HEALTH REFORM IN A NUTSHELL
What Employers Need to Know
Alson R. Martin
Lathrop & Gage LLP
10851 Mastin Boulevard
Overland Park, KS 66210-1669
Health Reform in a Nutshell
What Employers Need to Know
With the passage of the most significant reform of America's modern-day health care
system, employers must assess what the Patient Protection and Affordable Care Act
(PPACA) means for them. This presentation seeks to provide you with an overview of
the most important things an employer needs to know about health reform. This
material is informational only and does not constitute legal advice regarding any
HHS, IRS and DOL have already issued many PPACA healthcare reform regulations.
Many more regulations will be issued.
What’s Covered and What’s Not
Healthcare reform covers insured and self-funded comprehensive medical health
Health reform does not regulate “Excepted Benefits,” which include stand-alone vision,
stand-alone dental, cancer, long-term care insurance, Medigap insurance, as well as
accident and disability insurance that make payments directly to the individual.
Healthcare reform also does not affect retiree only plans.
US Supreme Court Decision
The US Supreme Court in NFIB v. Sebelius (June 28, 2012) ruled that (1) Congress
had the power to adopt the individual mandate as a tax under its taxing authority (but
not under the Commerce Clause, an important limitation on the Commerce clause); (2)
for purposes of the Anti-Injunction Act that prevents judicial decisions on taxes until
they are assessed by the IRS, the individual mandate is a penalty and not a tax for this
purpose; and (3) that while the 2014 Medicaid expansion is constitutional but the law's
remedy is unconstitutional. The remedy was that a state that did not agree to the
Medicaid expansion lost its federal funding for the expansion and its current funding.
The Court held that a state not implementing the expansion would only lose funds for
the expansion, but not its existing federal funding, in effect making the expansion
optional for each state. Many states are not increasing Medicaid eligibility to those
making less that 133% of Federal Poverty Level.
Small Business Tax Credit - 2010 and Thereafter
SMALL BUSINESS TAX CREDIT: Tax credits for employers with 24 or fewer
employees (excluding owners, certain relatives, and seasonal employees) with
average wages of less than $50,000, covering up to 35% of employer-paid premiums
(25% for tax-exempt entities). The employer must contribute 50% or more toward your
employees’ self-only health insurance premiums.
In 2014 and thereafter, that credit increases to 50% for for-profit employers (35% for
tax-exempt employers) and will be available for an additional two consecutive years. A
small employer must pay premiums on behalf of employees enrolled in a qualified
health plan offered through a Small Business Health Options Program (SHOP)
Plan Years Beginning On/After September 23, 2010
Grandfathered Health Plans are subject to certain HCR rules, as follows:
• Prohibition of annual and lifetime benefit limits (except that provisions annual limit prohibitions
not applicable for individual health insurance coverage).
• No rescission except for fraud or intentional misrepresentation.
• For plan years beginning before January 1, 2014, children, who are not eligible for employer-
sponsored coverage, covered up to age 26 on family policy.
• Pre-existing condition exclusions for covered individuals younger than 19 are prohibited.
• Pre-existing condition exclusions prohibited for all persons in 2014 except individual
• Prohibition on waiting period of more than 90 days in 2014 and thereafter.
• Summary of Benefits and Coverage (SBC).
• Medical Loss Ratio provisions.
Plan Years Beginning On/After September 23, 2010
New and Non-Grandfathered Health Plans – prior slide requirement plus:
• No cost-sharing for preventive services
• Discrimination in favor of highly compensated is prohibited. However, IRS
has Indefinitely delayed effective date and has yet to issue regulations.
• Children covered up to age 26 on family policy
• Internal appeal and external review processes
• Emergency services at in-network cost-sharing level with no prior
• Minimum value and essential health benefits
Plan Years Beginning On/After September 23, 2010
New and Non-Grandfathered Health Plans
Parents must be allowed to select a pediatrician as a primary care physician
for their children and women must be allowed to select an OB-GYN for their
primary care physician
Coverage for clinical trial participants
Any insurance policy sold to new entities or individuals after March 23, 2010
will not be grandfathered, even if the product was offered in the group or
individual market before March 23, 2010.
Collectively Bargained Plans
The regulations provide that fully insured (but not self-insured) collectively bargained
plans retain their grandfather status until the current agreement (i.e., the agreement in
effect on March 23, 2010) expires. Self-insured collectively bargained plans are subject
to the rules in the same way as other covered health plans.
