Complexities of the Affordable Care Act
Impacts of healthcare reform on employers
The Patient Protection and Affordable Care Act (PPACA), often referred to as Obamacare, was signed into law on March 23, 2010. The law’s intention is to overhaul the US healthcare system and affects nearly all taxpayers and employers.
The legislation contains a host of tax changes, many of which are both complex and novel. The law will significantly change the way health insurance is sold, purchased, and delivered in the United States. The primary goal of the law is to help millions of Americans obtain health insurance coverage. It is supposed to provide new coverage options, give consumers the tools they need to make informed decisions about their health care coverage, and put in place strong consumer protection.
At its core PPACA is broad and complex legislation, and has not been well communicated to employers or individuals who will be impacted. Confusion seems to reign supreme. Employers and individuals would be well advised to seek out advisors and consultants who are well versed in the requirements of the Act.
Although PPACA was signed into law in 2010, only some of the requirements are in place. Other requirements will take effect between 2014 and 2018. The requirements seem to be subject to change and I will predicate what I say with “as we know it today.”
Already in Place
As we approach 2014 there are some things employers and individuals should already be doing.
- Group plans should have been amended to reflect that dependent children can be covered on their parent’s plan up to the age of twenty-six.
- There can be no pre-existing conditions applied to individuals nineteen and younger.
- Employers should be distributing the required Summary of Benefits and Coverage (SBC) during annual enrollment and to new hires.
- Reporting health coverage value on the Form W2.
- Managing any required distribution of Medical Loss Ratio refunds (this applies only to fully insured plans).
- Employers should have changed their Section 125 Flexible Spending Accounts to reflect new limits ($2,500 maximum per family).
- For the tax years beginning after December 31, 2012, employers need to be withholding a 0.9 percent hospital insurance tax, a new component of FICA/Medicare payroll tax. This requirement applies to high-earning workers and self-employed taxpayers making in excess of $250,000 for joint returns, $125,000 for married taxpayers filing separate returns, and $200,000 in all other cases. The additional 0.9 percent HI tax applies only to the employee’s share, not the employer’s share.
- By July 31, 2013, employers should have calculated and paid the Patient Centered Outcomes Research Institute (PICORI) fees. In 2013 this fee is $1.00 per member covered on your plan.
- Finally, by October 31, 2013, all employers should have calculated the Minimum Value of their health plan (value must exceed 60 percent of the total plan coverage) and distributed the “Notice of Exchange” to all employees, covered and non-covered, full time or part time (it should be noted that the Department of Labor decided to waive penalties for non-distribution).
Individuals should be aware of the following:
- For tax years beginning after December 31, 2012, there is a surtax on unearned income of higher-income individuals. This is a Medicare tax imposed on individuals, estates, and trusts. You should consult your tax advisor if you think this might apply to you.
- On October 1, 2013, the state and federal exchange (Marketplace) opened for business for individuals to enroll for health care coverage. The State of Alaska opted not to run a state exchange so individuals seeking coverage must go to the federal exchange. As we are all painfully aware, this process is not going exactly as planned. The entire process is confusing and far more complex than simple. Depending on income (a function/multiple of the federal poverty level) some Alaskans may qualify for the federal subsidy (tax credit), many will not. Again, good advice would be to seek out a knowledgeable broker or consultant to guide you through the process. There will be tax consequences for people not having health insurance coverage in 2014.
- For tax years beginning after December 31, 2012, there is a higher threshold for deducting medical expenses. The new threshold is 10 percent (rather than 7.5 percent) of adjusted gross income for the tax year.
All of this, and I have only covered the highlights, is only a warm up! January 1, 2014, is when the ride really begins and the largest part of PPACA will impact all Americans, especially employers. For individuals I will make it easy—you should be enrolled in some form of qualified health plan by March 31, 2014, or face tax consequences. For employers, it becomes much more complex!
I am sure some employers were relieved when the Obama Administration announced that some of the PPACA mandates would be pushed out to January 1, 2015. The announcement certainly provides some relief to employers so they can get all of the requirements figured out without fear of a penalty consequence for inadvertently not being in total compliance with the overabundance of PPACA requirements. However, employers need to be aware that not all requirements were pushed out to 2015; it was primarily the penalties for non-compliance.
