With Congress in its summer recess, now is a good time to reflect on the top ACA issues worth monitoring as 2015 quickly approaches. Here are a handful of key issues to watch:
Dueling Court Cases on Federal Subsidies
One issue grabbing national headlines is the dueling decisions coming out of the U.S. Court of Appeals for the District of Columbia (Halbig v. Burwell) and the U.S. Court of Appeals for the Fourth Circuit (King v. Burwell) on missing language in the ACA that would have authorized the federal government to provide premium subsidies to individuals who sign up for health plans through the federal Exchanges. The legal issue in these court cases is whether the ACA premium tax credit (aka subsidy) is available to those individuals who enroll in qualified health plans (QHP) through state operated Exchanges or if it is available only to those to enroll in a QHP through a federally funded Exchange.
A primary concern is that a significant number of people in about two-thirds of the states (who did not set up a state-run Exchange) rely on the subsidy to purchase a plan in the federal Exchange. Specifically, the ACA’s employer mandate penalty of $3000 is based upon an employer having an employee seek coverage through an Exchange and receive the federal premium subsidy. In general, the employer mandate requires that “applicable large employers” offer their full-time employees minimum essential coverage or potentially pay a tax penalty. However, according to the statutory text of the ACA, the penalties under the employer mandate are triggered only if an employee receives a subsidy to purchase coverage through an Exchange established by the states. Both cases are being appealed to higher courts and will likely be consolidated into one case to be heard by the U.S. Supreme Court in the not so distant future.
In an interesting development, a video surfaced last week featuring one of the ACA’s chief architects (John Gruber) saying that health insurance subsidies should only be available in those states who opt to build and implement state-based Exchanges to gain participation. The idea was to create an incentive to have states actively involved in the hosting of an Exchange, rather than relying on the federal government to operate the Exchanges in each state. Whether this video will be used as evidence to uphold the argument that subsidies can only be offered by state-based Exchanges remains to be seen.
Lack of Back End Software for Federal Exchange
Of course, one of the big news stories in 2013 and early 2014 was the substandard launch of the federal Exchange, which led to many Americans having to wait to be enrolled in an ACA-compliant health plan. Although some technical snafus have been addressed, there are many that still remain. For example, a top White House official recently told Congress that the automated system that is supposed to send premium payments to insurance companies is still under development, and they did not have a completion date for it yet. The lack of an electronic verification process is only one part of the “backend” software that is still problematic five years after PPACA was passed.
Future of Navigators in Comparison with the Value of Brokers
Several recent studies have touted the benefits of using third parties, such as Brokers, to help consumers find coverage under the ACA. Some of these studies have focused on the usefulness of using Brokers/Agents over the benefits of using Navigators. A recent Urban Institute study found that health insurance Brokers were the most helpful in providing health insurance Exchange information when compared to other types of resources, including Navigators and website content. However, there are other published studies showcasing how Navigators have been useful to consumers. That being said, Brokers have assumed an integral role supporting millions of Americans in securing and maintaining coverage for many decades, and continue to be knowledgeable resources, as they are licensed in the states they operate in, whereas Navigators are not required to meet the same licensing standards as Brokers/Agents. It will be interesting to see what the future holds for Navigators, who are not as experienced and who are, in the end, dependent upon federal grants to provide their services.
Provider Access Issues & Emergency Room Over-Usage
A number of public policymakers have raised concerns recently about the fact that there are shortages of key physicians and other providers and as a result is causing a increase in non-emergent patient visits to expensive ER departments. A recent story in the New York Times highlighted similar concerns, saying the ACA cannot change the fact that visiting an emergency room may be easier than seeing a primary care physician in some instances or locations. Other stories and studies highlight how the ACA and health care reform initiatives can affect access to providers in many different ways, such as changing reimbursement levels, improving the availability of certain types of specialists, or re-educating the patient to move from visiting the ER department to either making an appointment ahead-of-time or visiting a less expensive Urgent Care center for care.
Premium Rate Increases
Another critical issue to monitor are premium increases that might be occurring in spite of the initial promises that the ACA would lower health care costs. Health plans have begun publishing proposed rates for 2015, resulting in a recent flurry of news articles and reports addressing the impact of the ACA on insurance premiums.
