July 19, 2012
On June 28, 2012, the Supreme Court announced its greatly anticipated decision in National Federation of Independent Business v. Sebelius, Nos. 11-393, 11-398, 11-400, 2012 WL 2427810 (U.S. Jun. 28, 2012), the case challenging the constitutionality of the Patient Protection and Affordable Care Act ("ACA"), Pub. L. No. 111-148 (Mar. 23, 2010), as modified by the Health Care and Education Reconciliation Act, Pub. L. No. 111-152 (Mar. 30, 2010). The ACA as modified contains comprehensive health-care reform provisions, including a mandate that by 2014 all individuals must obtain a minimum level of health insurance coverage or pay a penalty. In a 5-4 decision, the Court ruled that the mandate exceeded Congress's power under the Commerce Clause, but it upheld the Act's individual mandate/penalty provision as a valid exercise of Congress's taxing authority. Chief Justice Roberts, joined by Justices Ginsburg, Breyer, Sotomayor, and Kagan, joined in the "individual mandate/penalty" portion of the Court's decision. A different majority of the Court then ruled that the States must be permitted to opt out of the Act's expansion of Medicaid assistance. Chief Justice Roberts, joined by Justices Scalia, Thomas, Kennedy, and Alito, joined in the "Medicaid expansion" portion of the Court's decision. The rest of the ACA was left intact. Justices Scalia, Thomas, Kennedy, and Alito dissented, believing the ACA to be unconstitutional in its entirety.
As a result of the Court's ruling, except for the mandatory nature of the Medicaid expansion, all provisions of the ACA remain in effect. This includes the market reforms already in effect (such as the adult-child coverage, the phaseout of annual/lifetime limits, and the requirements for preventive care) as well as the disclosure and reporting requirements already announced by federal regulatory agencies (such as the Summary of Benefits and Coverage). Although it is still possible that the November 2012 elections might ultimately result in a congressional repeal or modification of the ACA, employers must nevertheless be prepared to meet the Act's impending deadlines. The following analysis is designed to help employers prepare for compliance with the Act in the event that it is not repealed:
1. Form W-2 reporting: The ACA requires employers to disclose the aggregate cost of employer-sponsored health insurance coverage provided to their employees on the employee's Form W-2. This employer disclosure requirement was optional for the 2011 tax year, but it is mandatory for the 2012 tax year. The Internal Revenue Service ("IRS") has offered guidance on how to report the cost of employer-provided health care, what coverage to include, and how to determine the cost of the coverage in I.R.S. Notice 2011-28, 2011-16 I.R.B. 656. The Notice is in a Question-and-Answer format and is available at the IRS website, www.irs.gov/irb/2011-16_IRB/ar08.html.
2. Summary of Benefits and Coverage; Uniform Glossary: For plan years beginning on or after September 23, 2012, employers must provide their employees with a written Summary of Benefits and Coverage ("SBC") as well as make available a Uniform Glossary of Terms commonly used in health insurance coverage (such as "deductible" and "copayment"). The IRS and the Departments of Labor ("DOL") and Health and Human Services ("HHS") have jointly issued final regulations implementing these disclosure requirements of the ACA. The regulations permit the SBC to be provided either as a stand-alone document or in combination with other summary materials (such as a pension/retirement plan Summary Plan Description). A list of FAQs about these new disclosure requirements is available at the DOL website, www.dol.gov/ebsa/faqs/faq-aca8.html#1.
3. Comparative effectiveness research fees: The ACA imposes a research fee on plan sponsors of self-funded plans and issuers of individual and group policies, beginning in 2012 and phasing out in 2019. The assessed fees are contributed to a trust, the Patient-Centered Outcomes Research Trust Fund," that will fund comparative effectiveness research to be conducted by the Patient-Centered Outcomes Research Institute. The research will evaluate and compare health outcomes and the clinical effectiveness, risks, and benefits of medical treatments and services. Group health plans must pay a per-participant fee as follows: $1 per plan participant for the first year ending between October 1, 2012 and September 30, 2013, and $2 per plan participant, indexed, thereafter through October 1, 2019.
4. FSA contribution limit: In 2013, salary reduction contributions to health-care flexible spending accounts ("FSAs") must be limited to $2,500.
5. Notice of health exchanges: In 2013, employers must give their employees written notice of the availability of health insurance through the relevant state-operated health insurance exchange (or the federal exchange if the State in question does not operate such an exchange). Regulations addressing this notice are pending.
In addition to meeting the impending deadlines for matters such as notice, disclosure, and reporting requirements, employers that have not already done so should engage in comprehensive planning regarding the health-care benefits package they offer, or might wish to offer, to their employees. Employers should carefully consider the following:
1. "Play or pay" analysis: Employers should consider the strategic implications of offering or not offering a health-care plan after 2013. Starting January 1, 2014, the ACA requires employers with 50 or more full-time employees to provide at least a minimum amount of health coverage or to pay a $2,000 fee per employee if at least one full-time employee enrolls in a qualifying (non-employer-provided) plan and receives the premium tax credit for enrollment. The Congressional Research Service has issued a report describing and illustrating the employer penalties, which is available at www.ncsl.org/documents/health/EmployerPenalties.pdf. Depending upon the employer's size as well as other factors (such as tax implications), it may be desirable to simply not offer a health-care plan and pay the resulting penalty instead.
2. "Grandfathered plan" analysis: If a health-care plan was in effect on March 23, 2010 (the date of enactment of the ACA), employers should perform a qualitative analysis on whether to retain it as a grandfathered plan. Certain group health plans providing coverage on that date are considered by the ACA to be "grandfathered plans" exempt from some, but not all, of the Act's requirements. A regulation jointly issued by the IRS, DOL, and HHS provides guidance on what employers must do to maintain the grandfathered status of their plans, including what changes will cause a plan to lose the status. Employers should decide whether the value of maintaining grandfathered status for their health plans outweighs the value of making changes to the plans to control costs or achieve other business objectives. Questions and Answers written for employers about grandfathered plans can be found at the following HHS website: http://cciio.cms.gov/resources/factsheets/aca_implementation_faqs4.html.
3. Eligibility/affordability analysis: Employers should conduct a qualitative analysis to determine whether existing plans meet the ACA's eligibility and affordability standards. An employer will be considered to be failing to provide minimum coverage if the cost of the employer-provided health insurance is 9.5% or more of the employee's household income or if the plan pays for less than 60% on average of covered health-care expenses (e.g., the coverage offered does not have at least a 60% actuarial value). In I.R.S. Notice 2011-73, 2011-40 I.R.B. 474, the IRS set forth its proposal of a "safe harbor" to make it easier for employers to determine whether the health coverage they offer is "affordable." The safe harbor would use 9.5% of wages the employer paid to an employee, instead of the employee's household income, as the standard for affordability.
4. "Cadillac" plan analysis: Employers should project the effect of the excise tax that will take effect in 2018 on high-cost ("Cadillac") plans. A 40% tax will be imposed on health coverage providers to the extent that the aggregate value of employer-sponsored health coverage for an employee exceeds a threshold amount. (High-cost plans are currently defined as those that cost more than $10,200 for an individual or $27,500 for a family, annually. These limits are indexed annually to inflation and are adjusted for specified factors, such as age, gender, and high-risk professions.)
There are many pitfalls employers may encounter in preparing to comply with the ACA. Although the links to government resources listed in this article provide some guidance, many employers will face questions that require expert analysis. If you or your clients need assistance with ACA compliance or another employment-related issue, contact me at firstname.lastname@example.org or (800) 727-6574 for a complimentary initial consultation.