A change in carriers under a fully insured collectively bargained plan does not result in
loss of grandfather status if the change is made before the current agreement (i.e., the
agreement in effect on March 23, 2010) expires.
Changes to benefits that apply while the current collective bargaining agreement is in
effect, such as increasing co-payments, do not result in loss of the grandfather.
However, whether the grandfather applies after the expiration of the collective
bargaining agreement is measured by comparing the benefits in effect at that time to
the benefits in effect on March 23, 2010. If the changes are not within the permitted
parameters then the plan will cease to be grandfathered when the relevant agreement
THE POSTPONED INSURED HEALTH PLAN NONDISCRIMINATION RULES do not
apply to “grandfathered” plans continuously in existence March 23, 2010.
As discussed hereafter, grandfathered plans cannot reduce benefits or increase
employee costs except in minor respects or grandfathering is lost.
Grandfathered plans DON'T have to:
• Cover preventive care for free
• Guarantee your right to appeal
• Protect your choice of doctors and access to emergency care
• Be held accountable through Rate Review for excessive premium increases
• Grandfathered individual health insurance plans (the kind you buy yourself, not the
kind you get from an employer) don't have to:
• End yearly limits on coverage
• Cover you if you have a pre-existing health condition
Grandfathered Plans Notice Requirement
Unfortunately, while the law does not require this, the current regulations require that a
grandfathered plan notify participants each year that the plan is a grandfathered plan
beginning September 23, 2010.
This requirement, if incorporated in final regulations, would cause plans qualified as
grandfathered plans not to be grandfathered because many employers have not given
this annual notice.
Permitted Grandfathered Plan Changes
The following changes do not cause a plan to lose its grandfathered status:
• Voluntary changes to increase benefits, to conform to required legal changes (including health
care reform mandates), and to voluntarily adopt health care reform requirements do not cause a
plan to lose its grandfathered status.
• Increasing a fixed-amount copayment, deductible and/or out of pocket limit if less than $5
increased by medical inflation as measured from the grandfather date, or a total percentage
measured from the grandfather date that is more than the sum of medical inflation plus 15
• In addition, recognizing that group health plans and health insurance issuers may have made
design changes since the grandfather date, the preamble to the Interim Final Rules states that
changes made in good faith compliance with the health care reform grandfathering requirements
prior to June 14, 2010 may be disregarded by regulators for enforcement purposes if the
changes only modestly exceed the permitted changes described above.
2011 – Simple Cafeteria Plan
NEW SIMPLE CAFETERIA PLAN available for businesses with 100 or fewer
employees. This is modeled after the Simple 401(k) plan – the employer gets a pass
on all nondiscrimination requirements if
1. eligibility and benefits meet stated requirements; and
2. a minimum contribution is made to the plan each year.
However while it appears to be Congress’ intent to exempt Simple cafeteria plans from
the new PPACA health insurance nondiscrimination rules, that is not provided in the
statute. Nevertheless, this problem is easy to design around.
Probably the only owners who can be covered are shareholders of C corporations who
are “employees,” as in regular cafeteria plans.
2011 – Nonprescription OTC Drugs
NONPRESCRIPTION OVER-THE-COUNTER DRUGS
(except insulin and OTC equipment and supplies, like
crutches, bandages, contact lens solution, blood sugar
tests) are no longer an eligible medical expense under a
health care flexible spending account (FSA), a health
reimbursement arrangement (HRA), a health care
savings account (HSA).
Solution – Get a Dr’s order for these OTC items at your
2013 W-2 Information Reporting For 2012
An employer was required show the value of health insurance for employees’ on their
Form W-2 for 2011 and thereafter. However, this deadline was extended a year by the
IRS, so the first time most W-2s will include this information will be in 2013 for calendar
Smaller Employer Exemption: Until the issuance of further guidance, an employer is
not subject to the W-2 reporting requirement for any calendar year if the employer was
required to file fewer than 250 Forms W-2 for the preceding calendar year.
2012 – Federal LTC Benefit Eliminated
Community Living Assistance Services and Supports
(CLASS) Act - the employee, not the employer, was pay
for it through payroll deductions if employee elects.
HHS determined this benefit could not be adequately
funded on a sustainable basis, and it has now been
eliminated from the healthcare reform law.