The Wall Street Journal published a front page report discussing the ACA’s impact on premium increases earlier this summer, saying, “Hundreds of thousands of consumers nationwide, who bought insurance plans under the Affordable Care Act, will face a choice this fall: swallow higher premiums to stay in their plans or save money by switching.”
The Journal goes on to say that a new picture is emerging in 10 states where 2015 premium insurance rates for individual plans have been filed, “In all but one (state), the largest health insurer is proposing to increase premiums between 8.5% to 22.8% next year.” Ironically, smaller health plans are reducing their 2015 rates in the same market in an attempt to gain market share.
The significance of this trend is underscored in a statement released earlier this summer by Karen Ignagni, president & CEO of America’s Health Insurance Plans (AHIP), in which she expressed concerns about keeping health insurance affordable for patients. “Affordability remains a top priority for consumers when it comes to their health care,” she said.
Bonus: Be Sure To Watch The Political Races
With the ACA’s continued challenges, the ups and downs of the U.S. economy, key world events in the Middle East, and other confounding variables, one has to wonder what will happen during the mid-year elections this fall. As reported by CNN and other news outlets, the ACA became an key issue in Obama’s 2012 re-election victory as well as Democrats picking up seats in the Senate and House in that election.
As November 3, 2015 approaches, many different messages could be sent back to the White House and Congress. If Republicans take over the Senate and retain control of the House, how will this impact the ACA over the next several years? If the congressional houses remain split, we may have less going on by either political party. How will the state-level elections impact the ACA and state-run Exchanges? Only time will tell.
Under the Patient Protection and Affordable Care Act (PPACA), beginning in 2015, certain large employers who do not offer affordable health insurance that provides minimum value to their full-time employees may be subject to significant penalties.
In a nutshell, in 2015, “applicable large employers” will be subject to an annualized employer “shared responsibility” penalty of $2,000 (indexed) per full-time employee (minus the first 80 full-time employees in 2015) if the employer does not offer health insurance to at least 70% of their full-time employees and their dependents. This amount will be increase from 70% to 95% after 2015. This is commonly referred to as the “Pay or Play” penalty.
Even if an applicable large employer offers insurance coverage to full-time employees, the employer still could be subject to an annualized penalty of $3,000 (indexed) per employee who receives an Exchange subsidy if the offered employer-sponsored health coverage does not meet minimum value standards or is not affordable. This $3000 penalty is capped at the amount that would apply if the $2,000 penalty described above were to apply.
What should an employer do now to prepare for these penalties?
(A) Determine if they are an “applicable large employer” -To do this, employers should count both full-time employees and part-time employee hours as follows:
1) Count the full-time employees for each month in the prior year.
2) Count the full-time equivalents for each month in the prior year.
a) Add total hours for non-full-time employees but count no more than 120 hours per month for any one non-full-time employee.
b) Divide the number obtained in (a) by 120. This is the full-time equivalent number.
3) Add the numbers obtained in (1) and (2) above (i.e., the full-time employee and full-time equivalent numbers) for each month.
4) Add the 12 sums obtained in (3) and divide by 12. This is the average number of full-time employees and full-time equivalents.
5) If this number obtained in (4) is under 50 (or under 100 for the 2015 determination for certain employers), the employer is not an applicable large employer for the year being determined.
Note: The applicable large employer is determined on a controlled group basis. For example, if there are three companies, each of which is wholly owned by the same parent company, the companies are all considered one employer for this calculation. Also note that, special transition rules apply in determining applicable large employer status for 2015 and that a special seasonal employee exception may apply even if the threshold in (5) is exceeded.
(B) If an employer will be an applicable large employer in 2015, it should determine whether it could be subject to penalties in 2015. For example, the employer should review its group health plan to determine if the insurance coverage is “offered” to full-time employees meets minimum value standards and is considered affordable to employees.
© An employer also will need to address how it will determine the full-time status of employees – will it use the “monthly measurement period” or the “look back measurement period.” This is particularly important for employers who have many variable-hour employees or seasonal employees.
(D) If the employer’s group health plan does not meet the threshold tests to avoid the penalties noted above, the employer should evaluate whether it wants to restructure its health care offerings or pay the penalties (which are non-deductible).
