HEALTHCARE REFORM AND WHAT IT MEANS TO EMPLOYERS

The Hospitality Law Conference February 11-13, 2013 Houston, Texas

Callan Carter Fisher & Phillips One Embarcadero Center, Suite 2050 San Francisco, CA 94111 (415) 490-9020 ccarter@laborlawyers.com

TABLE OF CONTENTS I. SCOPE OF ARTICLE ............................................................................................................. 2

II. HEALTHCARE REFORM IN GENERAL ............................................................................ 2 III. GRANDFATHERED STATUS ............................................................................................. 2 A. The Importance of Grandfather Status ................................................................................ 2 B. How a Plan Will Lose its Grandfather Status ..................................................................... 3 C. Disclosure Of Grandfather Status Required ....................................................................... 4 IV. ACA PROVISIONS AFFECTING EMPLOYERS ............................................................... 4 A. The Medical Loss Ratio ...................................................................................................... 5 B. The Individual Mandate ...................................................................................................... 6 1. The Tax .......................................................................................................................... 6 2. The Supreme Court Decision .......................................................................................... 6 C. The Employer Mandate: Play or Pay .................................................................................. 7 1. Who is a Large Employer? ............................................................................................. 7 2. Requirements To Play ................................................................................................. 7 3. Pay Tax ........................................................................................................................ 8 4. Who is a Full-Time Employee Who Must be Offered Coverage to Play? ..................... 8 D. Automatic Enrollment ......................................................................................................... 9 E. Nondiscrimination Requirements for Fully-Insured Plans ................................................. 9 F. Summary of Benefits and Coverage ................................................................................. 10 G. W2 Reporting ................................................................................................................... 10 H. Healthcare Flexible Spending Accounts (FSAs) .............................................................. 11 1. Over-The-Counter Drugs .............................................................................................. 11 2. Definition of Dependent ............................................................................................... 11 3. Election Limit ............................................................................................................... 11 I. No Lifetime Limit on Benefits .......................................................................................... 11 J. Restricted Annual Limits .................................................................................................. 11 K. Extension Of Coverage To Adult Children Under Age 26 ............................................... 11 L. Pre-existing Condition Limitations ................................................................................... 12 M.Limitations on Rescinding Coverage ................................................................................ 12 N. Patient-Centered Outcomes Research Trust ..................................................................... 12 V. GOING FORWARD ............................................................................................................. 14 VI. TIMELINE OF HEALTHCARE REFORM ......................................................................... 14
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Atlanta 1628533.1

CALLAN G. CARTER

Callan Carter is a partner in the San Francisco office of Fisher & Phillips LLP, working exclusively in the firms employee benefits practice. Callan has practiced employee benefits law since 1997. She advises clients on plan design, drafting, implementation and termination of qualified retirement plans, health and welfare plans, fringe benefit programs and non-qualified deferred compensation arrangements. Callan advises clients on complex applications of qualified retirement and health and welfare plan nondiscrimination and coverage rules, prohibited transactions, fiduciary issues, determination letters, controlled group determinations, and both health and welfare as well as retirement issues involved with mergers and acquisitions. She has performed comprehensive reviews of qualified retirement plans as well as advised clients regarding choice of and preparation of submission packages for and negotiation with IRS regarding correction programs, including VCP and SCP. She consults with executives and payroll personnel about the deferred compensation rules of Code Section 409A as well as drafting plan documents and ancillary documents to comply with Section 409A. She has significant experience with health and welfare plans, both self-insured as well as fully-insured and a tenacity for contract negotiations with business associates. Callan was admitted to the California Bar in 1994, and to the Georgia Bar in 2002. She earned her law degree from the American University, Washington College of Law, in 1993, Cum Laude. She received her LL.M. (Tax) from the Golden Gate University School of Law in 1999 with honors and received her undergraduate degree from Vanderbilt University in 1989. Callan is a member of the Northern California Human Resources Association (NCHRA) and a supporter of 100 Women in Hedge Funds. She authored the firms HIPAA Privacy and Security booklet and is a Contributing Author to Employee Benefits in Mergers and Acquisitions by Ilene Ferenczy and the XpertHR research product by Reed Business Information. She is a regular contributor the firms Benefits Update newsletter as well. Before joining the Firm, she was a tax specialist for a Big Four accounting firm.