2013 – Itemized Deductions for Medical Expenses and Employer
Drug Subsidy Deduction Eliminated
Increases the threshold for the itemized deduction for
unreimbursed medical expenses from 7.5% of adjusted
gross income to 10% of adjusted gross income; waives
the increase for individuals age 65 and older for tax years
2013 through 2016.
Employer tax deduction for Medicare Part D retiree drug
subsidies eliminated because double dip due to being tax
free to retirees.
2013 Health FSA Cap of $2500
HEALTH FSA EMPLOYEE CONTRIBUTIONS CAPPED AT $2500.
Contributions to health flexible savings accounts (FSAs) for
healthcare will be limited to $2,500 per year, indexed by the
Consumer Price Index in subsequent years.
Employer contributions are limited to $500, so the total annual
medical reimbursement benefit can be $3000 if the employer also
contributes to the plan.
$2500 limit applies per employer plan and per person, so spouses,
even if employed by same employer, have separate $2500 limit. An
individual employed by unrelated employers can have two $2500
2013 Medicare Taxes
Wages and earned income – from a rate of 1.45% to 2.35% - for singles
earning more than $200,000 a year and families above $250,000, for a total
of 3.8% paid by employer and employee above the threshold.
Investment Income – A new “Medicare” tax is imposed on investment income
for those with income above these $200,000/$250,000 levels.
• Tax does not apply to income exempt from gross income, such as exempt
gain from the sale of a principal residence, tax-exempt bonds, etc.
• Tax also does not apply to IRA and retirement plan distributions.
• Tax does not apply to S corporation distributions.
July 31, 2013 and Thereafter – Payment of PCORI Fees
IRS Form 720 is used to report and pay the Patient Centered Outcomes Research
Institute Fee ("PCORI fee") to the IRS. The tax and return is due July 31 following the
calendar year in which the plan year ends. Insurers pay the tax for insured plans
The PCORI fee for plan years ending on or after October 1, 2012, and before October
1, 2013 is $1.00 multiplied by the average number of covered lives in the group health
plan. The PCORI fee for the second year will increase to $2.00 times the average
number of covered lives in the group health plan and is indexed for increases in
national health expenditures for the following years.
The fee applies to certain "specified health insurance" policies and includes medical
policies, retiree-only policies, any accident or health insurance policy (including a
policy under a group health benefit plan) issued to individuals residing in the United
HRAs & MERPs– Payment of PCORI Fees
Health reimbursement arrangements (HRAs) and medical expense
reimbursement plans (MERPs) are self-funded employer paid health
plans subject to the PCORI fee.
If the plan sponsor also maintains a self-funded medical plan with the
same plan year, the medical plan and HRA may be treated as one
plan for purposes of the PCORI fee.
However, if the medical plan is fully insured, the medical plan and
HRA must be treated as separate plans for purposes of the PCORI
fee, with the insurer paying the fee for the medical plan and the
employer/plan sponsor paying the fee for the HRA.
October 1, 2013 and Thereafter
Employer Provided Exchange Notice
The employer’s health plan year is not relevant as to the required delivery of
this notice. Originally required March 1, 2013, this notice must be provided by
all employers subject to the Fair Labor Standards Act, regardless of size, to
employees by Oct. 1, 2013. Notices must be provided to both active part-time
and full-time employees (not spouse or dependents, regardless of whether
eligible for the employer’s health plan, if any.
New employees hired on and after October 1, 2013 must receive the notice
within 14 days of hire. This 14-day notification period for new hires is in effect
from October 1, 2013 through 2014 (the timing to be revisited at that point).
Notice can be sent first class mail or electronically.
More On Employer Provided Exchange Notice
There are 2 model notices. For employers with a health plan, see
http://www.dol.gov/ebsa/pdf/FLSAwithplans.pdf. For employers with
no health plan, see
Part B of the Notice for employers with health benefits may be
confusing to participants, as it gives them current year information
about the employer’s health plan when an employer may be
exploring different or no insurance in following year, which is when
the employee may be eligible to go to the exchange insurance
Employer Provided Exchange Notice - Who is Subject To FLSA?
Employers subject to the Fair Labor Standards Act (FLSA) must give
the notice. Most firms under $500,000 in annual dollars received from
sales made or business done are exempt from the FLSA and thus the
notice requirement other than those specifically included regardless of
income, which are hospitals; institutions primarily engaged in the care
of the sick, aged, mentally ill, or disabled who reside on the premises;
schools for children who are mentally or physically disabled or gifted;
preschools, elementary and secondary schools, and institutions of
higher education; and federal, state, and local government agencies.