(E) Finally, employers should review their data collection procedures to ensure that they will be able to report the healthcare information required to be reported for 2015 (the actual reporting will occur in 2016 for the 2015 calendar year). Insurers, sponsors of self-insured plans, and other entities that provide minimum essential coverage during a calendar year will be required to report certain information to the IRS and to participants. In addition, applicable large employers will be required to report about the coverage they provide to both the IRS and to their employees. Drafts of the IRS forms to be used in reporting this information have recently been published (Form 1095-B, Form 1095-B Transmittal, Form 1095-C, Form 1095-C Transmittal). Employers should review these forms to understand the data that will need to be reported.
It is not too late for employers to take action now to avoid penalties in 2015.
The Affordable Care Act (ACA) imposes significant information reporting responsibilities on employers starting with the 2015 calendar year. One reporting requirement applies to all employer-sponsored health plans, regardless of the size of the employer. A second reporting requirement applies only to large employers, even if the employer does not provide health coverage. The IRS is currently developing new systems for reporting the required information and recently released draft forms, however instructions have yet to be released.
Information returns
The new information reporting systems will be similar to the current Form W-2 reporting systems in that an information return (Form 1095-B or 1095-C) will be prepared for each applicable employee, and these returns will be filed with the IRS using a single transmittal form (Form 1094-B or 1094-C). Electronic filing is required if the employer files at least 250 returns. Employers must file these returns annually by Feb. 28 (March 31 if filed electronically). Therefore, employers will be filing these forms for the 2015 calendar year by Feb. 28 or March 31, 2016 respectively. A copy of the Form 1095, or a substitute statement, must be given to the employee by Jan. 31 and can be provided electronically with the employee’s consent. Employers will be subject to penalties of up to $200 per return for failing to timely file the returns or furnish statements to employees.
The IRS released drafts of the Form 1095-B and Form 1095-C information returns, as well as the Form 1094-B and Form 1094-C transmittal returns, in July 2014 and is expected to provide instructions for the forms in August 2014. According to the IRS, both the forms and the instructions will be finalized later this year.
Health coverage reporting requirement
The health coverage reporting requirement is designed to identify employees and their family members who are enrolled in minimum essential health coverage. Employees who are offered coverage, but decline the coverage, are not reported. The IRS will use this information to determine whether the employees are exempt from the individual mandate penalty due to having health coverage for themselves and their family members.
Insurance companies will prepare Form 1095-B (Health Coverage) and Form 1094-B (Transmittal of Health Coverage Information Returns) for individuals covered by fully-insured employer-sponsored group health plans. Small employers with self-insured health plans will use Form 1095-B and Form 1094-B to report the name, address, and Social Security number (or date of birth) of employees and their family members who have coverage under the self-insured health plan. However, large employers (as defined below) with self-insured health plans will file Forms 1095-C and 1094-C in lieu of Forms 1095-B and 1094-B.
Large employer reporting requirement
“Applicable large employer members (ALE)” are subject to the reporting requirement if they offer an insured or self-insured health plan, or do not offer any group health plan. ALE members are those employers that are either an applicable large employer on their own or are members of a controlled or affiliated service group with an ALE (regardless of the number of employees of the group member). ALEs are those that had, on average, at least 50 full-time employees (including full-time equivalent “FTE” employees) during the preceding calendar year. Full-time employees are those who work, on average, at least 30 hours per week. Employers with fewer than 50 full-time employees and equivalents are not applicable large employers and, thus, are exempt from this health coverage reporting requirement.
As referenced above, an employer’s status as an ALE is determined on a controlled or affiliated service group basis. For example, if Company A and Company B are members of the same controlled group and Company A has 100 employees and Company B has 20 employees, then A and B are both members of an ALE. Consequently, Company A and Company B must each file the information returns.
Each ALE member must file Form 1095-C (Employer-Provided Health Insurance Offer and Coverage) and Form 1094-C (Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns) with the IRS for each calendar year. The IRS will use this information to determine whether (1) the employer is subject to the employer mandate penalty, and (2) an employee is eligible for a premium tax credit on insurance purchased through the new health insurance exchange. ALEs with fewer than 100 full-time employees are generally eligible for transition relief from the employer mandate penalty for their 2015 plan year. Nonetheless, these employers are still required to file Forms 1095-C and 1094-C for the 2015 calendar year.
The employer mandate penalty can be imposed on any ALE member that does not offer affordable, minimum value health coverage to all of its full-time employees starting in 2015. Health coverage is affordable if the amount that the employer charges an employee for self-only coverage does not exceed 9.5 percent of the employee’s Form W-2 wages, rate of pay, or the federal poverty level for the year. A health plan provides minimum value if the plan is designed to pay at least 60 percent of the total cost of medical services for a standard population. In the case of a controlled or affiliated service group, the employer mandate penalties apply to each member of the group individually.
