Health Care Reform: What Employers Need to Know Now

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Health care reform has ushered in sweeping changes for employers and group health plans. Although many provisions will not take effect until 2014 or later, a number of provisions take effect this year and in 2011. Employers need to know about—and prepare for—the changes that will have a more immediate impact on them and their employees. The new laws implementing health care reform are the Patient Protection and Affordable Care Act (Pub. L. No. 111-148), as amended by the Health Care and Education Reconciliation Act of 2010 (Pub. L. No. 111-152).

Special Rules for Grandfathered Plans
Plans in effect on March 23, 2010, will be considered to be "grandfathered" and, therefore, not subject to certain health care reform changes. Regulatory guidance is expected regarding how and to what extent a grandfathered plan may be changed in the future without jeopardizing the plan's grandfathered status. Grandfathered plan exceptions to the new legislation are highlighted below.

Changes Effective in 2010

• Loss of Medicare Part D Deduction Accounting Change. Employers that receive the Medicare Part D retiree drug subsidy will not be able to deduct retiree drug expenses to the extent of the subsidy after 2012. Right now, however, employers will have to reflect a write-down of the book value of the deferred-income tax asset to reflect the loss of the deduction.
• Imputation of Income for Coverage of Adult Children No Longer Necessary. In most circumstances, employers will no longer need to impute income to employees for health plan coverage of adult children up through age 26.
• Nursing Mother Accommodations Required. Employers must grant reasonable (unpaid) break time and provide an appropriate place other than a bathroom for an employee to express breast milk for her nursing child for one year after the child's birth. Employers with fewer than 50 employees may be exempted in cases of undue hardship.
• Adoption Assistance Benefit Increased. The maximum benefit that employers may provide under adoption assistance programs is increased to $13,170 for 2010.
• Small-Employer Tax Credit Available. Employers with 25 or fewer full-time equivalent employees may be eligible for a tax credit of up to 35 percent of the premiums paid by the employer.
• Early Retiree Reinsurance Program. By June 23, 2010, the Department of Health and Human Services (HHS) must establish a temporary $5 billion reinsurance program to reimburse employer-based plans for 80 percent of annual claims between $15,000 and $90,000 (indexed for inflation) incurred by each early retiree age 55 or older not eligible for Medicare.
• Reduced Deduction for Compensation to Health Insurance Industry Executives. For health insurance issuers (and their controlled group members), the deduction for deferred compensation paid in 2013 or later to highly paid officers, directors, employees, or service providers for services performed on or after January 1, 2010, will be limited to $500,000 per individual per year.

Changes Effective for Plan Years Beginning on or After September 23, 2010 (January 1, 2011 for Calendar-Year Plans)

• Coverage of Adult Children Required. If a group health plan covers dependents, it must cover an employee's adult children (even if married) to age 26 and the employer must subsidize any such coverage to the same extent it subsidizes the coverage of minor children.
  Grandfathered Plan Exception: Prior to 2014, grandfathered plans do not have to cover adult children who are eligible for other employer-sponsored coverage.
• No Annual and Lifetime Limits Permitted. Group health plans may no longer impose annual dollar limits on essential health benefits or lifetime dollar limits.
• Rescission of Coverage Prohibited. No rescission of coverage is permitted except in cases of fraud or intentional misrepresentation.
• No Pre-Existing Condition Exclusions for Children. Group health plans may no longer include pre-existing condition exclusions for children under age 19.
• Non-Discrimination Rules Apply to Insured Plans. Internal Revenue Code § 105(h) non-discrimination rules, which prohibit discrimination in favor of highly compensated employees, will apply not only to self-insured group health plans, but also to fully insured group health plans. Although the tax consequences of a plan failing to comply with the 105(h) rules is not entirely clear, it appears that the employer will be subject to a $100-per-day penalty, but the discriminatory medical reimbursements will not be taxed.
  Grandfathered Plan Exception: This change does not apply to grandfathered plans.
• Preventive Care Without Cost Sharing Required. Plans must provide certain specified preventive care (e.g., immunizations and screenings) without cost sharing.
  Grandfathered Plan Exception: This change does not apply to grandfathered plans.
• Appeals and External Review. Plans must establish an internal claims and appeals process with external review that allows participants to present evidence and testimony on appeal and continue coverage during claim disputes.
  Grandfathered Plan Exception: This change does not apply to grandfathered plans.
• Provider Choice Required. Plan participants must be allowed to choose their primary care provider, including an OB-GYN for females and a pediatrician for children.
  Grandfathered Plan Exception: This change does not apply to grandfathered plans.
• Emergency Services. Plans must cover emergency services without prior authorization and out-of-network expenses with the same cost sharing as in-network emergency services.
  Grandfathered Plan Exception: This change does not apply to grandfathered plans.

Changes Effective in 2011 (Regardless of When Plan Year Begins)

• W-2 Reporting of Health Coverage Required. Employers must report the value of employer-provided health coverage on each employee's Form W-2.
• HSA Excise Tax Increased. The excise tax on HSA and Archer MSA withdrawals for non-medical expenses increases to 20 percent.
• No More Tax-Free Reimbursement of Over-the-Counter Drugs. Tax-free reimbursement of over-the-counter medications (other than insulin or drugs prescribed by a physician) is no longer permitted by an FSA, HRA, HSA, or Archer MSA.
• SIMPLE Cafeteria Plan for Small Employers. Employers with 100 or fewer employees may establish a SIMPLE Cafeteria Plan, which provides a safe harbor from non-discrimination requirements if the employer meets contribution, eligibility, and participation requirements.
• Automatic Enrollment in Long-Term Care Program Permitted. Employers who choose to participate in the CLASS Act long-term care program (to be established by HHS) are allowed to automatically enroll employees.