Employer Provided Exchange Notice – Who Is Subject to FLSA?
Only employers engaged in interstate commerce are subject to the FLSA.
Examples of engaging in interstate commerce include:
• An employee uses a telephone, facsimile machine, the U.S. mail, or a
computer e-mail system to communicate with persons in another state for
• An employee drives or flies to another state while performing his or her job
• The business uses goods from an out of state supplier; or
• The business uses an electronic device that authorizes a credit/debit card
Administration Extension from 2013 to 2016 of Non-ACA
Compliant Individual & Small Group Insurance
The administration announced on March 5, 2014 that non-compliant
individual health and small group policies can be extended an
additional two years for policy years beginning on or before Oct. 1,
2016. As with the original extension, the state insurance regulator must
agree to approve such policies, and the health insurance companies
must decide to continue offering such policies. States can elect to
extend the transitional policy for a shorter period than through October
1, 2016 but may not extend it to policy years beginning after October 1,
Optional 2013-2014 Fiscal Year Cafeteria Plan
An employer with a non-calendar year cafeteria
plan may amend it to allow one-time participant
election in or out of group health coverage during
the 2013-2014 plan year (written amendment due
by December 31, 2014.
2014 – No More Pre-Tax Employer Payment
Plans For Individual Coverage
The term “employer payment plan” is defined very broadly
by IRS Notice 2013-54, and includes any pre-tax
arrangement (including salary-reduction-funded health
FSAs and HRAs, MERPs and other premium
reimbursement arrangements) used to purchase individual
health insurance coverage in the individual market or on an
exchange unless the plan is for a single employee or solely
2014 Limits on HRAs and Health FSAs
Most stand-alone (those not integrated with comprehensive medical
coverage) health reimbursement accounts (“HRAs”) and medical
expense reimbursement plans (“MERPs”) generally will not comply
with the ACA's PHSA “group health plan” rules effective for plan
years beginning in 2014 prohibiting annual and lifetime dollar limits
and the preventive care requirements. Stand-alone HRAs are
permitted if limited to 1 participant or retirees. Stand-alone health
FSAs are also generally prohibited.
Penalty - $100/day/participant or $36,500/year/participant.
HRAs that are integrated with other major medical coverage as part of a
group health plan will not violate the annual dollar limit rules so long as the
other coverage on its own would comply because the combined benefit
satisfies the requirements. The HRA participants must also be participants in
the employer’s major medical plan or participate in another major medical
plan, such as through a spouse’s employer.
Stand-alone HRAs, even if they only reimburse excepted benefits (vision,
dental, etc) are not themselves excepted benefits.
HRA plans must provide for participant opt out so they can get subsidy on
exchange if otherwise qualified.
No Stand-Alone Health FSAs in 2014 and Thereafter
Health FSAs are group health plans subject to no annual dollar limit and
preventive care mandate and cannot be excepted benefits merely by providing
only, for instance, for dental and vision expenses. Health FSAs are excepted
benefits only if (1) the employer also makes available (the employee can turn it
down) to that employee group major medical health plan coverage and (2) the
health FSA maximum benefit payable to any participant cannot exceed two
times the participant's salary reduction election for the FSA for the year (a
dollar-for-dollar match) or, if greater, $500 plus the amount of the participant's
salary reduction election. Moreover, an FSA that is an excepted benefit must be
offered through a Section 125 cafeteria plan to be exempt from the annual
dollar limit prohibition.
2014 and Thereafter – Individual Mandate
Minimum Penalty. Most Americans must have major medical health
insurance with minimum essential coverage or pay this tax of $95 in 2014,
$325 in 2015, and $695 in 2016 (or, if greater, up to 1%, 2%, and 2.5 % of
household income above threshold amount for filing tax return). Families will
pay half the penalty amount for children under 18, up to a cap of $2,085 per
family (equal to 3 people, no matter how large the family). After 2016, the
dollar amounts are indexed to Consumer Price Index – CPI-U. A couple with
one child over 18 (or two children age 18 or under), and no coverage, would
pay a minimum of $285 in 2014, $975 in 2015 and $2,085 in 2016.
Maximum Penalty. The annual national average premium cost for a Bronze
plan if that is less than the applicable percentage of a person’s household
EXCEPTIONS TO INDIVIDUAL MANDATE
Individuals Who Cannot Afford Coverage. If an employer offers coverage that would
cost the employee more than 8 percent of his or her household income (for self-only
coverage) that individual is exempt from the tax.
