After more than a year of contentious debate, President Obama signed into law the “Patient Protection and Affordable Care Act” last week and the “Health Care and Education Reconciliation Act of 2010” this week. New obligations, specifically those imposed on employers and individuals, have the potential to dramatically alter the way businesses address the health care needs of their employees. Though most provisions are scheduled to become effective on or after January 1, 2014, certain changes will go into effect this year and may require more timely action.
New Obligations for Businesses
Through the imposition of penalty fees against employers that do not offer coverage or make minimum premium contributions, Congress intends to reinforce the importance and economic desirability of employment-based coverage. Even those employers that already provide coverage and that make minimum premium contributions will be subject to new costs and may need to reconsider the form and means of providing health coverage to employees.
Beginning in 2014, an employer with an average of more than 50 full-time employees that does not provide health insurance coverage, or that provides coverage that does not meet certain minimum standards, may become subject to a per-employee fee if one or more of its’ employees receives a premium assistance tax credit or cost-sharing reduction through a newly established state health insurance exchange. The fees will range from a maximum of $2,000 to $3,000 per applicable employee.
Beginning in 2018, any health insurance issuer of an employer-sponsored group health plan or employer that makes contributions to employees' health savings accounts, will be subject to an excise tax of 40% of the amount by which an employees' health benefits exceed the applicable limit for that year. The applicable limit for 2018 will be $10,200 for individual coverage, and $27,500 for family coverage.
Other new enrollment, reporting and reimbursement provisions will apply to employers, including:
- Automatic Enrollment. As of January 1, 2014, all employers with 200 or more employees that provide a health benefit plan will be required to enroll all new full-time employees in such plan (subject to any waiting period permitted by law) and to continue coverage of currently covered employees.
- Repeal of Medicare Part D Subsidy Deduction. Beginning in 2013, employers will no longer be able to claim a deduction for the portion of their retiree prescription drug costs that are subsidized by the Secretary of Health and Human Services.
- Reimbursement of Early Retiree Costs. Beginning later this year, employers that provide early retirees with employment based health benefits may seek reimbursement of eighty percent (80%) of the cost of health benefits, between $15,000 and $90,000, provided to a retiree, spouse or dependent. This reinsurance program will end on December 31, 2013 when state health insurance exchanges are scheduled to be in place.
- Health Insurer Annual Fee. Employers that provide insurance through an insurance company, rather than self-insuring, should expect that the annual excise tax assessed against insurance companies ($8 billion in 2014) will likely be passed through as an increase in premiums or administrative fees. Nationally, each insurance company will be assessed a proportionate share of the annual fee in relation to its share of premiums and third-party administration fees.
- Research Trust Fund Fees. Between 2013 and 2019, for every individual covered by an employer’s health plan, the employer will be required to pay $2.00 ($1.00 for 2013) toward a Patient-Centered Research Trust Fund.
- Disclosure of Health Care Coverage. After 2013, any employer with 50 or more full-time employees will be required to report information regarding the type and form of health coverage it provides to its employees to the IRS.
- June 2010, a program will be established to reimburse employers for early retiree health costs (see below for more information)
- A temporary high-risk pool will be established by September 2010 to provide health insurance for individuals who have been refused coverage because of pre-existing conditions
- Beginning in 2011, the employer-provided health benefits an employee receives must be reported on the Form W-2
Effective for the plan years beginning after September 2010:
Changes for Families and Individuals
- Group health plans must allow individuals under the age of 27, who are not otherwise covered, to be kept on a parent’s group or individual plan
- Insurance providers will be prohibited from rescinding an insurance policy after an individual becomes ill
- Insurance providers will be prohibited from applying an aggregate lifetime limit on the benefits provided to any individual
- Group health plans will be prohibited from discriminating in favor of highly compensated employees
While broadening the pool of those covered by insurance through an expansion of Medicaid, the creation of state health insurance exchanges and the availability of premium tax credits and subsidies, the legislation increases costs for certain individuals through a number of means.
For example, beginning in 2013, taxpayers whose household income exceeds certain limits ($250,000 for a married couple filing jointly, $200,000 for an individual) will be subject to a higher hospital insurance (Medicare Part A) tax for income above the thresholds described above and a new tax on unearned income. Specifically, in 2013, the Medicare Part A tax will be increased for these taxpayers, to the extent household income exceeds the thresholds, from 1.45% to 2.35%.
In addition, a new tax of 3.8% will be assessed on the net investment income of those taxpayers whose household income exceeds the same thresholds. The tax will not apply, however, to distributions from certain deferred compensation arrangements, including 401(k) and 403(b) plans.
The legislation also will alter the tax treatment of health care benefits, including the following:
- Limit on Flexible Spending Arrangement (FSA) Contributions. Beginning in 2011, the exclusion of an employer’s contributions to a health FSA from an employee’s gross income will be conditioned on the employer’s cafeteria plan limiting employee salary reduction elections to $2,500.
- Itemized Deduction of Medical Expenses. Currently, in order to claim itemized deductions for medical expenses, a taxpayer’s medical expenses must exceed 7.5% of adjusted gross income. In 2013, the minimum percentage will be increased to 10%, limiting the number of taxpayers able to claim itemized deductions for medical expenses.
- Exclusion of Non-Prescribed Medicine from Medical Expenses. Beginning in 2011, the definition of reimbursable “medical expenses” for HSAs, Archer MSAs and FSAs will exclude medicines or drugs (other than insulin) that were not prescribed by a physician, regardless of whether the medicine is available without a prescription.
- Increase on Additional Tax on Distributions from Archer Medical Savings Accounts (MSA) and Health Savings Accounts (HSA) for Non-Medical Uses. As of January 1, 2011, the additional tax imposed on a distribution from an Archer MSA or HSA when the distribution is not used for qualified medical expenses will be increased, respectively from 15% and 10% to 20%.
This initial advisory on the health care reform legislation was prepared by our Tax Department. Additional, detailed advisories analyzing the impact of specific provisions of the new law will be forthcoming. For more information or assistance with respect to complying with the new plan requirements or other employment and employee benefit matters, please contact a member of Nutter McClennen & Fish LLP’s Tax Department.
This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.