healthcare reform: tax and legal implications

HEALTHCARE REFORM:TAX AND LEGAL IMPLICATIONS

Presented by:

Seale Pylate

[email protected]

EMPLOYER’S ESSSENTIAL ELEMENTS OF REFORM

EFFECTIVE TIME PROVISION

Enactment Grandfather plans established

1/1/2010 Small business tax credits available

90 days after enactment

Retiree reinsurance program begins

1/1/2011(calendar year plans)

Insurance market reforms beginLimits on FSA reimbursement for medicines and drugs

1/1/2012(calendar year plans)

New plan disclosures required:Uniform summary of coverageQualify of care report


1/1/2012 W-2 reporting – value of health care (for larger employers)

After 9/30/2012 $1 tax per participant

1/1/2013 FSA contribution limited ($2,500)New 3.8% surtax on unearned incomeAdditional 0.9% Medicare tax

3/1/2013 Employer’s notice about Exchange


1/1/2014 Individual coverage mandateLarge employer mandateState-run Exchanges beginAutomatic Enrollment

2014-2016 Penalties for non-compliance with individual mandate phased in

1/1/2017 Large employers may participate in Exchange

1/1/2018 Cadillac tax begins

All = Grandfathered and New PlansNew = New Plans only

PLAN EFFECTIVE

REFORM

All 1/1/2011 No lifetime limits

NewAll

1/1/20111/1/2014

No annual limits on essential benefitsSame

All 1/1/2011 Cover adult dependents until age 26 (Flex spending account coverage permitted until age 27)

All 1/1/2011 No pre-ex for insureds/participants under age 19


PLAN EFFECTIVE

REFORM

All 1/1/2011 No retroactive rescission of coverage, except fraud misrepresentation

New 1/1/2011 No cost sharing for preventive care

New 1/1/2011 New claims appeal process, including level of external review


PLAN EFFECTIVE

REFORM

New 1/1/2011 Insured plans subject to anti-discrimination testing under Code Section 105(h)

New 1/1/2011 No prior authorization for emergency room treatment

New 1/1/2011 Greater choice of primary care physician

LITIGATION UPDATE

• Filed by 21 states

• Primary basis for challenges:– Constitutionality of individual mandate;– Constitutionality of employer mandate;– Medicaid issue

LITIGATION UPDATE

• Supreme Court rejected first appeal– Baldwin v. Sebelius (11/8/10)– Standing issue– Expedited hearing for second appeal denied

• Four cases decided (Michigan, Virginia, West Virginia, and Florida)– Split decisions– Effects of Florida decision

GRANDFATHERING

• Maintaining grandfathered plan status– Notice requirement – Maintaining records

• Timing of loss of status– Upon effective date of change– No delay

• Addressing grandfathering in a merger or acquisition– Is your plan grandfathered?– Is the seller’s plan grandfathered?– How long is too long to continue to maintain the seller’s plan?

GRANDFATHERING

• Bona fide employee reason for change– Issuer exits market – Issuer no longer offers the product to the employer– Coverage becomes impractical due to low

participation – Elimination from a multiemployer plan as part of the

collective bargaining process – Multiple benefit packages covering many employees

are available

MANDATED COVERAGE

INDIVIDUAL MANDATE

• Effective Date: January 1, 2014

• Individuals maintain minimum essential coverage or pay tax

• Limited exemptions– Religious– Illegal aliens– Prisoners– Very low-income individuals– Hardship recipients– Small breaks in coverage – Members of Indian tribes

• Minimum Essential Coverage– Medicare Part A– Medicaid– CHIPs– TRICARE– VA– Employer-sponsored coverage, new or grandfathered– Individual coverage– Exchange

INDIVIDUAL MANDATE

CONSEQUENCES FOR FAILURE TO MAINTAIN COVERAGE– Greater of $ amount or % of income

• $95 or 1% of income in 2014• $325 or 2.0% of income in 2015• $695 or 2.5% of income in 2016• After 2015, $ amount indexed for inflation