Taxpayers With Income Below Filing Threshold. Also exempt are those who earn too
little to be required to file tax returns. For 2013, thresholds are $10,000 for a single
person under age 65, and $20,000 for a married person filing jointly with a spouse. The
thresholds go up each year in line with inflation, so those cut-offs will be higher in
Hardships. HHS can grant hardship exemptions, which will be granted liberally to those
whose 2013 coverage was cancelled.
Other Exemptions. Also exempt are undocumented aliens, members of Indian tribes,
persons with gaps in coverage < 3 months, those in jail, and members of certain
religious groups exempt from Social Security taxes, i.e., Anabaptist (Mennonite, Amish,
Health Reform’s Out-of-Pocket Limits
Generally Effective in 2014 – One Delayed Effective Date
Healthcare reform’s requirement that health insurance individual and
small group plans cap how much consumers must pay out-of-pocket
each year for medical care will take effect as scheduled in 2014 for
some and 2015 for others. For 2014 and thereafter, the health reform
law requires that private insurance plans offered in the individual and
small group markets limit how much in cost-sharing charges —
deductibles, copayments, and coinsurance — that people enrolled in a
plan must pay each year for covered benefits provided by the plan’s
network of health care providers.
More On Out Of Pocket Limits
The requirement does not apply to “grandfathered” plans or to self-insured employer
plans, large group employer plans, or large group market insurers. In 2014, the
maximum out-of-pocket limit is $6,350 for an individual and $12,700 for a family (the
same as for HSA compatible high deductible plans, and applies to health insurance
offered in the individual, nongroup, market.
Deductible Limit. The deductible cannot exceed $2,000 for a plan covering a single
individual, or $4,000 for any other plan.
The annual deductible limit as applying only to employers and insurers in the individual
and small group markets for non-grandfathered plans. In the case of a plan using a
network of providers, cost sharing paid by, or on behalf of, an individual for benefits
provided outside of such network does not count toward the annual limitation on cost
sharing or the annual limitation on deductibles.
Still More On Out Of Pocket Limits
One Delay Until 2015. However, employer plans that have “separately
administered” benefits, such as a primary package of health benefits and a
different insurer or administrator for other benefits, such as prescription
drugs, need not comply until 2015. Employer plans with separately
administered benefits that qualify for the delay must apply some out-of-
pocket limits in 2014. These plans must ensure that their primary package of
health benefits has an out-of-pocket limit of no more than $6,350 for
individuals and $12,700 for families. A separately administered benefit, such
as prescription drugs, that already has an existing limit on out-of-pocket costs
must also comply with the limits of $6,350 for individuals and $12,700 for
families in 2014.
2014 – Individual Responsibility Tax
Both insured and self-funded plans will pay into state-based program during
2014-2016 to cover high cost claimants enrolled for individual coverage in
and outside the exchange
The per member fee in 2014 is $63; states can charge additional fees to
reinsure their individual, small and large group insured markets
Post-65 retiree coverage excluded along with HIPAA-excepted benefits;
May be paid from ERISA plan assets
2014 Health Care Exchanges (Marketplaces)
These new state-based marketplaces will give individuals and small
businesses in 2015 and thereafter (with 100 or fewer employees, or just 50 if
state elects) a place to shop for standardized, private health insurance.
Subsidies are provided for those earning less than 400% of the federal
poverty level. In states that opt out of expanding Medicaid, some people
making below 138% of FPL will be eligible for Medicaid, some will be eligible
for subsidized coverage through marketplaces, and about 7 million others will
not be eligible for exchange subsidies or Medicaid.
Offerings at platinum, gold, silver and bronze levels. In 2017, SHOP
exchanges can be expanded to employers with over 100 employees at
option of exchange.
2014 Health Care Exchanges (Marketplaces)
16 states are setting up their own exchanges. 8 additional states are
partnering with HHS to set up their exchanges. In the rest of the
states, HHS has set up the state marketplace.
While the statute says the individual tax subsidy for exchange
purchased insurance for qualifying individuals applies to insurance
purchased on an exchange established by a state, IRS regulations
include all state exchanges, including those established by HHS.
DC court has ruled that these IRS regulations are valid.
