<nobr>Mar 26, 2010</nobr>

Overview of the Final Health Care Reform Law

The House and Senate on March 25 approved the Health Care and Education Reconciliation Act (H.R. 4872), the sidecar reconciliation bill that modifies the Patient Protection and Affordable Care Act (H.R. 3590/P.L. No. 111-148) that Obama signed into law on March 23.

The Senate approved H.R. 4872 by a vote of 56-43, but made two changes that dropped Pell Grant provisions from the bill that required the House to vote again on the bill (220-207). The House originally approved H.R. 4872 on March 21. President Obama is scheduled to sign H.R. 4872 into law on March 30.

Below is a brief description of the major provisions of the new legislation that will affect large employers. (We call it a new law below, even though it has not yet been formally signed by the President. His signature is as certain as one can be in these circumstances.)

Overview of the final healthcare reform law (i.e., Public Law 111-148, as amended by HR 4872):

In general: The new healthcare reform law, Public Law 111-148 (HR 3590, the signed Senate bill, as amended by HR 4872, the sidecar reconciliation bill), establishes an exchange framework, operated by the states, to act as a clearinghouse for the purchase of health insurance by individuals and small businesses. The ceiling for Medicaid eligibility will be raised to 133% of the federal poverty level (FPL), and a new category of "childless adults" will become eligible for benefits. (133% of the FPL is $14,436 for one person and $29,393 for a family of four.) Almost all individuals will be required to have health insurance, and those who do not will be penalized; graduated subsidies will be given to those with income up to 400% of the FPL for whom insurance is not affordable.

Free rider penalty: Employers (determined in accordance with the aggregation rules of IRC section 414) with more than 50 fulltime employees will be subject to a "free rider" penalty if their employees purchase subsidized insurance through an exchange. For purposes of the penalty, fulltime employees are defined as those employees who are employed on average at least 30 hours per week with respect to any month. For purposes of determining whether an employer has at least 50 fulltime employees, part-time employees must be translated into the equivalent number of fulltime employees and then added to the number of fulltime employees. All dollar amounts are nondeductible for tax purposes and will be indexed; penalties are calculated on a monthly basis.

Employers that do not offer coverage to fulltime employees will face a penalty of 1/12 times $2000 per month per fulltime employee, without taking into account the first 30 employees.

Employers that do offer coverage will be subject to a penalty for each employee who purchases subsidized coverage in the exchange and meets either of the following criteria: 1) the employer's coverage is deemed "unaffordable" for the employee because it exceeds 9.8% of his or her household income; or 2) the plan's actuarial value is less than 60%. The penalty in this case is equal to 1/12 times $3000 per month for each non-covered employee who meets the specified criteria, subject to a ceiling of 1/12 times $2000 per month times the number of fulltime employees. For purposes of the ceiling, the first 30 fulltime employees are not taken into account.

There will not be a penalty for waiting periods in excess of 60 days. (As noted below, however, waiting periods in excess of 90 days will be prohibited starting in 2014.)

Effective date: months beginning after 2013.

Excise tax on "Cadillac" plans: The 40% excise tax on high-cost plans will apply to healthcare premiums exceeding thresholds of $10,200 for individuals and $27,500 per year for families. The tax will be imposed on the value of coverage exceeding these thresholds, which will be indexed for inflation (CPI-U). (These thresholds are increased to $11,850 for individual coverage, and $30,950 for family coverage, for retirees and workers in "high-risk" industries.) Coverage under multiemployer plans is deemed, for purposes of the threshold, to be family coverage.

Adjustments to the thresholds will be made for firms that have higher healthcare costs, due to the age and/or gender of their employees, than the national average. The dollar thresholds will be increased in 2018 if the premium inflation rate between now and 2018 exceeds the amount estimated by CBO. There will not be a phase-in of the thresholds for residents of 17 high-cost states.

Amounts potentially subject to the tax will include the value of health coverage, health flexible spending accounts (FSAs), Health Reimbursement Accounts (HRAs), and employer contributions to Health Savings Accounts (HSAs); the tax is not applicable to stand-alone dental and vision plans. For self-funded plans, these values are calculated using COBRA methodology.

