With the enactment of the Patient Protection and Affordable Care Act of 2010 (the “Act”) on March 23, 2010, sweeping changes were made to the manner in which health care is provided in the United States. While many group health plan sponsors were required to implement a number of the Act’s reforms as of January 1, 2011, questions remain regarding the Act’s validity and permanence, given court rulings regarding the constitutionality of the Act and efforts to repeal the Act by various members of Congress. In any event, unless the Act is definitively deemed unconstitutional or repealed, plan sponsors must continue to determine the extent to which the Act applies to their plans and how to administer the provisions of the Act. This article discusses some of the challenges that plan sponsors will face in year two of the Act, and recent noteworthy changes to the Act.
Repeal of the Free Choice Voucher
Along with providing for the continued funding of the federal government, the Department of Defense and Full-Year Continuing Appropriations Act of 2011¹ repealed one of the more controversial provisions of the Act — the free-choice voucher. No later than 2014, the Act requires each of the States to establish and administer an exchange to facilitate the purchase of health insurance coverage by residents of the State or the region, as applicable. Absent the repeal, employees who met certain income criteria would have had the choice to use employer contributions in the form of a voucher, to obtain coverage through a State-based insurance exchange instead of towards the employer-sponsored plan. If the cost of the exchange coverage is less than the cost of the coverage provided under the employer-sponsored plan, the employee would have been able to receive the difference as taxable compensation. Given the likely administrative issues relating to the implementation of the voucher, including determining which employees qualify for the free choice voucher, its repeal has been welcome news to most plan sponsors.
Form W–2 Reporting
To help employees understand how much their health plan coverage costs, the Act includes a provision requiring employers to report the cost of the health care coverage provided to employees on Form W-2 starting with the 2011 calendar year. In Notice 2010-69, the mandatory reporting requirement was delayed to 2012, and reporting for the 2011 calendar year was made voluntary. In Notice 2011-28, the Internal Revenue Service (“IRS”) issued interim guidance on how to satisfy the new reporting requirement. Under this guidance, which the IRS cautions may later be superseded, the IRS clarified that the reporting requirement does not cause otherwise excludable employer-provided health care coverage to be taxable, i.e., health care coverage provided by an employer continues to be tax-free if the requirements of Section 106 of the Internal Revenue Code (which has not changed) are met. Drafted in the form of 31 “questions and answers”, the Notice includes the following clarifications:
- Exemption for Small EmployersFor the 2012 Forms W–2, employers that were required to file fewer than 250 Forms W–2 for the preceding calendar year (i.e., for 2011), are not subject to the reporting requirement for the 2012 calendar year.
- No Reporting Requirement for Coverage Provided under a Multiemployer PlanEmployers will not be required to include the cost of coverage provided to an employee under a multiemployer plan in an employee’s Form W-2. This means that if an employee only has coverage under a multiemployer plan, that employee’s contributing employer will not have any reporting obligation for that employee.
- Aggregate or Total Cost of Coverage ReportedEmployers must report the aggregate or total cost of coverage (including, the portions paid by the employer and the employee on a pre-tax or post-tax basis) provided to employees and their dependents under all applicable employer-sponsored coverage. The following coverages, however, may be excluded from the aggregate cost and, therefore, are not reportable:
- Long-term care coverage
- Dental or vision-only coverage provided under a separate policy of insurance and non-integrated dental or vision coverage that is self-funded or insured (i.e., employees have the right to opt out of dental or vision coverage and must pay for coverage if they elect such coverage)
- “HIPAA-excepted benefits” like accident insurance, workers’ compensation, cancer-only policies, etc.
- Contributions to an Archer MSA or to a health savings account
- Salary reduction contributions to a health flexible spending arrangement
- Amounts Reported in Box 12The aggregate reportable cost of coverage is reportable in box 12 of the Form W-2.
- Reporting for Terminated EmployeesEmployers may use any reasonable method of reporting the cost of coverage provided under a plan for a terminated employee as long as the method is used consistently for all other terminated employees who received coverage under that plan during that year.
- Reporting Based on COBRA PremiumsThe method for calculating the reportable cost of coverage may be based on the COBRA premium.
Grandfathered or Not?
Over the last year, plan sponsors have had to consider whether it was feasible or even worthwhile to maintain their plan’s “grandfathered status”. A plan that did not cover any individuals on March 23, 2010 (e.g., because it was newly introduced after that date) are not considered “grandfathered”, but any plan option that covered any individual on that date is a “grandfathered plan.” The determination of grandfathered status is critical
because plan sponsors can delay the applicability of some of the Act’s reform requirements until the date that the plan loses its grandfathered status. Under the regulations implementing the Act’s grandfather rules, a plan option will lose its grandfathered status on the date that any of the following plan changes become effective²:
- Any significant cut or reduction of benefits to diagnose or treat a condition
- Any increase in co-insurance percentage charges
- Any significant increase in any co-payment charge
- Any significant increase in any deductible
- A reduction in employer contributions by more than five percent
- The addition or tightening of an annual limit on what the plan pays
Because the grandfather rules apply to each benefit plan option that a plan sponsor offers individually, plan sponsors that offer multiple plan options (e.g., HMO, PPO, indemnity plan, etc.) may have both grandfathered plan options and non-grandfathered plan options. These plan sponsors, therefore, have had to ensure that their plan options include the appropriate reform requirements and are administered accordingly. While the non-grandfathered plan reform provisions relating to first-dollar coverage for preventive care, the payment of emergency care services, and access to primary care providers and OB-GYNs are pretty straightforward, there are two requirements which have caused plan sponsors much consternation in the last year — the new non-discrimination requirement for fully-insured plans and the expanded claims and appeals requirements.