I.

SCOPE OF ARTICLE

This article discusses those sections of The Patient Protection and Affordable Care Act, as revised by The Health Care and Education Reconciliation Act, together known as healthcare reform, and their underlying rules as of January 11, 2013 which relate to employers. Please note that several provisions of healthcare reform will not take effect until 2014, and thus very little guidance on these future provisions currently exists. It behooves the reader to stay abreast of future guidance. II. HEALTHCARE REFORM IN GENERAL

The two Acts (Public Law Numbers 111-148 and 111-152) are referred to together as PPACA or ACA and were enacted on March 23 and 30, 2010, after great Congressional debate and a lengthy legislative process over several years. The final legislation contains significant expansions of access to medical coverage for all Americans and affects everyone: employers, individuals, insurance companies, states, federal programs, educational institutions, medical device manufacturers, healthcare providers, restaurants and even tanning salons. III. A. GRANDFATHERED STATUS The Importance of Grandfather Status

Various provisions of healthcare reform either do not apply at all or have extended compliance deadlines for what it refers to as "grandfathered plans." Grandfathered plans are those employer group health plans that were in existence on March 23, 2010 and whose subsequent changes are not significant. Almost every plan, eventually, whether it is fully-insured or self-insured, will lose its grandfathered status. Paying fewer claims during a plan year could cause an unfunded selfinsured plan to lose its grandfathered status. Since most plans will lose their grandfather status eventually, it is useful to focus on why a plan sponsor might want to retain grandfathered status at all. Those healthcare reform changes that will never apply to grandfathered plans include 1) the requirement to install an external review process; 2) mandatory 100% coverage of preventive care services; 3) greater access to emergency services (removal of increased cost sharing for outof-network emergency services); 4) participants' freedom to choose any network doctor as their primary care provider (such as a pediatrician or OB/GYN); and 5) most significantly, the application of the nondiscrimination rules of Internal Revenue Code section 105(h) to fullyinsured plans (these rules will continue to apply to self-insured plans, even grandfathered ones). The extension of coverage to children under age 26 provides for an extended compliance date for grandfathered plans. Non-grandfathered plans had to extend coverage to dependents under age 26 (regardless of student, marital or financial status) as of the first day of the first plan year that began on or after September 23, 2010. Grandfathered plans must fully comply with this rule 2

beginning in 2014. But before 2014, grandfathered plans do not have to extend coverage to a dependent if the dependent has access to medical coverage under the dependent's employer's group health plan. Many employers may find this exception difficult to administer and therefore decided to offer coverage to all dependents under age 26 at the beginning of their next plan year even though they could take advantage of the exception for grandfathered plans. For plans that do want to take advantage of the exception, maintaining grandfathered status is important. For those that do not, maintaining grandfathered status may be less important. B. How a Plan Will Lose its Grandfather Status

On June 17, 2010, the Internal Revenue Service (IRS), Department of Labor (DOL) and Department of Health and Human Services (HHS) jointly issued interim final regulations regarding a group health plan's status as a grandfathered health plan. The regulations were designed to take into account reasonable changes routinely made by plans or insurance issuers without the plan or health insurance coverage losing its grandfathered status, so that individuals could retain the ability to remain enrolled in the coverage they had on March 23, 2010. As such, plans and issuers are generally permitted to make voluntary changes to increase benefits, to conform to required legal changes and to voluntarily adopt other provisions of the healthcare reform laws that the plans, as grandfathered plans, would not otherwise be required to adopt. A plan will lose its grandfathered plan status if changes are made to the plan's coverage that significantly decrease the benefits, materially increase cost sharing by participants in ways that might discourage covered individuals from seeking needed treatment, or substantially increase the cost of coverage paid by participants. Specifically, the following changes will cause a health plan to lose its grandfathered status:

