Understanding the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act is complicated, but crucial to healthcare planning as an employer.
The Patient Protection and Affordable Care Act signed into law by the president on March 23, 2010, enacted sweeping changes to the nation’s traditional health insurance markets. The Health Care and Education Reconciliation Act of 2010, which followed on March 30th, then made changes to the original law. Much controversy has surrounded their passage, including several lawsuits challenging their constitutionality. The Eleventh Circuit struck down the individual mandate, thought by many to be the cornerstone of the legislation. The U.S. Supreme Court granted review of three petitions of the Eleventh Circuit’s decision and is set to hear oral arguments on four separate issues this March.
The laws included several provisions which affect employers who provide health insurance benefits to their employees. These will be phased in over a number of years. Although the future of the laws is uncertain at this time, it is only prudent for employers to be planning and preparing for full implementation. Highlighted below are some of the provisions having an impact on employers and the effective dates for compliance.
One of the first provisions implemented was the requirement that group health plans provide dependent coverage of adult children until they turn 26 years of age. This provision generally applied for plan years beginning on or after September 23, 2010. For plan years beginning before January 1, 2014, the provision is only applicable for an adult child who is not eligible to enroll in an employer-sponsored health plan other than the plan of the parent. However, for plan years beginning on or after January 1, 2014, the provision applies regardless of whether an adult child is eligible to enroll in any other coverage. Employer-paid coverage for these adult children is considered a tax-free benefit to the employees.
Employers will be required to report the cost of employer-sponsored healthcare coverage on Form W-2. This provision was originally mandatory for 2011, but the IRS announced that employers would not be required to report this information for 2011 due to the difficulty in preparing payroll systems for the requirement. Transition relief has also been granted for small employers (those filing fewer than 250 W-2 forms) for 2012.
Several changes were made to the operation of cafeteria plans. One of the first to be implemented was the prohibition on reimbursements for medications obtained without a prescription. This was effective for amounts paid or incurred after December 31, 2010. In addition, a new $2,500 annual limit on salary reduction contributions to Health Flexible Spending Accounts (FSAs) offered under cafeteria plans was imposed for taxable years beginning after December 31, 2012. For plans that currently permit health FSA salary reductions in excess of $2,500, plan amendments and changes to employee communications are required before the effective date of January 1, 2013.
In addition, SIMPLE Cafeteria Plans could be offered by eligible small employers starting in 2011. An eligible employer is one that employed an average of 100 or fewer employees during either of the two preceding years, provided the employer was in existence throughout the year in issue. Safe harbors are provided from the nondiscrimination requirements for both cafeteria plans and specified qualified benefits, including group term life insurance, benefits under a self-insured medical expense reimbursement plans, and benefits under a dependent care assistance program. The employer is required under the plans to make a contribution regardless of whether an employee makes any salary reduction contribution.
Starting December 31, 2013, large employers will be subject to penalties if they do not offer health coverage, if their health plan requires waiting periods of more than 60 days before offering coverage, or if they offer coverage to employees who participate in a state exchange and claim a premium tax credit or cost-sharing reduction. A large employer is defined as an employer who employed an average of at least 50 full-time employees during the preceding calendar year. There are special rules for applying the provision to employers of seasonal workers and construction industry employers.
Employers with more than 200 full-time employees who offer health benefits are required to automatically enroll new employees in one of their health plans. New full-time employees will automatically be enrolled in one of the plans (subject to any waiting period authorized by law). The automatic enrollment program must include adequate notice and the opportunity for an employee to opt out of any coverage. Since no effective date was provided for this provision, the effective date is considered the date of enactment, March 23, 2010.
Summary of Benefits and Coverage
By March 23, 2012, each insured or self-insured group health plan must provide, in paper or electronic form and before any enrollment restrictions, a summary of benefits and coverage explanation to applicants at the time of enrollment or re-enrollment. However, plans are not required to comply until final regulations are issued and applicable. Proposed regulations have been issued. The summary of benefits and coverage must be provided, in addition to the summary plan description, and it must contain, among other things, a uniform definition of standard insurance and medical terms, description of the coverage and limitations on coverage, cost-sharing provisions (including deductible, coinsurance and co-payment obligations), the renewability and continuation provisions, examples of common benefits scenarios, a statement of whether the plan provides minimum essential coverage, a contact number for additional questions, and an Internet address where a copy of the actual coverage document can be reviewed and obtained.
Small Employer Tax Credit
As of 2010, eligible small employers have been able to claim a tax credit for the costs of health insurance coverage for employees. An eligible small employer is one with no more than 25 full-time equivalent employees for the tax year, whose average annual wages paid do not exceed $50,000. Also, the employer’s health plan requires the employer to make contributions of no less than 50 percent of the premium cost for each enrolled employee. For tax years 2010 to 2013, the credit was/will be generally equal to 35 percent of the contributions made by the employer on behalf of employees for health insurance premiums. Only non-elective employer contributions are taken into account in calculating the credit. The credit is reduced for employers with more than 10 full-time equivalent employees or those with average annual wages of more than $25,000. Starting in 2014, the credit percentage will rise to 50 percent, but the credit will only be available to a qualified small employer that purchases health insurance coverage for its employees through a state exchange and only for up to two consecutive taxable years. The two-year limit does not apply before 2014, and tax years prior to 2014 will not count toward the maximum two-year period. Therefore, a qualified small employer can potentially claim the credit for six taxable years.
If the Supreme Court strikes down the legislation, employers may not need to worry about provisions yet to take effect, but since many of these provisions become effective in 2013, it is best to start planning now. iBi
Susan Coats is a tax manager at Heinold-Banwart. She can be reached at (309) 694-4251 or [email protected].