ALE members must prepare a Form 1095-C for each employee. The return will report the following information:
An ALE member will file with the IRS one Form 1094-C transmitting all of its Forms 1095-C. The Form 1094-C will report the following information:
As noted above, each ALE member is required to file Forms 1095-C and 1094-C for its own employees, even if it participates in a health plan with other employers (e.g., when the parent company sponsors a plan in which all subsidies participate). Special rules apply to multiemployer plans for collectively-bargained employees.
Action required
In light of the complexity of the new information reporting requirements, it is recommended that employers should begin taking steps now to prepare for the new reporting requirements:
Starting in 2015, the Affordable Care Act (ACA) requires applicable large employers to offer affordable, minimum value health coverage to their full time employees (and dependents) or pay a penalty. The employer penalty rules are also known as the employer mandate or the “pay or play” rules.
Effective in 2014, affordability of health coverage is used to determine whether an individual is:
On July 24, 2014, the IRS released Revenue Procedure 2014-37 to index the ACA’s affordability percentages for 2015.
For plan years beginning in 2015, an applicable large employer’s health coverage will be considered affordable under the pay or play rules if the employee’s requires contribution to the plan does not exceed 9.56 percent of the employee’s household income for the year. The current affordability percentage for 2014 is 9.5 percent.
Applicable large employers can use one of the IRS’ affordability safe harbors to determine whether their health plans will satisfy the 9.56 percent requirement for 2015 plan years, if requirements for the applicable safe harbor are met.
This adjusted affordability percentage will also be used to determine whether an individual is eligible for a premium tax credit for 2015. Individuals who are eligible for employer-sponsored coverage that is affordable and provides minimum value are not eligible for a premium tax credit in the Exchange.
Also, Revenue Procedure 2014-37 adjusts the affordability percentage for the exemption from the individual mandate for individuals who lack access to affordable minimum essential coverage. For plan years beginning in 2015, coverage is unaffordable for purposes of the individual mandate if it exceeds 8.05 percent of household income.
Employer Mandate
The pay or play rules apply only to applicable large employers. An “applicable large employer” is an employer with, on average, at least 50 full-time employees (including full-time equivalents) during the preceding calendar year. Many applicable large employers will be subject to the pay or play rules starting in 2015. However, applicable large employers with fewer than 100 full-time employees may qualify for an additional year, until 2016, to comply with the employer mandate.
Affordability Determination
The affordability of health coverage is a key point in determining whether an applicable large employers will be subject to a penalty.
For 2014, the ACA provides that an employer’s health coverage is considered affordable if the employee’s required contribution to the plan does not exceed 9.5 percent of the employee’s household income for the taxable year. The ACA provides that, for plan year beginning after 2014, the IRS must adjust the affordability percentage to reflect the excess of the rate of premium growth over the rate of income growth for the preceding calendar year.
As noted above, the IRS has adjusted the affordability percentage for plan years beginning in 2015 to 9.56 percent. The affordability text applies only to the portion of the annual premiums for self-only coverage and does not include any additional cost for family coverage. Also, if an employer offers multiple health coverage options, the affordability test applies to the lowest-cost option that also satisfies the minimum value requirement.
Affordability Safe Harbors
Because an employer generally will not know an employee’s household income, the IRS created three affordability safe harbors that employers may use to determine affordability based on information that is available to them.
The affordability safe harbors are all optional. An employer may choose to use one or more of the affordability safe harbors for all its employees or for any reasonable category of employees, provided it does so on a uniform and consistent basis for all employees in a category.
The affordability safe harbors are:
Individual Mandate
Beginning in 2014, the ACA requires most individuals to obtain acceptable health insurance coverage for themselves and their family members or pay a penalty. This rule is often referred to as the “individual mandate”. Individual may be eligible for an exemption from the penalty in certain circumstances.
Under the ACA, individuals who lack access to affordable minimum essential coverage are exempt from the individual mandate. For purposes of this exemption, coverage is considered affordable for an employee in 2014 if the required contribution for the lowest-cost, self-only coverage does not exceed 8 percent of household income. For family members, coverage is considered affordable in 2014 if the required contribution for the lowest-cost family coverage does not exceed 8 percent of household income. This percentage will be adjusted annually after 2014.