Non-Discrimination Requirement for Non-Grandfathered Insured Plans
The Act prohibits non-grandfathered insured plans from discriminating in favor of highly compensated individuals. For various reasons, including attracting and retaining workforce members, employers have structured their health plans in insured arrangements to provide select employees with benefits that are better than those provided to the general employee population. Insured arrangements were used to avoid the non-discrimination requirements that apply to self-insured health plans. This new non-discrimination requirement under the Act threatens the viability of these arrangements, as such plans will likely be considered discriminatory. In Notice 2011-1, the IRS announced that the non-discrimination requirement will not apply to plans until the agencies (i.e., the IRS, and the Departments of Labor and Health and Human Services) issue guidance on the implementation of the provision. While the agencies have solicited comments on this requirement, no such guidance has been issued to date. When such guidance is issued, however, sponsors of non-grandfathered plans must determine whether their plan designs can withstand scrutiny.
Claims and Appeals Procedures for Non-Grandfathered Plans
In our September 2010 newsletter we discussed the new claims and appeals requirements that apply to non-grandfathered health plans. In that newsletter we detailed the additional items that must be included in notices, the new “full-and-fair review” requirements, the new external review requirement, and the new requirement to strictly adhere to the claims and appeals requirements of the Act or forfeit the administrative process and the court’s deferential standard of review. The article also referenced the enforcement grace period provided by the Department of Labor in Technical Release 2010-02 with respect to the additional notification requirements under the Act. In Technical Release 2011-01, the Department of Labor further delayed enforcement of the following claims and appeals requirements to plan years beginning on or after January 1, 2012:
- The 24-hour time frame for making urgent care claim decisions
- Requirement to provide notices in a culturally and linguistically appropriate manner, i.e., translating notices into appropriate non-English languages
- Strict adherence requirement
- Requirement to disclose diagnosis and treatment information in notices to claimants
The guidance also includes a list of consumer assistance programs and ombudsmen that may be relied upon for inclusion in notices to claimants. Such information must be included in notices of adverse benefit determinations under non-grandfathered health plans for plan years beginning on or after July 1, 2011.
We note that in Technical Release 2011-01, the Department of Labor specifically states that the enforcement grace periods were provided to give the agencies time to publish new regulations that are necessary or appropriate to implement the internal claims and appeals requirements of the Act. Given this objective, it would not be totally off base to assume that the claims and appeals requirements that were initially issued will be amended. Thus, plan sponsors must be sure to stay abreast of any such changes.
Coverage for Children until Age 26 and the State Tax Problem
The Act requires all health plans (grandfathered or not) that cover children to extend coverage for children until they attain age 26. Such coverage may not be conditioned on the child’s tax-dependency, marital, or student status or residence. In Notice 2010-38, the IRS clarified that coverage provided to such a child is excludable from the employee’s income for federal tax purposes. In states whose tax codes automatically conform to the requirements of the federal income tax code, coverage provided to a non-tax dependent is also excludable for state income tax purposes. However, in those states whose tax codes do not automatically follow the provisions of the federal tax code, like California, coverage provided to an adult child may be taxable to the employee. On April 7, 2011, legislation (i.e., Assembly Bill 36) was finally passed in California which clarifies that coverage provided to an adult child under a health plan in accordance with the Act will not be taxable to the employee. The legislation took effect as of the effective date of the Act and provides welcome relief to employers that had been struggling with how to impute the value of coverage provided to adult children as income. We note that not all states have taken action to conform their definitions of “dependent” to the federal government’s. Plan sponsors, therefore, must determine whether there are any state tax issues in each state where they have employees who cover their children.
Uniform Disclosure Requirement
The Act directed the agencies to issue guidance, no later than March 23, 2011, relating to the requirement to issue a uniform notice describing the benefits provided under the plan, as well as any cost-sharing requirements and other terms and limits. The uniform disclosure will take the form of a four-page summary of benefits booklet. The Act also requires plans to notify participants of any plan changes 60-days prior to the date that the change becomes effective. (This is different from the current summary of material modifications requirement under ERISA which requires notice no later than 60 days after the change.) Although guidance has not yet been issued by the agencies to date, the agencies are expected to issue such guidance soon, as the Act requires distribution of the notice by plans by March 23, 2012.
Supreme Court Review of Constitutional Challenge to Act
On April 25, 2011, the Supreme Court denied a petition filed by the Attorney General of Virginia to review a December 2010 decision by the District Court for the Eastern District of Virginia, holding that the requirement for taxpayers to maintain coverage for themselves or face a penalty was unconstitutional, but which upheld all other parts of the Act. The Supreme Court’s rejection of the petition means that the Attorney General must first pursue an appeal with the Fourth Circuit Court of Appeal. We note that the Virginia court and a district court in Florida have ruled that the Act’s individual mandate is invalid, but three other district courts have held otherwise.
What Happens Next?
Based on the foregoing discussion, it is clear that the Act is a work in progress. As the agencies issue guidance on the various requirements of the Act, it is important for plan sponsors to stay abreast of the changes that directly affect their plans and to timely adopt plan amendments, implement administrative changes and distribute notices to participants. This may require careful coordination with insurance carriers, third party administrators, payroll departments, legal counsel, consultants, and/or actuaries. Please contact us if you have any questions.
¹ The law was enacted on April 15, 2011
² A special grandfather rule applies to fully-insured collectively bargained plans. If any of the above referenced changes are made to the insured plan, such plan will not lose its grandfathered status until the expiration date of the longest running collective bargaining agreement that relates to the plan, provided the agreement was in effect on March 23, 2010.