• $ amount– assessed for taxpayer, spouse and each dependent not

covered (max 3 X’s)• In 2014, family of 4 pays greater of 1% of income or

$285• Penalty ½ if dependent under age 18

• % of income assessed on income over filing threshold– In 2010, threshold $8,375 (individual)– In 2010, $16,750 (married filing jointly)

INDIVIDUAL MANDATE

EMPLOYER MANDATE

• Effective: January 1, 2014• LARGE EMPLOYERS must offer minimum essential

coverage or be subject to tax• Must be offered to full time employees and dependents

– Full time = 30 hours• Two separate bases for penalties:

– Failure to maintain any coverage– Failure to maintain minimum essential coverage that is

affordable

• Large employer: – 50 or more full-time employees– 30+ hours per week is considered full time– Number of employees includes full-time equivalents for

purposes of minimum threshold– Determined on a controlled group basis

• Minimum essential coverage: – No required benefits– Full time = at least 30 hours – Satisfy by reimbursement of exchange premiums

EMPLOYER MANDATE

No Coverage Offered: $2,000 X (Full-Time - 30)

• Tax is based upon number of full-time employees; full-time equivalents are excluded

• Exclude first 30 full-time employees in calculating the tax

• Penalty is non-deductible

EMPLOYER MANDATE

EMPLOYER OFFERS NO COVERAGE: 46 employees working 30 + hours per week 10 employees working 25 hours per week Large employer

At least one employee receives a subsidy 16 employees (46-30) X $2,000 = $32,000 $52,000 tax adjusted penalty ($32,000/.61)

EMPLOYER MANDATE - EXAMPLE 1

Coverage Offered Not Affordable:$2,000 X (Full-Time - 30) $3,000 X Full-Time receiving

Federal assistance• Lesser of two amounts;• Federal assistance provided when premium costs

exceed 9.5% of AGI;• Penalty is non-deductible

EMPLOYER MANDATE

EMPLOYER COVERAGE NOT AFFORDABLE: 250 employees 35 employees eligible for Federal subsidy Large employer Penalty (lesser):

220 employees X $2,000 = $440,00035 employees X $3,000 = $105,000

$172,000 tax adjusted penalty ($105,000/.61)

EMPLOYER MANDATE - EXAMPLE 2

HEALTHCARE EXCHANGE

• Effective Date: January 1, 2014• Established by states

– Regional or statewide coverage available• Small employers and individual coverage

– 100 or fewer employees• Intended to permit consumer comparison of policies• Essential benefits

– Same as essential benefits under annual and lifetime limits– Required for plans offered under the Exchange

• Bronze-level coverage (minimum coverage) (60% of actuarial value)

• Silver-level coverage (70% of actuarial value)• Gold-level coverage (80% of actuarial value)• Platinum-level coverage (90% of actuarial value)• Young-invincibles coverage (limited eligibility)

HEALTHCARE EXCHANGE

EMPLOYER-SPONSORED COVERAGE W-2 REPORTING

• Effective Date: Coverage provided after December 31, 2011

• New IRS Form W-2 reporting obligation

• Employer Sponsored Coverage:– Three alternative methods of calculation

• COBRA premium values• Premiums charged for employee’s coverage• Modified COBRA premiums

– Includes employer and employee contributions– Covers medical, dental, vision– Excludes flex spending contributions, single disease,

fixed indemnity coverage, and on-site medical clinics

EMPLOYER-SPONSORED COVERAGE W-2 REPORTING

• Effective Date: Coverage provided after December 31, 2011

• New guidance delaying reporting for small employers– Fewer than 250 W-2s per year (this is the electronic

reporting threshold)– No reporting obligation until further notice

• Terminated employees who request the Form W-2 early

• Calculate the cost on a calendar year basis without regard to whether employer uses a fiscal year

