What Does Health Care Reform Mean for Employers—Now and Later?

April 30, 2010

The Patient Protection and Affordable Care Act ("PPACA") was signed March 23, 2010, and the Health Care and Education Reconciliation Act ("Reconciliation") was signed March 30, 2010 (together, the "Acts"). This massive law (over 1,000 single-spaced pages) sets the stage for a regulatory framework that will change the entire landscape of how health care is financed and accessed in the United States. 

While many of the things that will most fundamentally change health care, such as coverage mandates for all but a few Americans, will not take effect until 2014, the Acts change, but retain, the employer-based coverage system. The changes in employer-plans which the Acts mandate will affect how employers provide coverage almost immediately.

This Update describes the Plan design and tax reporting changes that will affect employers in the next few years. A later update will address the insurance reforms, purchase exchanges and "pay or play" rules that will impact employers in 2014 and later years.

Employer Plan Designs Must Change

The Acts require some changes in plan design for virtually every plan, whether it is fully-insured, self-insured or sponsored by a governmental or church employer (which were previously seldom regulated federally because they are exempt from ERISA). The design changes are required beginning in the plan year that begins after September 23, 2010—so, as early as October 1, 2010. While there are some grandfathering exceptions for plans in effect as of March 23, 2010, even existing plans are subject to many design changes at the same time as new plans must comply.

Early Mandates:

Here is a list of design mandates that are effective first:

  1. Must allow children of employees up to age 26 to remain on, or be added back to, the plan as a dependent, provided their child does not have access to health insurance through own job.

    1. This includes married children, but does not require that dependents (a spouse or child) of the employee's child, be allowed to enroll.
    2. Gets rid of frequently-seen full-time student and tax dependent criteria.
    3. A change in the Tax Code was also added, so that these children can be added to parent policies and the cost be tax free as long as child doesn't reach age 27 by the end of the calendar year, regardless whether the child would otherwise be a tax dependent.

  2. Must eliminate pre-existing condition exclusions for children under the age of 19.
  3. Must eliminate lifetime dollar benefit maximums on "essential" elements of coverage.

    1. Only "reasonable" (as determined by HHS) annual dollar limits may be placed on "essential" elements of coverage.
    2. There is no definition of "annual limits".
    3. All annual limits on essential coverage to disappear by 2014.

  4. Plans must pay preventive care costs without co-pays.
  5. Avoid discriminating among employees as to the plan's benefits based on salary level.

    1. Note: nondiscrimination already applies under Code Section 105(h) to self-insured plans and these new rules make this Code section applicable to fully-insured ones. 
    2. This mandate will have a major impact on employers' flexibility to design plans with different eligibility, premium-cost-sharing or other coverage rules as among different groups of employees within a work force.
    3. These rules apply on a "controlled group" basis.

  6. Plans cannot rescind coverage once it has begun, except for fraud or intentional misrepresentation.
  7. All plans must have a coverage appeal process meeting certain minimums (ERISA terms are the initial default, until we get new regulations) and will have to have an external review process.

    1. External appeals are to follow state regs if fully-insured or, if not, or if there are no regs, plans must follow to-be-issued HHS regs.

  8. All health plans must cover all emergency care at same co-pay levels, even if provided at a non-network facility.
  9. Must provide coverage to individuals who participate in clinical trials.

Later-Mandated Changes:

There are also some later-mandated changes in plan design that employers will want to prepare to deal with:

  1. No health spending accounts (HSA, HRA, FSA, Archer) will be able to pay for over-the-counter drugs (other than pursuant to a prescription) purchased after 12/31/2010 (and if a health plan does reimburse, the payment is not excluded from income).
  2. All health plans will be required to have a no-more-than-4-page fact sheet no later than March 23, 2012.

    1. HHS to issue standards/template for fact sheet by March 23, 2011.
    2. No health plan changes will be allowed before 60 days following written notice of change ($1,000/day/enrollee penalty!).
    3. Note that the 60-day advance notice of changes may be effective (law is not completely clear) even before HHS issues a template for the new summary of benefits—as early as immediately for non-grandfathered plans and for the next plan year beginning after September 23, 2010 for those that are grandfathered—so details of plan changes should be carefully communicated to participants.

