Rights and Obligations of Employees and Employers Under Health Care Reform
By John A. Papahronis and Jim Prince
Comprehensive health care reform, sometimes referred to as “Obamacare,” was initiated in March 2010 with the passage of the Patient Protection and Affordable Care Act1 (PPACA) and the Health Care and Education Reconciliation Act of 2010.2 The enactment of the reform legislation has been and continues to be followed by the promulgation of thousands of pages of regulations by the executive agencies charged with the implementation of the statutes.3
The statutes and regulations impose specific requirements on issuers of insurance policies and on employers as well as their health plans in the following general areas:
1) Market Reforms
2) Tax Incentives and Penalties
3) Reporting and Administrative Requirements
This article is intended to provide a general summary of the complex rules that have been issued.
Sometimes referred to as the public health service mandates, market reforms are new standards that apply to health plans and policies. These mandates do not apply equally to all health plans or policies. For example, they generally do not apply to plans or policies that provide coverage for limited conditions, such as plans that only cover dental or vision care, or plans that apply only to retirees. In addition, plans that were in existence on March 23, 2010, (the date PPACA was enacted), and which have not been significantly changed (referred to as “grandfathered plans”) are not subject to all of the mandates.
Significant market reforms include the following:
Prohibition on Annual and Lifetime Limits
Prior to health care reform, most health plans and policies imposed annual and lifetime limits on the dollar value of benefits that a person could receive. For example, a common provision limited benefits to $1 million per person on a lifetime basis. Once the limit was reached, the plan or policy had no further obligation to pay for care. Pursuant to the Public Health Service Act mandates, both grandfathered and nongrandfathered plans and policies are now prohibited from applying lifetime or annual limits.
Prohibition on Pre-existing Condition
Another common provision in health plans and policies prior to health care reform excluded coverage of conditions which existed prior to the date that the individual became covered. Under health care reform, both grandfathered and nongrandfathered plans and policies are not permitted to refuse to pay expenses for care of on the basis of a pre-existing condition.
Preventive Care Services
Nongrandfathered plans and policies are now required pay 100 percent of the cost of preventive care services identified by the government as being effective in preventing illnesses. The list of preventive care services that must be paid for without any co-payment or other cost sharing is lengthy. Among others, it includes numerous immunizations and screening procedures, contraceptives and counseling services.
Nondiscrimination in Health Insurance
Prior to health care reform, an employer was permitted to provide a better health plan for its highly compensated employees than it provided to other workers so long as the benefits were funded through insurance policies. Under health care reform, an excise tax is imposed on an employer who offers insurance policies to its employees that discriminate in favor of highly compensated employees and owners. This excise tax is not being enforced until the Department of the Treasury issues regulations. This excise tax does not apply to grandfathered plans.
Limitation on Cost Sharing
For plan/policy years beginning after 2013, health care reform limits the amount of cost sharing that a nongrandfathered health plan or policy can impose on individuals. Cost sharing includes deductibles, co-insurance, co-payments and other required expenditures with respect to the essential health benefits under a plan. The premiums an individual has to pay for the coverage and expenditures for services not covered by a plan or policy are not subject to the cost-sharing restriction. The cost-sharing limits for 2014 are $6,350 for self-only coverage and $12,700 for family coverage. These limits will be adjusted in future years.
TAX INCENTIVES AND PENALTIES
In order to encourage coverage and enforce other health care initiatives, there are numerous taxation and reporting provisions. These include new fees and taxes intended to finance the health care reform initiatives as well as the following penalties imposed on individuals and employers.
Beginning in 2014, individual taxpayers will be assessed a “shared responsibility” penalty if they, their spouses or their dependents don’t have health care coverage that is deemed by the government to constitute “minimum essential coverage.” This individual mandate is measured on a monthly basis. The maximum annual penalty is the greater of a flat dollar amount or a percentage of income as follows:
Year Flat Percent
Dollar Amount of Income
2014 $95 1 percent
2015 $325 2 percent
2016 and $695 2.5 percent thereafter
Shared Responsibility for Employers (Play or Pay)
Beginning in 2015, certain applicable large employers may be subject to a penalty for 1) failing to offer minimum essential health care coverage for substantially all full-time employees and their dependents (the “no coverage penalty”); or 2) offering eligible employer-sponsored coverage that is not “affordable” or does not offer “minimum value” (the “inadequate coverage penalty”). These obligations are sometimes referred to as the employer shared responsibility or “play or pay” requirements.
For purposes of these rules, an “applicable large employer” is an employer who employed an average of at least 50 full-time employees (including full-time equivalent employees) during the preceding calendar year.4 A special transition rule for 2015 exempts certain employers who employ at least 50 but fewer than 100 full-time employees and who meet certain other requirements. The term “employer” includes predecessor employers. Also, all commonly controlled entities under Code Section 414(b), (c), (m) or (o) are treated as a single employer for purposes of the applicable large employer determination.