increasing non-fixed-amount cost-sharing requirements (such as increasing an employee's portion of all costs from 20% to 25%); increasing fixed-amount co-payments by an amount that exceeds the greater of 1) a percentage that is more than 15% plus the amount of medical inflation above the levels in effect on March 23, 2010 or 2) $5 increased by medical inflation above the levels in effect on March 23, 2010; increasing fixed-amount cost sharing payments other than co-payments (such as deductibles and out-of-pocket limits) by a percentage that is more than 15% plus the amount of medical inflation (set by the DOL using the overall medical care component of the Consumer Price Index for All Urban Consumers, unadjusted) above the co-payment levels in effect on March 23, 2010; or decreasing the employer contribution rate by more than 5% below the contribution rate in effect on March 23, 2010. The "contribution rate" for this purpose is defined as the amount of contributions made by an employer compared to the total cost of coverage, expressed as a percentage. This rule applies to all tiers of coverage. 3

In addition, the elimination of all or substantially all benefits to diagnose or treat a particular condition will cause a plan to cease to be grandfathered. The regulations provide that if the principal purpose of a corporate merger, acquisition or similar business restructuring is to cover new individuals under a recipient grandfathered health plan or if a recipient plan is different enough from a transferor plan to be considered a change that would cause the transferor plan to lose its grandfathered status if the recipient plan terms were considered to be an amendment to the transferor plan, then the recipient plan will cease to be a grandfathered health plan. On November 17, 2010, the Internal Revenue Service, Department of Labor and Department of Health and Human Services jointly amended the interim final regulations. Previously, one of the ways an employer group health plan could lose its grandfathered status was if the employer changed insurance companies. The amendment to the regulations allows all group health plans to switch insurance companies and still maintain their grandfathered status, so long as the structure of the coverage does not violate the other requirements for maintaining grandfathered status. This amendment allows employers with insured health plans greater flexibility in choosing their provider if they want to retain grandfathered status. According to the preamble to the amendment to the regulations, there had been a concern that the provision terminating grandfathered status upon any change in issuer would give insurance companies "undue and unfair leverage in negotiating the price of coverage renewals." The amendment does not apply retroactively to changes to health insurance coverage made prior to November 17, 2010. For this purpose, the date that the new coverage becomes effective is the operative date. In other words, those plans that had already entered into a contract with a new insurance company that was effective prior to November 17, 2010, would still cease to be a grandfathered plan. C. Disclosure of Grandfather Status Required

In order to maintain grandfathered status, a plan must include a statement in any plan materials provided to participants and beneficiaries describing the benefits provided under the plan (such as a summary plan description, or SPD) that the plan believes it are a grandfathered health plan. This statement must include contact information for questions and complaints. The regulations provide model language for this disclosure statement. The regulations also require that a plan maintain records documenting the plan or policy terms in connection with the coverage in effect on March 23, 2010 to verify the plan's continued status as a grandfathered health plan. Such records must be made available for examination upon request. IV. ACA PROVISIONS AFFECTING EMPLOYERS

Please see the timeline at the end of this article for an easy-reference chart of certain healthcare reform provisions, some of which are discussed below in no particular order.

A.