For plan years beginning in 2015, the IRS has increased this percentage from 8 percent to 8.05 percent.
Following the recent Supreme Court ruling regarding contraceptives in the Hobby Lobby Stores case, a new circuit decision now sets the stage for another possible Supreme Court decision on the ACA. On Tuesday (July 22, 2014), the U.S. Court of Appeals for the District of Columbia (in Halbig v. Burwell) and the U.S. Court of Appeals for the Fourth Circuit (in King v. Burwell) issued conflicting opinions regarding the IRS’ authority to administer subsidies in federally facilitated exchanges.
In general, the employer mandate requires that “applicable large employers” offer their full-time employees minimum essential coverage or potentially pay a tax penalty in 2015. However, according to the statutory text of the ACA, the penalties under the employer mandate are triggered only if an employee receives a subsidy to purchase coverage “through an Exchange established by the State under section 1311…” of the ACA. If a state elected not to establish an exchange or was unable to establish an operational exchange by January 1, 2014, the Secretary of HHS was required to establish a federal-run exchange under section 1321 of the ACA.
The appellants in each of these cases are residents of states that did not establish state run exchanges. Consequently, the appellants argue that the IRS does not have the authority to administer subsidies in their states because the exchanges were set up by HHS under section 1321 of the ACA and not under section 1311 as is the clear prerequisite for IRS authority to administer the subsidies.
In regulations implementing the subsidies, the IRS recognized this discrepancy and noted that “[c]ommentators disagreed on whether the language [of the ACA] limits the availability of the premium tax credit only to taxpayers who enroll in qualified health plans [QHPs] on State Exchanges."
The IRS, however, rejected these comments and stated that, “[t]he statutory language of section 36B and other provisions of the Affordable Care Act support the interpretation that credits are available to taxpayers who obtain coverage through a State Exchange, regional Exchange, subsidiary Exchange, and the Federally-facilitated Exchange. Moreover, the relevant legislative history does not demonstrate that Congress intended to limit the premium tax credit to State Exchanges. Accordingly, the final regulations maintain the rule in the proposed regulations because it is consistent with the language, purpose, and structure of section 36B and the Affordable Care Act as a whole.”
In Halbig v. Burwell, the D.C. Circuit disagreed with the IRS’ interpretation and, in a 2-1 decision, held that the IRS regulation authorizing tax credits in federal exchanges was invalid. The court focused heavily on the text itself and concluded, “that the ACA unambiguously restricts the …subsidy to insurance purchased on Exchanges established by the state.”
In an opinion issued only hours following the D.C. Circuit decision, the 4th Circuit, in King v. Burwell, agreed with the IRS’ interpretation and upheld the subsidies by permitting the IRS to decide whether the premium tax credits should be available over the federal exchange. The justices argued that the text did not intend to create two unequal exchanges. Additionally, they argue that the ambiguous text of the act intended that the exchanges be operated as appendages of the Bureaucracy, and so under the directives of the IRS.
Currently, 36 states are using federally facilitated exchanges, including Florida. Further, roughly 85% of enrollees who signed up for health insurance receive subsidies allowing them to purchase coverage that would be otherwise unaffordable. If the subsidies allocated over the federal exchange were declared invalid, those individuals’ ability to receive subsidies to purchase coverage could be jeopardized. As a result, the average price of a health plan is projected to rise from $82 per month to $346 per month, making it more difficult to afford for approximately 5.4 M enrollees.
While the Halbig decision is a major setback to the ACA, it is almost certainly not the final word on this issue. Given the fact that two courts have reached different outcomes, the Supreme Court is more likely to weigh in on the decision. However, the Halbig decision is likely to be reviewed by the entire D.C. Circuit prior to any potential review by the Supreme Court.
As fall approaches, both state and federal Exchanges created by the Affordable Care Act (ACA) are preparing for potential opportunities and challenges they may face during the 2015 open enrollment period. The start date for the Exchange open enrollment has been delayed by a month, beginning on November 15, 2014, and will run through February 15, 2015. Those desiring coverage beginning January 1, 2015 must enroll by December 15, 2014.
