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Health Care Reform Legislation: Impact on Employers

March 23, 2010 - McDermott, Will&Emery

On March 21, 2010, the U.S. House of Representatives passed historic health care reform legislation that, if enacted, will have a significant impact on employer-sponsored group health plans.  The Health Care and Education Affordability Reconciliation Act (H.R. 4872) consists of a set of amendments to modify the Patient Protection and Affordable Care Act (H.R. 3590), which has been passed by both the U.S. Senate and the House of Representatives and was signed into law by President Obama on March 23, 2010.  The Senate will now consider the amendments made by the act and will need a simple majority of 51 votes to pass the legislation.   

Following is a preliminary summary of important features of the act as they affect employer-sponsored group health plans.

Employer Responsibility

Under the act, employers would not be required to offer health coverage or make a minimum contribution toward coverage.  However, employers with 50 or more employees that do not provide health coverage would be penalized in the amount of $2,000 per full-time employee.  In addition, if an employer provides “unaffordable” coverage to its employees, but has at least one full-time employee who receives a premium tax credit toward purchase of insurance in a health insurance exchange, the employer would be penalized in the amount of $3,000 per employee receiving such premium credit.  The first 30 employees employed by an employer are disregarded in calculating the penalty amount.  Employers may still retain waiting periods of up to 90 days without being assessed a penalty, but longer waiting periods will trigger the penalty.  Finally, part-time employees would be counted for purposes of determining whether an employer has 50 or more employees, but penalties would only be assessed on full-time employees who work 30 or more hours per week.

Medicare Part D

Effective 2013, the act would eliminate the federal income tax deduction for the 28 percent subsidy that an employer receives for providing creditable prescription drug coverage for retirees.  This provision will have a direct impact on public employers because the elimination of the deduction will need to be immediately reflected on companies’ financial statements based on U.S. Securities and Exchange Commission accounting rules.

In addition, the act gradually closes the coverage gap in Medicare Part D prescription drug benefits over time, decreasing the coinsurance by 7 percent per year between 2012 and 2019, so that, effective in 2020, Medicare beneficiaries will have a 25 percent coinsurance for prescription drug purchases in excess of the deductible and below the catastrophic limit.  The act also establishes a rebate of $250 in 2010 for those Medicare Part D beneficiaries who reach the so-called donut hole.

Cadillac Tax

Effective in 2018, the act would impose a nondeductible excise tax of 40 percent on insurance companies and plan administrators (including self-insured plans) for any health-related coverage for which the combined employer/employee premiums exceed the threshold of $10,200 for single coverage and $27,500 for family coverage (indexed).  The threshold would be higher for certain workers with high risk jobs or for retirees aged 55 and older.  The tax would apply to the amount of the premium in excess of the threshold.  The act would also exclude from the calculation dental and vision coverage.

Health Care Reimbursement Accounts

Effective in 2013, health care reimbursement account contributions would be limited to $2,500 per year indexed annually.  In addition, effective January 1, 2011, over-the-counter drugs would no longer be permitted to be reimbursed from a health care flexible spending account, health reimbursement account or health savings account, unless prescribed by a physician.

Limitation on Pre-Existing Condition Exclusions

For plan years beginning on or after the date that is six months following enactment, group health plans would not be able to impose pre-existing condition exclusions on children under age 19.  In addition, effective in 2014, group health plans would be completely prohibited from imposing pre-existing condition exclusions on plan participants.

Dependent Coverage for Uninsured Young Adults

For plan years beginning on or after the date that is six months following enactment, a group health plan would be required to extend coverage to an employee’s dependent through age 26 if the dependent does not have access to other health coverage.  In addition, the coverage would not be taxable to the employee or dependent.  Further, the act eliminates the requirement that a dependent not be married in order to receive the extended coverage.  Beginning in 2014, the requirement that the dependent does not have access to other employer-provided coverage would no longer apply. 

Elimination of Lifetime Aggregate Limits

For plan years beginning on or after the date that is six months following enactment, a group health plan would not be able to impose lifetime or restrictive annual limits on benefits under the plan.  Beginning in 2014, a group health plan would not be able to impose any annual limits.

Preventive Care Benefits

First dollar coverage will be required for preventive care benefits (i.e., not subject to the deductible).  In addition, no cost-sharing would be allowed for preventive care (i.e., all employer paid).

Premium Taxes

Beginning in 2013, a new federal premium tax of $1 on each covered life under a self-insured or fully insured health plan will be assessed to finance a comparative effectiveness research program.  This amount will increase to $2 per covered life in 2014, will thereafter be indexed to the medical component of the consumer price index and will sunset in 2019.

W-2 Reporting of Health Benefits

Employers will be required to report the value of health benefits on Form W-2 effective for the first taxable year after December 31, 2010.

McDermott Will & Emery will continue to monitor this important and historic legislation as it develops.  It will be important for all employer sponsors of group health plans to analyze their current benefit plan design and plan for future modifications.