Client Alert
Health Care Reform Legislation Becomes Law-Many Provisions Effective This Year-Employers Need to Take Action
April 1, 2010
On March 21, 2010, the U.S. House of Representatives approved the Patient Protection and Affordable Care Act (H.R. 3590) (the “Act”). President Obama signed the bill into law on March 21, 2010. The bill, which was approved by the Senate in December, will make sweeping changes to the current health care system over the next several years. A separate bill, the Health Care & Education Affordability Reconciliation Act of 2010 (H.R. 4872), was also passed by the House and Senate, and was signed into law on March 30, 2010. The reconciliation bill resolves the differences in the House and Senate versions of the bill.
The following is an overview of some of the highlights of the Act that are of particular importance to employers and are effective this year or next year. We will issue subsequent alerts focusing on provisions that are effective later, as employers should consider those provisions when considering changes to plan design, its implementation and issues such as whether or not they wish to continue providing employee health coverage.
GRANDFATHERING OF EXISTING PLANS
The following is an overview of some of the highlights of the Act that are of particular importance to employers and are effective this year or next year. We will issue subsequent alerts focusing on provisions that are effective later, as employers should consider those provisions when considering changes to plan design, its implementation and issues such as whether or not they wish to continue providing employee health coverage.
GRANDFATHERING OF EXISTING PLANS
Existing group health plans in effect on March 21, 2010 are grandfathered, and do not have to comply with many of the health insurance reforms discussed below. Plans retain this protection even when new employees or family members join the plan, or the plan changes components or parts of the benefit design. Note, however, some provisions of the new law will apply to grandfathered plans, as discussed below. Also, collectively bargained plans will lose grandfathering protection on the date on which the last of the collective bargaining agreements, which were ratified before March 21, 2010, terminates.
CHANGES EFFECTIVE IN 2010 OR 2011
CHANGES EFFECTIVE IN 2010 OR 2011
Many provisions in the Act are effective the first day of the plan year that is six months after the date of enactment. For these provisions, the Act is effective for plans with a plan year beginning October 1st, November 1st, or December 1st at the beginning of the plan’s 2010 plan year this fall. The Act is effective for plans with a calendar year plan year on January 1, 2011. The following provisions are those that become effective in 2010 or 2011.
Changes affecting plans which are grandfathered and either insured or self-funded:
Changes affecting plans which are grandfathered and either insured or self-funded:
- Dollar lifetime limits and unreasonable annual limits on benefits are prohibited.
- An insurer is not allowed to rescind coverage except in cases of fraud or intentional misrepresentation of material fact.
- Plans that provide coverage for dependent children are required to allow participants to cover adult dependent children under 26 years of age (regardless of student status and whether or not married). However, prior to January 1, 2014, the plan is not required to cover dependents if they are eligible to enroll in employer-sponsored coverage under another plan.
- Coverage of children under age 19 may not be subject to preexisting exclusions or limitations.
Changes affecting plans which are insured, self-funded, but not grandfathered:
These changes are effective in 2010 or 2011 unless otherwise indicated:
- Plans must cover certain preventive care screenings and immunizations with no required copayment.
- The nondiscrimination rules of Internal Revenue Code Section 105(h) apply to insured plans. The rules previously applied only to self-insured plans.
- Plans must establish an effective appeals process for appeals of coverage determinations and claims which shall at a minimum (1) have in effect an internal claims appeal process; (2) provide notice to enrollees of the available internal and external appeals processes and of any available ombudsman; (3) allow an enrollee to continue to be covered during the appeals process; and (4) provide an external review process for such plans and issuers that, at a minimum, includes the consumer protections set forth in the Uniform External Review Model Act.
- If a plan requires the designation of a primary care provider, the participant must be allowed to select any primary care provider that will accept the participant. For children, the plan must permit the designated primary care provider to be a pediatrician. If emergency services are covered, prior authorization cannot be required and the plan must cover the services regardless of whether the provider is a participating provider with respect to the plan. The plan may not require authorization or referral to receive care from an obstetrician or gynecologist. However, such provider must agree to adhere to the plan’s policies and procedures regarding referrals and prior authorization for treatment.