This delay will help to ease some enrollment pressure points, but does not address some of the challenges associated with a new automatic renewal policy. Specifically, the Obama Administration and the Department of Health and Human Services (HHS) just announced a proposed rule to automatically renew existing Exchange health plans and premium subsidies for 2015 that individuals obtained in 2014.
Automatic Renewal Concerns
A key feature of the 2015 open enrollment period is implementation of the automatic renewal system. Consumers who do not return to the www.healthcare.gov website and change their plan or eligibility information will be automatically re-enrolled in their current plan from the previous enrollment period for the 2015 plan year. The overall goal is to relieve pressure on the Exchange website while allowing for roughly 95% of consumers to re-enroll in health plans. However, automatic re-enrollment raises issues with the subsidy programs operated by the Exchanges.
Beginning in 2015, the automatic re-enrollment function is likely to cause issues with consumers that have a different income levels than the previous year. With the automatic re-enrollment feature, most consumers may not report changes in their income, thus creating discrepancies in subsidy distributions. For instance, if someone experiences a decrease in income from the previous year, but the change is not reported due to the automatic re-enrollment, the consumer may not receive subsidies that he/she is eligible for, and vice versa if the consumer’s income increases. With roughly 87% of consumers enrolled in an Exchange plan receiving subsidy tax credits, resolving this issue will be key to the success of the upcoming enrollment period.
In addition, reports continue to surface that the IRS has not been able to document the reported income for several million Americans who enrolled an Exchange plan for the 2014 plan year. Therefore, hundreds of thousands of individuals may end up receiving subsidies for two different plan years, which they might not qualify for resulting in an unexpected tax burden, interest and penalties.
Open Enrollment Period Delayed
Despite the issues plaguing the Exchanges, a recent change in the date of the 2015 open-enrollment period may help alleviate some of the future website and enrollment strains. This spring, the Obama Administration announced a month-long extension of the 2015 open enrollment period until February 15, 2015. An initial delay was announced last fall that pushed back the start date from October 15 to November 15, 2014. As a result of these changes, insurance companies will benefit from the delay, consumers will have more time to enroll in an Exchange plan, and websites hope to have fewer technical and administrative hiccups. However, some have expressed concerns that the White House continues to make up the rules as they go along which violates normal regulatory protocols associated with a statutory-based initiatives like the ACA.
While the Exchanges prepare for the new open enrollment season, some problems from the previous open enrollment likely remain unresolved. As widely reported earlier, both www.healthcare.gov and its state-level Exchanges experienced a slew of technical issues and glitches in the 2014 open enrollment that hampered enrollment and significantly increased the wait time for enrollment activation for many.
Verifying Income Levels
Other technical issues have hampered enrollment, such as the lack of oversight in filling out applications on the Exchange websites. The delay in www.healthcare.gov’s verification requirement has led to chaos in the federal Exchange, as well as in states that use the federal Exchange, by implementing an “honor system” where individuals self-report their income without having to provide proof. As a result, HHS and the IRS must verify the incomes of a backlog of roughly 2 million individuals for federal subsidy eligibility.
AAG will continue tracking and reporting on key health care reform changes that will affect employers and individuals alike.
Many employers originally thought they could shift health costs to the government by sending their employees to a health insurance Exchange/Marketplace with a tax-free contribution of cash to help pay premiums, but the Obama administration has squashed this idea in a new ruling. Such arrangements do not satisfy requirements under the Affordable Care Act (ACA), the Obama administration said, and employers could now be subject to a tax penalty of $100 a day — or $36,500 a year — for each employee who goes into the individual Marketplace/Exchange for health coverage.
The ruling this month, by the Internal Revenue Service, prevents any “dumping” of employees into the exchanges by employers.
Under a main provision in the health care law, employers with 50 or more employees are required to offer health coverage to full-time workers, or else the employer may be subject to penalties.
Many employers had concluded that it would be cheaper to provide each employee with a lump sum of money to buy insurance on an exchange, instead of providing employer-sponsored health coverage directly to employees as they had in the past.
But the Obama administration has now raised objections in an authoritative Q&A document recently released by the IRS, in consultation with other agencies.
The health law, known as the Affordable Care Act (ACA), was intended to build on the current system of employer-based health insurance. The administration wants employers to continue to provide coverage to workers and their families and do not see the introduction of ACA as an eventual erosion of employer provided coverage.