Leading up to 2014 employers, especially employers with more than fifty full time employees, are faced with making huge decisions regarding their benefit plans:
- Stay the course—Continue to seek solutions that incrementally offset annual national trend cost increases of 8 to-9 percent. This path has become more difficult due to the impact of cost sharing requirements contained in PPACA. Employees may already shoulder a significant portion of healthcare cost increases. PPACA limits the portion of premium that an employee can be charged to 9.5 percent of the employee’s income. If the employee portion exceeds the 9.5 percent (rules do not apply to the cost of dependent coverage) and the employee decides to go to the Exchange and qualifies for a subsidy, the employers will face a $3,000 penalty for that employee if the employer’s plan does not meet the minimum value standard required by PPACA.
- Pay and Exit—Employers with fifty or more full time employees may consider just paying applicable penalties under federal law, currently set at $2,000 per employee, and no longer sponsoring healthcare benefits.
- Play Differently—Our research indicates that a majority of employers are ready to play differently to achieve different health and cost outcomes. Employers may consider 1) Play by new rules where they continue to sponsor a medical plan, but migrate from a traditional “managed trend” approached to a “house money/house rules” approach that is more requiring of plan participants and integrates a pay-for-performance philosophy into their benefits programs; or 2) Play on a new field where they go from plan sponsor (defined benefit approach) to “coverage facilitator” (managed defined contribution approach). Private and government-run health care exchanges will introduce new strategic options that plan sponsors should evaluate closely.
Changes for 2014 Renewals
Some of the PPACA requirements that were not pushed out to 2015 that will impact all plans renewing after January 1, 2014, are as follows:
- There is a new definition of full time employee. Employees must be considered eligible if they work thirty or more hours per week.
- There is a new maximum waiting period for eligibility. The waiting period cannot exceed ninety days—period.
- There can no longer be any pre-existing conditions applied to anyone, regardless of age.
- There will be a requirement for automatic enrollment for plans with two hundred or more employees (guidance for this requirement will not come out until sometime in 2014).
- There are new coverage requirements for “Approved Clinical Trials.”
In 2014 employers will need to budget for a bit more. In addition to the PICORI fee, which increases to $2.00 per member in 2014, there will be a couple more fees applied. One of the new fees applied to fully insured as well as self-funded plans is the Transitional Reinsurance Program fee. The US Department of Health and Human Services (HHS) estimates this fee to be $5.25, again per member per month ($63 annually). Employers must submit enrollment data to HHS by November 15, 2014, and the fee must be paid within thirty days of notification from HHS.
This fee could be significant. For example, if the plan covers five thousand members, the fee would be $315,000 annually. The other new fee, the Health Insurance Sector Fee, applies only to fully insured plans. The insurance carrier is responsible for this fee, but, rest assured, it will be built into your premium.
Moving forward, in 2015 the SHOP Exchanges are supposed to be fully operational. Limited SHOP’s are open in 2014. SHOPS are similar to the individual exchange only it is a marketplace for employers to find qualified coverage, especially if the small group employers (defined as having less than fifty full time employees) believe they may qualify for the small group tax credit.
In 2016 the SHOP Exchange will be open to employers with up to one hundred employees. In 2017 large employers (more than one hundred employees) may be allowed into the SHOP Exchanges.
And finally, in 2018, the “Cadillac” tax comes into play. Believe it or not, this tax will be imposed on employers who offer benefit plans that are “too good.” I cannot even guess what the philosophy is here!
This has been a brief review of PPACA, one of the most complex and far reaching laws that we have. I have skipped over far more than I have covered. When the Obama Administration decided to push the penalty phase of the employer mandate out to 2015, it was announced by the Congressional Budget Office that the federal government would lose $30 billion in penalty-driven revenue budgeted for 2014! Please be advised, compliance has become critical. You will not want to be one who is contributing to that $30 billion!
Ron McCurry is the owner of Alaska Employee Benefit Specialists.