EXCHANGE (MARKETPLACE) PREMIUM SUBSIDIES
Obamacare premium subsidies and cost assistance will be based on the
Federal Poverty Level (FPL) Guidelines at the start of the open enrollment
period (October 1st 2013 for 2014). Thus, premium subsidies, cost-sharing
assistance, and taxes for 2014 are based on the 2013 Federal Poverty
• If you make less than four times (400% of the FPL) you may qualify for
reduced premiums through the marketplace due to advanced premium tax
• If your income is below two and a half times (250%) the FPL you qualify for a
policy with reduced deductibles, copayments and lower maximum out of pocket
Exchange Subsidies For Income Below 400% Of Federal Poverty Level
100% of FPL 400% of FPL
Household Size (2013) (2013) Premium Max Range
1 $11,490 $45,960 $ 0 -$363.85/month
2 $15,510 $62,040 $ 0 -$491.15/month
4 $23,550 $94,200 $ 0 -$745.75/month
Note – the FPL is greater in Alaska and Hawaii.
2014 – Exchange Insurance Loophole
Persons purchasing insurance on exchange can have 12 months of
coverage by only paying first 9 months of premiums. Intent was to
give people who can’t pay premiums due to hardship, such as layoff,
a chance to catch up.
If Individual does not pay last 3 months premiums, the insurance
pays providers in month 10 but not months 11 and 12.
Such an individual remains eligible to buy exchange insurance the
next year even if missed premiums never paid!!
Plan Years Beginning In 2014
90-Day Waiting Period Maximum; PHSA 2708
The maximum 90-day wait rule applies for plan years beginning on or after January 1,
2014. All calendar days are included in the 90-day period, including weekends and
holidays. Both grandfathered and non-grandfathered group health plans must comply.
The test applies solely for eligible employees.
If a group health plan conditions eligibility on an employee regularly working a
specified number of hours per period (or working full time), and it cannot be
determined that a newly hired employee is reasonably expected to regularly work that
number of hours per period (or work full time), the plan may take a reasonable period
of time to determine whether the employee meets the plan’s eligibility condition. The
plan may require that any employee having completed a number of cumulative hours
of service not to exceed 1,200 hours.
Violations are subject to the 4980H excise tax.
2014 – Additional Items
MEDICAID ELIGIBILITY will increase to 133 % of poverty level for all
nonelderly individuals in states adopting the Medicaid expansion.
States will receive increased federal funding to cover these new
populations. There is no deadline for a state to adopt expansion.
AUTO-ENROLLMENT DELAYED. Any employer with 200 or more
full-time employees must begin auto-enrolling all eligible employees
into its health plan, providing employees notice and allowing them to
opt-out of coverage. Technical Release 2012-01 states that
employers are not required to comply with the automatic enrollment
provision until final regulations are issued and become applicable.
Extension Of 2014 Employer Mandate To 2015 or 2016
IRS Postponed Effective Date From 2014 to 2015. “Applicable Large Employers” with at
least 50 full-time (30 or more hours per week) and full-time equivalent US employees in
preceding year must offer insurance meeting specified requirements to all but 5% (or 5 if
greater) of its full-time employees or pay a $2,000 per full-time worker penalty after its
first 30 employees if any of its full-time employees receive a federal premium subsidy
through a state exchange.