Employer contributions to sponsored health coverage, which averages more than $5,000 a year per employee, are not counted as taxable income to workers. But the IRS has said employers could not meet their obligations under ACA by simply reimbursing employees for some or all of their premium costs from the marketplace/exchange.
Christopher E. Condeluci, a former tax and benefits counsel to the Senate Finance Committee, said the recent IRS ruling was significant because it made clear that “an employee cannot use tax-free contributions from an employer to purchase an insurance policy sold in the individual health insurance market, inside or outside an exchange.”
If an employer wants to help employees buy insurance on their own, Condeluci said, they can give the employee higher pay, in the form of taxable wages. But in such cases, he said, the employer and the employee would owe payroll taxes on those wages, and the change could be viewed by workers as reducing a valuable benefit.
A tax partner from a large accounting firm has also said the ruling could disrupt reimbursement arrangements used in many industries.
For decades, many employers have been assisting employees by reimbursing them for health insurance premiums and out-of-pocket costs associated with their health coverage. The new federal ruling eliminates many of those arrangements, commonly known as Health Reimbursement Arrangements (HRAs) or employer payment plans, by imposing an unusually punitive penalty. The IRS has said that these employer payment plans are considered to be group health plans, but they do not satisfy requirements of the Affordable Care Act for health coverage.
Under the law, insurers may not impose annual limits on the dollar amount of benefits for any individual, and they must provide certain preventive services, like mammograms and colon cancer screenings, without co-payments or other charges.
But the administration has said that employer payment plans or HRAs do not meet these requirements.
This ruling was released as the Obama administration rushed to provide guidance to employers and insurers who are beginning to review coverage options for 2015.
The Department of Health and Human Services said it would provide financial assistance to certain insurers that experience unexpected financial losses this year. Administration officials hope the payments will stabilize medical premiums and prevent rate increases that are associated with the required policy changes as a result of ACA.
Republicans want to block these payments, however, as they see them as a bailout for insurance companies who originally supported the president’s health care law.
Stay tuned for more updates on ACA as they are released. Should you have any questions, please do not hesitate to contact our office.
Can corporations shift targeted workers who have known high medical costs from the company health plan to public exchange (aka Marketplace/SHOP) based coverage created by the Affordable Care Act? Some employers are beginning to inquire about it and some consultants are advocating for it.
Health spending is driven largely by those patients with chronic illness, such as diabetes, or those who undergo expensive procedures such as an organ transplant. Since a large majority of big corporations are self-insured and many more smaller employers are beginning to research this as an option to help control their medical premiums, shifting even one high-cost member out of the company health plan could potentially save the employer hundreds of thousands of dollars a year by shifting the cost for the high-cost member claims to the Marketplace/SHOP plan(s).
It is unclear if the health law prohibits this type of action, which opens a door to the potential deterioration of employer-based medical coverage.
An employer “dumping strategy” can help promote the interests of both employers and employees by shifting health care expenses on to the public through the Marketplace.
It’s unclear how many companies, if any, have moved any of their sicker workers to exchange coverage yet, which just became available January 1, 2014, but even a few high-risk patients could add millions of dollars in claim costs to those Marketplace plans. The costs could be passed on to customers in the next year or two in the form of higher premiums and to taxpayers in the form of higher subsidy expenses.
A Possible Scenario
Here’s an example of how an employer “dumping-situation” it might work:
At renewal, an employer reduces the hospital/doctor network on their medical plan to make the company health plan unattractive to those with chronic illness or high cost medical claims. Or, the employer could raise the co-payments for drugs or physician visits needed by the chronically ill, also making the health plan unattractive and perhaps nudging high-cost workers to examine other options available to them.
At the same time, the employer offers to buy the targeted worker a high-benefit “platinum” plan in the Marketplace. The Marketplace/SHOP plan could cost $6,000 or more a year for an individual in premiums, but that’s still far less than the $300,000 a year in claim costs that a hemophilia patient might cost the company.
The employer could also give the worker a raise so they could buy the Marketplace/SHOP policy directly.
In the end, the employer saves money and the employee gets better coverage. And the Affordable Care Act marketplace plan, which is required to accept all applicants at a fixed price during open enrollment periods, takes over the costs for their chronic illness/condition.
Some consultants feel the concept sounds too easy to be true, but the ACA has set up the ability for employers and employees to voluntarily choose a better plan in the Individual Marketplace which could help save a significant amount of money for both.