The Medical Loss Ratio

One of the provisions of healthcare reform is the medical loss ratio (MLR) that requires insurance companies to spend a certain proportion of their income on healthcare benefits for their customers. If an insurance company does not meet its MLR standard, it is required to issue a rebate to its policyholders. (The MLR standards do not apply to self-insured medical plans.) In 2011, the Labor Department issued a Technical Release, which provided guidance on how sponsors of group health plans covered by ERISA should handle such rebates. ACA requires insurance companies in the large-group market (employers with at least 100 employees) to spend at least 85% of premiums on medical benefits and quality-improvement activities. Insurance companies in the small-group and individual markets must spend at least 80% of premiums. Beginning with the summer of 2012, insurance companies were required to report 2011 MLR data to each state in which they do business. They report aggregate premium, claims experience, and quality-improvement expenditures for their large-group, small-group and individual markets in each state. Insurers then calculate the MLR based on their entire business in the large-group or small-group market, not based on a particular group health plan's experience. Insurance companies that did not meet the MLR standards are required to provide a rebate to their customers and insurance companies began distribution of such rebates in August 2012. Insurance companies also must provide notices of rebates to current group health plan participants and group policyholders. The notice must include general information about the MLR standard, the issuer's actual MLR, and the rebate. When rebates are paid to a group policyholder that is an ERISA plan sponsor, the rebates may be plan assets, and thus subject to rules under Title I of ERISA relating to fiduciary responsibilities and prohibited transactions. The DOL's Technical Release provides guidance regarding the duties of employers, plan sponsors, and other fiduciaries' responsibilities for decisions related to the MLR rebates they receive from insurance companies. If the plan or its trust is the policyholder, then the policy and the rebate are definitely plan assets. When a rebate is a plan asset, fiduciaries must act prudently, solely in the interest of the plan participants, and in accordance with the terms of the plan document when handling the assets. If distributing payments to any participant is not cost effective, the fiduciary may apply the rebate toward future participant premium payments or toward benefit enhancements. If the rebate is distributed to participants, the amounts are taxable to the extent the employees paid their share of the premiums with pre-tax dollars.

B. 1.

The Individual Mandate The Tax

One of the most controversial provisions of healthcare reform is the so called "individual mandate" which requires almost all individuals who file a federal income tax return to have health coverage that meets the definition of "minimum essential coverage." While the individual mandate regulates taxpayers and not employers, it is included in this article because it will indirectly affect employer plans. Individuals who are required to have health insurance either can obtain coverage through their employers or can purchase it from an insurance company through a state-operated exchange. Those who fail or refuse to purchase health coverage are subject to payment of a tax called the "shared responsibility payment." This payment is payable for any month a taxpayer does not have health coverage. Generally, the tax is calculated based on the number of individuals claimed as exemptions on the individual's return. In 2014, the tax for a single person is the lesser of $95 per month or 1% of income above the threshold amount that a person has to earn to be required to file a federal income tax return ("filing threshold"). The shared responsibility payment increases both in amount and percentage in 2015, and in 2016 the tax is the lesser of $695 per month or 2.5% of income above the filing threshold. The rules are a little complicated and there are limits on the tax for taxpayers claiming more than two dependents, but these are the general rules. 2. The Supreme Court Decision

The big question for Americans was whether it is constitutional for the federal government to require that most of its citizens be covered by health insurance. At the end of 2010, a federal district judge in Florida held that Congress has no authority under the commerce clause of the Constitution to enforce this provision of health reform. The commerce clause allows Congress to regulate economic activity that affects interstate commerce. This judges holding struck down the ACA on the grounds that the individual mandate was such an integral part of the whole healthcare reform scheme that the entire ACA was void. A Virginia court took a more limited approach to the constitutionality of the individual mandate and found it to be unconstitutional, but upheld the other provisions of the ACA. Both of these decisions conflicted with decisions of other federal district courts which found the new law to be constitutional. The constitutional decision wound its way up the U.S. Supreme Court which held that the individual mandate (and almost all other provisions of the ACA, save a required expansion of financial Medicaid eligibility) is indeed constitutional. NFIB v. Kathleen Sibelius, Secretary of Health and Human Services, __ U.S. ___ (2012).

C.

The Employer Mandate: Play or Pay

Probably the most important mandate for employers is the "play or pay" mandate, also known as the employer shared responsibility, which will require large employers (those with the equivalent of 50 or more full-time employees) to provide adequate and subsidized group health plan coverage to all full-time employees and their families beginning in 2014. If an employer fails to satisfy this requirement, it will be subject to a penalty. This could have a significant economic impact on many employers. Accordingly, it is very important for employers to now start modeling how this mandate will impact their bottom line in 2014. 1. Who is a Large Employer?