The term "employee" is defined to include any former employee, surviving spouse, or other primary insured individual.

Effective date: taxable years beginning after 2017.

Medicare Part D Retiree Drug Subsidy: The new law eliminates the deductibility of an amount equal to the Part D subsidy for employers who maintain prescription drug plans for Part D eligible retirees.

Effective date: taxable years beginning after 2012. Accounting effects in some cases are immediate, however, as the impact of this change must be recognized in financial statements for the period in which the law is signed.

The Wyden "choice" provision: The new law creates a voucher system for employees whose required contribution to an employer plan exceeds 8% of their household income but is below 9.8%. Employees in this category may take the amount their employer otherwise would spend for an employee in the plan in which the employer pays the largest share of the employees premium and use it instead to purchase a plan in the exchange.

• To be eligible for the voucher, an employee's household income may not exceed 400% of the FPL ($43,320 for one person; $58,280 for 2; $73,240 for 3; $88,200 for 4);


• If the exchange plan is less expensive than the employer's plan, the employee may pocket the difference; the voucher will be tax-free to the employee, except that any amounts that exceed the premium cost will be taxable;


• The amount of the voucher will reduce the free rider penalty that the employer otherwise would pay for an employee receiving subsidized premiums through the exchange.

Effective date: vouchers provided after 2013 and periods beginning after 2013.

Auto enrollment: Employers with more than 200 fulltime employees will be required to provide for the automatic enrollment of their new fulltime employees into their health plans (subject to any waiting period authorized by law).

Effective date: in accordance with regulations promulgated by the Secretary of HHS.

Class Act: The new law will create a voluntary federal program for long-term care insurance that will be self-funded. Workers will be able to purchase coverage via employer-administered payroll deduction. Employers are not required to establish payroll deduction systems for this purpose.

Effective date: in general, the program will take effect on January 1, 2011.

Prescription drug coverage: The new law will close the Part D "doughnut hole" coverage gap for Medicare beneficiaries by 2020. (25% coinsurance will still be applicable until the individual reaches the catastrophic coverage ceiling.) A one-time $250 rebate will be given to individuals entering the doughnut hole in 2010.

Medicare Hospital Insurance tax on high-income taxpayers: An additional 0.9% hospital insurance tax (increasing the current tax from 1.45% to 2.35%) will be imposed on wages over $200,000 for individuals and $250,000 for couples. (This additional tax will apply only to the employee and not to the employer's share.) These threshold amounts will not be indexed for inflation.

In addition, a new annual HI tax of 3.8% will be assessed on the "net investment income" (interest, dividends, annuities, royalties, and rents but not a distribution from a qualified plan) of these same high-income individuals. (The new tax will also apply to the net investment income of trusts and estates.) The tax will apply to the lesser of net investment income for the year or the individual's/family's income in excess of the $200,000/$250,000 threshold.

Effective date: taxable years beginning after 2012.

Medicare Advantage plans: The new law freezes Medicare Advantage payments in 2011 and will reduce MA benchmarks beginning in 2012. The benchmark reductions will be phased in gradually.

Limit on health flexible spending accounts: For taxable years beginning after 2012, contributions to a health FSA will be limited to $2500 per year, indexed in accordance with changes in the CPI starting in 2014.

Grandfathering: The new law draws a distinction in some cases between new market reforms and consumer protections that are applicable to all group health plans and those that are applicable only to those group health plans that are not "grandfathered." The term "grandfathered" is not clearly defined, although one interpretation is any group health plan in existence on the date of enactment. The description below distinguishes between new provisions applicable to all plans and those applicable only to non-grandfathered plans. Within those two categories, a further distinction is made by effective date.

I. Consumer protections applicable to ALL group health plans, regardless of grandfathered status: Provisions applicable to large group health plans (outside of the exchanges) include the following:

Effective for plan years beginning on or after March 23, 2010:

Uniform summary of benefits: Group health plans must provide plan participants with a uniform summary of benefits and explanation of the benefits provided by the plan, using standardized definitions.