Legal but ‘Gray’
The consensus among insurance and HR professionals is that even though the employer “dumping-strategy” is technically legal to date (as long as employees agree to the change and are not forced off the company medical plan), the action is still very gray. This is why many employers have decided this is not something they want to promote at this time.
Shifting high-risk workers out of employer medical plans is prohibited for other kinds of taxpayer-supported insurance. For example, it’s illegal to persuade an employee who is working and over 65 to drop company coverage and rely entirely on the government Medicare program. Similarly, employers who dumped high-cost patients into temporary high-risk pools established originally by the ACA health law are required to repay those workers’ claims back to the pools.
One would think there would be a similar type of provision under the Affordable Care Act for plans sold through the Marketplace portals, but there currently is not.
The act of moving high-cost workers to a Marketplace plan would not trigger penalties under ACA as long as an employer offers an affordable medical plan to all eligible employees that meets the requirements of minimum essential coverage, experts said. If workers are offered a medical plan by their employer that is affordable coverage and meets the minimum essential coverage requirements, workers cannot use tax credits to help pay for the Marketplace-plan premiums.
Many benefits experts say they are unaware of specific instances where employers are shifting high-cost workers to exchange plans and the spokespeople for AIDS United and the Hemophilia Federation of America, both advocating for patients with expensive, chronic conditions, said they didn’t know of any, either.
But employers are becoming increasingly interested in this option.
This practice, however, could raise concerns about discrimination and could cause decreased employee morale and even resentment among employees who are not offered a similar deal, which could end up causing the employer more headaches and even potential discrimination lawsuits.
Many believe that even though this strategy is currently an option for employers, in the end, it may not be a good idea. This type of strategy has to operate as an under-the-radar deal between the employer and targeted employee and these type of deals never work out. Most legal experts who focus on employee benefits do not recommend this strategy either as it just opens the door of discrimination claims from employees.
Please contact our office for assistance in reviewing all of the benefit options available to your company and employees under ACA.
If you are interested in signing up for medical coverage through the Marketplace, please note that you only have until the end of the open enrollment period (March 31, 2014) to sign up for coverage effective either April 1, 2014 or May 1, 2014. The effective date of your coverage in the Marketplace depends on when your application is submitted and processed.
The only way you will be able to enroll in a Marketplace medical plan outside of the open enrollment period is if you qualify for a “special enrollment” due to a qualifying event. A qualifying event is a change in your life that would make you eligible to sign up for coverage outside of open enrollment such as a marriage, divorce, birth or adoption, moving to a new state, loss of employment or loss of coverage due to changes in employment, etc. With employer based medical coverage, you typically have 30 days from the date of the qualifying event to enroll or make changes to your coverage due to a qualifying event, but the Marketplace allows you 60 days from the qualifying event to make changes.
You can enroll on either Medicaid or the Children’s Health Insurance Program (CHIP) at any time during the year as there is no limited open enrollment periods for these programs. You only need to qualify for these programs to be eligible. You can either complete a Marketplace application to find out if you are eligible for either program or contact your state agencies for further information.
The tentative next open enrollment dates for the Marketplace are November 15, 2014 through January 15, 2015, however please note that these dates are subject to change.
The IRS has released the 2013 version of Form 8941, which eligible small employers will need to use to calculate their small business health care tax credit.
Employers may qualify for a tax credit of up to 35% (or up to 25% for eligible tax exempt organizations) of nonelective employer contributions under a qualifying health insurance arrangement, if they have fewer than 25 employees AND pay average annual wages of less than $50,000 per employee. A qualifying health insurance plan generally requires the employer to pay a uniform percentage of the premium (not less than 50%) for each enrolled employee’s health coverage. Once calculated, the tax credit is claimed as a general business credit on Form 3800 (or for tax exempt small employers as a refundable credit on Form 990-T).
There are important changes to the tax credit that become effective beginning with 2014 taxable years that are important to note:
1. the maximum credit amount increases from 35% to 50% of employer paid premiums
2. coverage under a qualifying arrangement must be offered through a SHOP Exchange
3. the credit can be claimed for only 2 consecutive years beginning in or after 2014, and
4. due to the cost-of-living adjustment, the tax credit will be reduced if an employer’s average annual wages exceed $25,400 and will be eliminated if average annual wages exceed $50,800
Employers who plan on claiming the small business tax credit for 2014 will need to make sure they are familiar with these new requirements.