  3. FSA contributions will be capped at $2,500 [indexed] in taxable years starting in 2013 and later.
  4. Annual reports will be required from plans to Secretary of HHS and participants regarding quality and wellness initiatives (timing dependent on issuance of regs, but might be as early as late 2012).
  5. Waiting periods before coverage is effective can be a maximum of 90 days for full-time employees, beginning in 2014.

    1. Full time = average of 30 hours per week.

  6. Large employers (200+ full time employees) will be required to automatically enroll new full-time hires into health coverage in 2014, if they do not affirmatively opt out.
  7. All pre-existing condition exclusions will be banned in 2014.
  8. No annual dollar limits on essential health benefits allowed beginning 2014.
  9. HIPAA's nondiscrimination prohibition based on health status etc. is expanded.

    1. Wellness incentives—which are allowed as a specific exception to this nondiscrimination requirement—and which are now limited to 20% of total plan cost, will be allowed for 30% of plan cost in 2014.

  10. An "essential benefits package" will be dictated and all employer plans will be mandated to have at least these services covered, with deductibles and out-of-pocket limits to be capped at same level now applying to HSA plans (as indexed), beginning in 2014.

Which Plans are Grandfathered, and What Does Being Grandfathered Mean?

Some of the new design rules may not affect your plan, for so long as it is "grandfathered." A self-insured plan or one funded via an insurance contract is "grandfathered" if it was in effect on March 23, 2010, including for renewals and new enrollees added thereafter. But, importantly, it is not clear if any changes other than enrollment changes can be made and a plan still retain grandfathered status—regulations will be needed to clarify this.  Employers will want to be very careful about making any plan design changes pending more guidance, if being grandfathered is important to the employer. Union-bargained plans in effect March 23, 2010, are also generally grandfathered until the bargaining agreement expires.

But, even if grandfathered, a plan is not exempt from the following mandates:

  1. The lifetime or annual benefit limit restrictions.
  2. The up-to-age-26 coverage mandate.
  3. The ban on rescissions.
  4. The maximum waiting period of 90 days.
  5. The elimination of < age 19 pre-existing condition limits in the next plan year, and on all pre-existing limits in 2014.
  6. The 4-page uniform explanation of coverage and 60-day advance notice of plan changes to participants.
  7. If fully-insured, a grandfathered insurance contract is not exempt from a requirement that the insurer rebate premiums based on its claims loss ratio (more detail on this will be in our Insurance Reform/Exchanges Client Update).
  8. FSA contribution limits and prohibition on tax-free reimbursements of over-the-counter drugs.

What does this leave? If grandfathered now, and a plan remains so (which may be difficult), the plan doesn't have to:

  1. Provide no-cost preventive services.
  2. Cover emergency care at non-network facilities, or pay for clinical trial costs.
  3. Address the appeals process changes that will be mandated.
  4. Comply with the salary-based nondiscrimination rules (unless already subject because the plan is self-insured).
  5. Address reporting requirements regarding quality and wellness initiatives.
  6. Cover the "essential benefits" or have deductibles and out-of-pocket maximums within HSA limits, to be "qualified" to exempt the employer from the 2014 "pay or play" mandates.

FBT Bottom Line:

The one mandate that employers will most cherish avoiding is the application of Code Section 105(h) nondiscrimination rules regarding who is covered, and at what cost-sharing, in its health plan. This can only be avoided if a plan is grandfathered, so employers will eagerly await guidance on what types of changes they can make in their plans without losing grandfathered status. 

Yet, the insurance market will not suddenly become static—few employers have had the luxury of buying the same insurance contract design for more than a year or two before inflationary pressure or other market pressures have required contract changes. And, if remaining grandfathered means an employer cannot change insurance carriers, then many employers will have to relinquish grandfather status to retain negotiating flexibility.

So, if a plan is fully-insured now, and an employer has large groups it does not cover(other than those working less than 30 hours per week on average) or that it covers in a different benefit plan, or if it pays a higher share of the premium cost for more highly compensated workers, then those employers need to begin now to consider what their next plan year's design will be and who will be covered, to comply with the broader mandates for non-grandfathered plans—including the rules of Code Section 105(h) that prohibit discrimination in favor of higher paid workers. In a future Legal Update, FBT will discuss 105(h) in more detail, with examples of how its reach can require employers to completely re-think how they offer health benefits to their workforce. 

For more information, please contact Debbie Reiss Hardesty, or any other attorney in Frost Brown Todd's Employee Benefits Practice Group.

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