Effective for plan years beginning on or after September 23, 2010:

Lifetime limits: Plans may not impose lifetime limits on the dollar value of benefits for any participant or beneficiary for those benefits that are deemed to be "essential health benefits";

Annual limits prior to 2014: Plans may set only a "restricted annual limit" on benefits deemed to be "essential health benefits"; the Secretary of HHS will define what these limits may be;

Prohibition on rescissions: Plans may not generally rescind health coverage for a plan participant once covered under the plan;

Preexisting condition exclusion: For enrollees under age 19, group health plans may not impose any preexisting condition exclusion;

Coverage of adult dependents up to age 26: For plan years beginning on or after September 23, 2010, and through plan years beginning before 2014, a group health plan that offers family coverage must make dependent coverage available for an adult child (regardless of marriage status) until the child turns age 26, provided the child is not eligible to enroll in another group health plan; amounts spent for medical care for these adult children will not be includible in the parent's taxable income through the end of the taxable year in which the child has not yet turned 27.

Effective for plan years beginning on or after January 1, 2014:

Annual limits: Plans may not impose annual limits on the dollar value of benefits for any participant or beneficiary for those benefits that are deemed to be "essential health benefits";

Preexisting condition exclusion: Group health plans may not impose any preexisting condition exclusion with respect to the plan; and

Waiting periods: A group health plan may not impose a waiting period that exceeds 90 days.

II. Consumer protections applicable only to group health plans that are NOT grandfathered:

Effective for plan years beginning on or after September 23, 2010:

Coverage of preventive services: Plans must provide certain preventive services and may not impose cost-sharing on these benefits;

No discrimination based on salary: Plans other than self-insured plans are prohibited from discriminating on the basis of salary with respect to health coverage; and

Appeals and review: Group health plans must implement an appeals process for appeals of coverage determination and claims that will, among other things, include a binding external review process. Employees who appeal a decision must receive continued coverage pending the outcome of the appeal.

Effective for plan years beginning on or after January 1, 2014:

Guaranteed renewal: A health insurance issuer that offers health insurance coverage in the group market must renew or continue in force such coverage at the option of the plan sponsor;

No discrimination based on health status, etc.: A group health plan may not establish rules for eligibility or continued eligibility for enrollment based on specified health status-related factors (such as medical history or genetic information) of the individual or a dependent of the individual; and

Limits on cost-sharing: A group health plan may not impose annual limits on cost-sharing that exceed the dollar amounts in effect under section IRC 223(c)(2)(A)(ii) (pertaining to out-of-pocket expenses for high deductible health plans) for self-only and family coverage.

Other important elements in the new law include:

Wellness rewards: Subject to some restrictions, employers will be permitted to give higher rewards to employees who participate in wellness and prevention programs; although the basic reward will be limited to 30% of the cost of employee-only coverage, the law permits HHS, Labor, and Treasury to increase this amount to 50%.

Effective for plan years beginning after 2013.

W-2 reporting: Employers will be required to annually report the value of an employee's employer-provided health benefits on the W-2.

Effective for taxable years beginning after 2010.

Retiree reinsurance program: $5 billion will be devoted to the creation of a temporary reinsurance program for employer-sponsored retiree coverage that will reimburse 80% of claims between $15,000 and $90,000;

Eligible claims will be those for individuals 55 to 64 years old who are not active workers (or their dependents) or eligible for Medicare;

Effective June 21, 2010; will sunset January 1, 2014.

Change in AGI threshold for medical expenses: The threshold for taking an itemized deduction for medical expenses on an individual's federal tax return will be increased from 7.5% of adjusted gross income to 10% of AGI for taxable years beginning after 2012;

Will remain at 7.5% for those 65 and older through 2016.

FDA pathway for biogenerics: A pathway at the FDA to license biogeneric drugs will be created; brand-name drugs will be given a 12-year period of exclusivity.

Increase in HSA penalty: The penalty for non-medical withdrawals from HSAs will be increased from 10% to 20%;

Effective for distributions made after 2010.

OTC drugs: The nontaxable reimbursement of OTC drugs from HSAs, health FSAs, and HRAs will be eliminated;

Effective for taxable years beginning after 2010.

Questions or comments on the new health care reform law should be addressed to either Gretchen Young, gyoung@eric.org, or Adam Solander, asolander@eric.org.

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Key Health Care Reform Documents

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