- Effective for tax years beginning on or after January 1, 2013, contributions to employee health FSAs will be limited to $2,500 per year subject to adjustments for inflation.
- Effective for tax years beginning on or after January 1, 2011, reimbursements for non-prescription drugs will no longer be allowed from a health FSA, HSA, or HRA.
- Effective for tax years beginning on or after January 1, 2011, the excise tax for a nonqualified distribution from an HSA will increase to 20%.
- The cost of coverage of an employer-sponsored health plan must be included in an employee’s W-2.
- An employer that has more than 200 full-time employees and that offers employees health coverage must automatically enroll new full-time employees in one of its plans, subject to any waiting period authorized by law, and continue enrollment of current employees in a health plan offered by the employer. Employees must receive notice of and an opportunity to opt out of coverage. Technically, this provision is effective as of the date of enactment, but the statute states that it will be implemented according to regulations to be issued by the Secretary. As a practical matter, it will be very difficult for employers to implement automatic enrollment without guidance, and the publication of guidance will take time. This is a gray area that requires employers to understand the requirement but handle the issue in a practical matter.
- By March 21, 2012, a plan administrator of a health plan (or an insurer of a fully-insured plan) must provide a summary of benefits and coverage explanation to all applicants and enrollees at the time of initial enrollment and annual enrollment. This is in addition to the Summary Plan Description required by ERISA. HHS will issue standards for the summary by March 21, 2011.
CHANGES EFFECTIVE IN LATER YEARS
Employers should be aware of the following provisions of the Act when considering plan design changes for future years.
Employers should be aware of the following provisions of the Act when considering plan design changes for future years.
Health Care Exchanges. In 2014, state-based health care exchanges will be established. Individuals and small business will be allowed to purchase insurance through the exchanges. Some individuals and small business may be eligible to receive credits for the purchase of insurance.
Employer Coverage Mandate. Once the health care exchanges are established in 2014, employers with more than 50 full-time employees will be required to make a minimum level of coverage available to all employees or pay a per-employee fee.
Wellness Programs. Wellness programs would be expanded under the Act. Wellness incentives or penalties would be permitted up to 30% of premiums beginning in 2014, up from 20% currently. This amount could be increased to 50% following a study on wellness programs by agencies.
Tax on “Cadillac Plans”. Beginning in 2018, a 40% excise tax on the cost of health plans above $10,200 for single coverage, and $27,500 for family coverage. Thresholds would be increased for inflation, retirees over 55, and others engaged in high-risk professions. Employers would be required to disclose the value of health care coverage received by each employee on the employee’s W-2.
Medicare Retiree Drug Subsidy. Effective in 2013, favorable tax treatment of the Medicare Retiree Drug Subsidy will be eliminated. Payments received under this program will no longer be deductible by the employer.
Tax on High-Income Individuals. Effective for tax years beginning January 1, 2013, an additional health insurance payroll tax of 0.9% will apply to the employee portion of FICA wages in excess of $200,000 ($250,000 for joint filers). A tax of 3.8% will apply to net investment income to the extent that total individual or joint income exceeds these levels. Distributions from qualified plans will not be treated as investment income.
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Contact Information: If you have questions regarding the effect of the Act on your health plan, please contact Diane J. Fuchs or Elisa A. Cawood, the principal authors of the alert. You may also contact the Womble Carlyle attorney with whom you usually work, or one of our Employee Benefits attorneys.
This document is intended as an informational reminder and does not constitute legal advice. If you have any questions or would like to discuss a particular situation, please contact Womble Carlyle Sandridge & Rice, LLP. The purpose of this article is to provide general information about significant legal developments and should not be construed as legal advice on any specific facts and circumstances.
