By Steven Friedman and Ilyse Schuman
The U.S. Supreme Court’s recent decision to uphold the Patient Protection and Affordable Care Act (ACA) presents employers with a number of immediate and critical decisions that they must take.
The Court’s conclusion that Congress had the authority under its taxing power to require most Americans to obtain health insurance in 2014 or pay a penalty ends the cloud of uncertainty over the constitutionality of the health care reform law. However, the most important questions and compliance challenges for employers are still ahead.
With the constitutionality of the “individual mandate” settled, action now shifts from the Court to the regulatory agencies charged with implementing the massive law. Accordingly, employers can expect a flurry of regulatory activity in the coming year as key provisions of the ACA are scheduled to become effective.
However, employers need to take steps now to make sure their plans and policies are compliant and that they are well-positioned to make the decisions that face them in 2014. As discussed below, the ACA creates obligations that affect employment-related documents as well as benefit plans.
Employer plan compliance mandates
Numerous employers plan changes mandated by the ACA are already in effect and important new requirements are scheduled to take effect soon. These changes include:
- Requirement for employers to provide an eight-page Summary of Benefits and Coverage upon application, enrollment, and re-enrollment in the plan. Also, a notice of material modifications describing plan changes must be provided 60 days before modifications are effective (both effective in 2013).
- Flexible spending account contributions by an employee must be limited to $2,500 per year (effective in 2013).
- Reporting on the value of health care coverage for 2012 Form W-2s (exemption for employers with fewer than 250 2011 Form W-2s).
Effective in 2014
Additional changes will become effective in 2014 or have an uncertain effective date. These include:
- Plans may not impose any annual limits on the dollar value of essential health benefits (effective 2014).
- Plans must not impose pre-existing condition exclusions for any participant (already effective for individuals under age 19, in 2014 effective for all participants).
- The level of penalties/incentives for wellness plans may be as much as 30 percent of the cost of coverage — an increase from the current 20 percent; may rise up to 50 percent by regulation (effective in 2014).
- Non-grandfathered insured plans must not discriminate in favor of highly compensated individuals under rules similar to nondiscrimination rules already applicable to self-insured plans (delayed until regulations are issued).
- Plans must not have waiting periods for entry into a plan in excess of 90 days (effective in 2014).
- Employers with more than 200 employees must automatically enroll full-time employees (delayed until regulations are issued—will not be effective by the original 2014).
Audit program focuses on plan documentary, administrative compliance
Employers must make certain that they maintain current and compliant plan documents. Historically, neither IRS nor the U.S. Department of Labor (DOL) have taken much interest in monitoring plan compliance and consequently, some employers have been lax in maintaining updated plan documents, summary plan descriptions and other required documentation (e.g., COBRA and HIPAA documents). Many employers use the same insurance-provided documents as both the plan and the summary plan description, and this often leads to a non-compliant or incomplete documentation.
We are aware, however, that the Labor Department has initiated an audit program focusing on health and welfare plans. The DOL is reviewing many areas of plan documentary and administrative compliance, including the following areas:
- All ACA-required provisions;
- Accuracy and completeness of summary plan descriptions;
- Eligibility rules;
- Benefits during leaves of absence;
- HIPAA certificates of coverage;
- Required plan notices.
A “wrap document,” which incorporates many critical components of a plan, can greatly enhance plan compliance.
Agreements providing post-employment coverage may violate ACA
Under the ACA, plan nondiscrimination rules will apply to non-grandfathered insured plans in the calendar year after regulations that interpret this area are published. Obviously, we do not know what these rules will provide, however, if an employer will maintain a non-grandfathered plan when the rules are effective, care must be exercised to assure the rules are not violated.
Employers may currently lawfully provide for either post-employment coverage or a COBRA subsidy to select former employees under an insured plan, however, if an arrangement provides for this benefit beyond the end of the year, it is possible that government rules will outlaw the portion of the arrangement that extends into 2013.
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“Fail safe” language in severance agreements and employment agreements should be included that will allow an employer to nullify an arrangement that the government will not honor.
“Pay or play” — the employer mandate
Beginning in 2014, state health insurance exchanges become operational and the individual mandate becomes effective. For employers, 2014 also signals the beginning of the pay or play employer mandate, which apply to employers with 50 or more “full-time equivalent” employees.
Under the mandate, an employer will either elect to play, by providing “minimum essential” health coverage to their full-time employees, or, to pay a penalty. Employers who fail to offer the required coverage will pay a penalty equal to $2,000 for each full-time employee in excess of 30 employees if any full-time employee receives a federal subsidy to purchase insurance through a health insurance exchange.
Cadillac health plan tax
In an effort to rein in high-cost employer-sponsored health plans, the ACA will impose a 40 percent excise tax on the annual value of employer-provided health coverage that exceeds $10,200 for single coverage or $27,500 for family coverage beginning in 2018. The value of coverage includes both employer and employee contributions.
In the wake of the Supreme Court’s decision, employers must prepare for all of the mandates in the Affordable Care Act that impact employer-provided group health plans as scheduled. Although political challenges to the ACA remain with the presidential and congressional elections looming, employers should not delay taking the steps necessary to ensure compliance with the law.
While the political debate over the Affordable Care Act continues, employers face important new obligations, including summary of benefits and coverage requirements and W-2 reporting of health care coverage. The initiative by the Department of Labor to audit health and welfare plans that encompasses ACA-required provisions brings added urgency to employers’ compliance efforts.
Employers are also awaiting direction from the regulatory agencies on a number of important pending regulations. These include the requirements under the pay or play employer mandate and the related definitions of a full-time employee and “minimum value,” the rules for automatic enrollment, and the application of the nondiscrimination rules to insured plans.
In addition to the many provisions already in effect or that will soon become effective, employers should be making critical decisions now about the employer “play or pay” mandate set to take effect in 2014. Perhaps the most important business and strategic decision will be whether a company maintains its health coverage for full-time employees or decides to pay the penalty for not doing so.