A full-time employee for any month is defined as an employee who works at least 30 hours of service per week, or 130 hours of service for the month.5 The final regulations issued by the Internal Revenue Service in February 2014 provide detailed rules for determining hours of service. If an employer was not in existence during the entire preceding calendar year, the determination of applicable large employer is based on the reasonable expectation of the number of full-time employees for the current year.6
Once it has been determined that an employer is an applicable large employer and therefore subject to the employer shared responsibility requirements, an employer must identify the full-time employees that must be offered group health coverage. A full-time employee is an employee who is reasonably expected to work a full-time schedule of at least 30 hours per week, and must be offered coverage by the first day of the fourth full month following his date of hire. The final regulations provide a look-back measurement methodology for determining the status of other categories of employees, such as variable hour employees, part-time employees and seasonal employees. In general, the methodology uses a “measurement period” or look-back period over which hours are counted for determining whether such employees averaged at least 30 hours per week. When an employee’s status is determined based on the measurement period, the employee’s status is locked in for the duration of a “stability period,” regardless of the actual number of hours worked by the employee during the stability period.
As mentioned above, an applicable large employer will incur the “no coverage penalty” if the employer fails to offer substantially all full-time em-ployees and their dependents the opportunity to enroll in “minimum essential coverage” under an “eligible employer-sponsored plan” for the month, provided that at least one full-time employee has been certified to the employer as having enrolled in the health care exchange and qualified for a premium subsidy.7 Code Section 4980H requires that the offer of coverage be made to employees and their dependents. A “dependent” is defined to include natural and adopted children who are under age 26, but excludes foster children and stepchildren. Further, the employee’s spouse is not a dependent for this purpose. If an employer fails to offer coverage and incurs the no coverage penalty, the amount of the excise tax is $2,000 multiplied by the number of full-time employees, minus 30. The final regulations provide that an employer will be treated as covering substantially all of its full-time employees if it covers 95 percent of its full-time employees8 (a special transition rule lowers this percentage to 70 percent for 2015).
Even if an employer avoids the “no coverage penalty,” it may incur the “inadequate coverage penalty” if it does not offer affordable coverage that provides minimum value, and at least one employee receives a premium tax credit for health coverage purchased though the health insurance exchange.9 The amount of the inadequate coverage penalty tax is equal to $3,000 multiplied by the number of full-time employees who receive premium tax credits. An employer-sponsored health plan provides minimum value if the plan’s share of the total allowed cost of benefits provided to an employee is at least 60 percent.10 There are three methods for determining whether a group health plan provides minimum coverage: 1) the Internal Revenue Service and the Department of Health and Human Services have developed a minimum value calculator; 2) certain safe harbor plan designs will be specified in future guidance; and 3) a certification may be obtained from an actuary.
Coverage under an eligible employer-sponsored plan is deemed to be affordable is the employee’s required contribution does not exceed 9.5 percent of the employee’s household income.11 There are three safe harbor methods available to an employer to determine the affordability of its group health plan: 1) a safe harbor based on Form W-2 income; 2) a rate of pay safe harbor; and 2) a safe harbor based on the federal poverty line.
REPORTING AND ADMINISTRATIVE REQUIREMENTS
Employers are subject to a number of new reporting requirements under health care reform. With respect to employees, health care reform requires employers to report the cost of employer-sponsored health care coverage. Beginning in 2016, employers will also have to provide employees and the IRS with information concerning health care coverage provided by the employer to its employees. These additional reporting requirements are intended to allow employees to document their coverage for purposes of the individual mandate and to report the employer’s compliance with the play or pay mandate.
As demonstrated above, health care reform is a watershed event for health care plans and the employers that sponsor them. Governmental agencies have issued an enormous amount of detailed regulations and other guidance in an attempt to start the implementation of PPACA. Nevertheless, there is sure to be further guidance that will be issued to further clarify areas that have previously been addressed and to address areas that have not yet been covered. In the meantime, given the complexity of the issues involved and the significant financial consequences, most employers will need third party assistance in evaluating implications on their business. Such assistance can come from insurance brokers and consultants, accountants, and employee benefits attorneys. However, it will also be important for general business attorneys to be familiar with the issues involved so that they can guide their clients as health care reform continues to roll out.
1. Pub. L. No 111-148 (PPACA).
2. Pub. L. No 111-1525 (HCERA).
3. Because of the breadth of the legislation, the Departments of Labor, Treasury and Health and Human Services all have authority (in some cases concurrent) with respect to the implementation and administration of HCR.
4. Code Section 4980H(c)(2)(A).
5. Code Section 4980H(c)(4)(A).
6. Treas. Reg. §54.4980H-2(b)(2).
7. Code Section 4980H(a).
8. Treas. Reg. §54.4980H-4(a).
9. Code Section 4980H(b).
10. 45 C.F.R. §156.145(a).
11. Code Section 36B(c)(2)(C).
ABOUT THE AUTHORS
John Papahronis is a shareholder and ERISA attorney at McAfee & Taft, where his practice encompasses the entire range of employee benefit services, health and welfare plans, legal compliance and fiduciary counseling. He has particular experience and expertise counseling employers on health and welfare plan matters, including the Affordable Care Act.
Jim Prince is a shareholder at McAfee & Taft and a member of the firm’s Employee Benefits and Executive Compensation Group. His practice is concentrated in the areas of employee benefits and taxation, and he has extensive experience representing clients, including employee benefit plans, in matters involving the IRS and the Department of Labor.
Originally published in the Oklahoma Bar Journal - Oct. 4, 2014 - Vol. 85, No.26