tax‐favored account (e.g.
health FSA, HRA, HSA), unless prescribed by a doctor.
HSA Distributions for Nonqualified Expenses
Distributions from an HSA for expenses other than qualified medical expenses will be assessed a 20% penalty
beginning in 2011.
This is a preliminary review of key provisions affecting employer‐sponsored coverage that are included in the
combined legislation.