EMPLOYER-SPONSORED COVERAGE WELLNESS PROGRAMS

• Effective Date: Currently set for 2014

• Two types of wellness programs– Programs that do not require an individual to meet a

standard (for example, require meeting attendance)– Programs that do require a standard (for example,

meeting blood pressure or cholesterol goals)• Limited to 20% premium reductions• Reasonably designed to promote health (not a

subterfuge)• Annual qualification• Reasonable alternative standards for those who

cannot meet the standard• Notice of the reasonable alternative

EMPLOYER-SPONSORED COVERAGE WELLNESS PROGRAMS

• Effective Date: Currently set for 2014

• DOL has indicated that it will increase the limit from 20% to 30% before 2014

• The total amount may be more than the limit if the additional reduction is due to a program that doesn’t require a participant to meet a “standard”

EMPLOYER-SPONSORED COVERAGE CODE SECTION 105(h)

• Effective Date: Delayed until further notice for fully-insured plans; now for self-insured plans

• What is Code Section 105(h)?– Tax section of the Internal Revenue Code– Applies a tax on discriminatory benefits– Prohibits discrimination on the basis of eligibility and

benefits– Numerical testing as well as a benefit classification

• To which plans does Code Section 105(h) apply?– Historically only applied to self-insured plans– Fully-insured plans subject to 105(h) after healthcare

reform



• What are the differences in the application to self-insured and fully-insured?– Penalties– Types of plans covered (dental, vision, accident & disability,

long-term care, specific disease or illness, and hospital fixed indemnity)

• What is the test?– Benefits 70% (with exclusions)– Benefits 80% or more of those who are eligible if 70% are

eligible– Reasonable classification



• What are the penalties for failure to comply?– For self-insured plans, including the benefit in income– For fully-insured plans, a $100 per day per affected

participant excise tax– Potential liability for a claim for benefits under ERISA– Subject to self-reporting

• How do self-insured plans address 105(h) issues?– Comply with the test– Treat premiums as after-tax contributions

PRACTICAL CONSIDERATIONS

• Amended Plan Documents and Service Agreements – Review your new plan document

• Was it properly amended?• Carefully review definitions

– Review your service agreement• Does it require your service provider to comply with the

PPACA in general?• Does it set forth any new duties that you expect your

service provider to perform?• Look at limitations on liability and indemnity

PRACTICAL CONSIDERATIONS

• Employee Notices– Review your notices to ensure that they conform to your

document– Review employee handbooks and all other employee

communications

• Review your authorization documents

QUESTIONS

– Questions?

REPORTING, TAXES AND REVENUE RAISERSAFFECTING EMPLOYERS

HIGH COST EMPLOYER COVERAGE (CADILLAC PLANS)

• Effective for tax years beginning after 2017

• Excise Tax: 40% of “excess benefits”– Calculated as the value of employer-sponsored

coverage over dollar limit

• Imposed on health care providers– Insurer (fully-insured plan);– Employer/administrator (self-insured plan);– Employer (HSA or MSA contributions)

DETERMINING APPLICABLE DOLLAR LIMIT: – Beginning thresholds (in 2010):

• $27,500 other than self-only• $10,200 self-only;

– Single formula adjustment for period between 2010 and 2018 to reflect medical inflation

• EXAMPLE:– Cost of self-only coverage increases by 80%

between 2010 and 2018– Adjustment percentage under formula is 135%

(100 + (80-55))– In 2018, threshold is $13,770 for self-only

($10,200 X 135%)


Determining Value of of Employer-Sponsored Coverage: – COBRA premium valuation – Aggregate the value of employer-sponsored coverage,

including medical, drugs, FSA and HSA, on site clinics, EAPs

• Premiums included whether paid by employer or employee (whether paid before or after tax)

– Separate dental/vision benefits, disability, long-term care, secondary benefits and fixed indemnity coverage may be excluded


Coverage in 2018 $13,770 threshold for self-only ($1,148 per month) $14,500 value of employer-sponsored coverage ($1,208 per month) $60 excess coverage ($1,208 – $1,148 = $60) 9 months of coverage during 2018

$60 monthly excess X 9 months X 40% = $216 excise tax

HIGH COST EMPLOYER COVERAGE (CADILLAC PLANS) - EXAMPLE