Employer with average between 50 and 99 Full-Time (including full-time equivalents)
Employees in 2014:has a one-year delay in the employer mandate, until January 1, 2016
(and for non-calendar-year plans, any calendar months during the plan year beginning in
2015 that fall in 2016) if employer did not lay-off employees to fall below the 100
employee threshold and that employer did not reduce any coverage you were already
offering, and beginning on February 9, 2014 and ending on Dec. 31, 2014, employer
does not eliminate or materially reduce the health coverage, if any, offered as of February
MORE ON EMPLOYER MANDATE EXTENSION
2014 final regulations provide new transitional relief for two types of
employers. The applicable large employer status (what triggers the
potential application of the mandate) for a calendar year is still based
on the number of employees in the preceding calendar year. Transition
rules, discussed below, include those for non-calendar year health
plans, the ability to count employees for less than 12 months in 2014 to
determine applicable large employer status, initial offers of health
coverage in 2015, dependent coverage, employers with at least 50 but
less than 100 full-time and full-time equivalent (FTE) employees, and
reduction of the 95% offer of health coverage requirement to 70% for
SEASONAL EMPLOYEES NOT COUNTED FOR ALE STATUS
If the number obtained is 50 or greater full-time and full-time equivalent
U.S. employees and the employer included seasonal employees, the
employer may then apply the special rule for seasonal employees to
see if they can be excluded. If the employer only exceeds 49 full-time
and full-time equivalent employees for four or less calendar months
(not necessarily consecutive) or 120 or fewer days (not necessarily
consecutive) and the excess over 49 for those four months or 120 days
are seasonal employees, then the employer is not an applicable large
Employer Mandate Reduction Strategy
Applicable large employers offering employee pay all coverage or a low benefit minimum
essential coverage plan (need not cover all 10 essential health benefits) are not subject
to the 4980H(a) penalty but could still face the 4980H(b) penalty of $3000 per year per
full-time employee (there is no subtraction of 30 here) for workers who go to an exchange
and qualify for subsidized coverage if the employer’s coverage is either (1) not affordable
(self-only coverage more than 9.5% of income) or (2) lacks minimum value. Whether this
will be a significant penalty depends on how many of an employer’s employees qualify for
and purchase subsidized health insurance on an exchange. In many cases, the result
could be much less expensive than the 4980H(a) penalty where many employees,
especially those with low incomes, will not go to the exchanges due to the relatively high
cost of the coverage after the subsidy, the availability of care at hospital emergency
rooms, with the employee mandate tax being less than the out of pocket insurance cost.
More Health Reform Employer Mandate Avoidance Strategies
(1) Make more employees part-time; (2) Subcontract work to
independent contractors; (3) increase part-time employees; (4) Hire
older workers on Medicare. Employers that are facing significant cost
increases because of the requirements to cover new groups of
employees will want weigh all these possible alternatives.
Caution - reducing hours of current employees who would have
coverage to less than 30 so that the employer need not provide
coverage runs serious risk of an ERISA § 510 anti-discrimination
Employer Mandate Avoidance Strategies - PEO Use Is Risky
Can a controlled group of employers with more than 50 FTEs with more than
30 working over 30 hours per week wanting to provide health insurance to key
managers move them to a staffing company (professional employment
organization or PEO) and not cover the remaining employees if remaining
employees total less than 50 FTEs or none work over 30 hours per week? The
final employer mandate regulations say that where employers seek to use
temporary staffing agencies or professional employer organizations (PEOs)
purporting to be the common law employers to evade application of §4980H,
the actual employer is determined using the common law employee rules used
by the IRS.
Practical Results of HCR
More Exchange Insurance Subsidies Than Planned?
Health reform provides strong incentives for employers, perhaps with
the agreement of their employees, to drop employer-sponsored health
insurance for as many as 35 million Americans . . . and raising the
gross taxpayer cost of the subsidies to roughly $1.4 trillion in the first 10
years. This could be the cost of health insurance subsidies.
From: Holtz-Eakin & Smith, “Labor Markets and Health Care
Reform: New Results,” AMERICAN ACTION FORUM (May 2010)
Health Reform Does Nothing For Cost Shifting
Health insurance reform does not address the inequities between
provider costs paid by government-sponsored plans and those paid
by employer-sponsored plans. Medicare and Medicaid have lower
payment rates than private insurers, leaving providers looking to the
private sector to make up for these lower reimbursements.
The one thing reform does for states participating in the Medicaid
expansion is to reduce uncompensated charity care, a help to health
care providers, i.e., hospitals and physicians.
Employers Must Look At What Competitors Are Doing
Health insurance is only one portion of the overall compensation
package employees receive. If one portion of that package is reduced
or eliminated, wages will likely be increased to retain and attract
valuable labor where there is competition for these employees. Thus,
the key question is whether the employer can keep the employee
happy by discontinuing health coverage and increasing wages. Of
course, this would subject larger employers to the employer mandate
penalty, but that penalty is far less that the cost of health coverage.
Potential Higher After-Tax Costs For Highly Compensated
If high-wage workers want to continue to receive health insurance, the
new non-discrimination rules, if and when they become effective, force
employers to offer equivalent insurance to most workers. For those
firms dominated by lower-wage workers that will provide no coverage
and, if they now provide it but discontinue it, resulting in paying the
workers increased compensation and the employer mandate penalty (if
an applicable large employer), then once the nondiscrimination rules
are effective for insured plans, employer will not be able to provide
health insurance solely for the high wage workers or the employer will
have a $100/day ($36,500 per year) penalty times 75% of its