The play or pay provision only applies to employers with the equivalent of 50 or more full-time employees in the prior calendar year. An employer is determined on a control group basis. An employee is full-time if he or she, on average, works at least 30 hours a week (or 130 hours per month). To determine if you are a large employer, first count the number of employees who work at least 30 hours per week (130 hours per month). To that number, you add the number of full-time equivalent employees, which is determined by adding together the number of hours of the non-full-time employees (up to a maximum of 120 hours per month per employee) and dividing by 120. This calculation should be done for each month of the prior year and then the months totals should be divided by 12 to determine an average. If the resulting average is 50 or more, the employer is subject to the play or pay provisions. There are, by the way, rules for subtracting seasonal employees if the total number of employees exceeds 50 for only 120 days or less. 2. Requirements To Play

If the play or pay provision applies, the employer must either offer minimum essential coverage which provides minimum value at an affordable price to substantially all of its full-time employees (not full-time equivalents) or risk paying an excise tax. For a plan to provide minimum value, it must pay 60% of the claims incurred by participants (including copays, deductibles, co-insurance, etc.). The IRS and HHS will offer an online minimum value calculator for you to determine if your plan provides minimum value. To be affordable, the participant must not be forced to pay more than 9.5% of the employees household income for the calendar year. Since most employers do not have access to their employees family financial information, the IRS created affordability safe harbors in its January 2013 proposed regulations. An employer will be in compliance if it complies with one of three safe harbors: 1) the annual employee cost of the employee-only tier of the cheapest medical option (providing minimum value) does not exceed 9.5% of the employees Form W-2, Box 1; 2) the monthly employee cost of the employee-only tier of the cheapest medical option (providing minimum value) does not exceed 9.5% of 130 times the employees hourly rate of pay; or 3) the monthly employee cost of the employee-only tier of the cheapest medical option (providing minimum value) does not exceed 9.5% of the state-specific, federally-established single individual federal poverty level divided by 12. 7

3.

Pay Tax

If the employer does not offer qualified coverage to at least 95% of full-time employees or if it does offer coverage to 95% of full-time employees but one full-time employee does qualify for federal premium assistance for coverage under an Exchange, an excise tax may be levied by the IRS. If the employer does not offer qualified coverage to at least 95% of full-time employees and at least one full-time employee qualifies for federal premium assistance for his or her coverage under the Exchange, it will owe the IRS a non-deductible annual payment equal to $2,000 times the number of its full-time employees minus 30. For purposes of the payment, only full-time employees (not full-time equivalents) are counted. The $2,000 penalty is an annual penalty, imposed monthly, so if you play for some months, you will only pay 1/12 of the $2,000 for those months in which you do not play. If the employer does offer coverage to at least 95% of full-time employees, but that coverage does not provide minimum value or it is offered at an unaffordable price, and at least one fulltime employee qualifies for federal premium assistance for his or her coverage under the Exchange, it will owe the IRS a non-deductible annual payment equal to $3,000 per employee receiving federal premium assistance, up to a maximum of $2,000 times the number of its fulltime employees minus 30. An individual or family will qualify for federal premium assistance if their household income is less than 400% of the federal poverty level. 4. Who is a Full-Time Employee Who Must be Offered Coverage to Play?

To play, the employer must offer qualified coverage to full-time employees. The determination of who a full-time employee is can be rather convoluted and depends on whether the employee is an ongoing or new employee. The IRS January 2013 proposed regulations set forth the required recordkeeping and administrative requirements for determining full-time status. For ongoing employees, the employer must use a standard lookback measurement period of 3-12 months to determine whether each employee worked, on average, 30 or more hours per week. At the end of the measurement period, the employer determines if each employee will be classified as full-time or part-time for the following stability period, which must be 6-12 months in length. However, the stability period for full-time employees can not be shorter than the standard lookback measurement period and the stability period for non-full-time employees can not be longer than the standard lookback measurement period. The employer may use an optional administrative period of up to 90 days to allow it to make the classification calculations and complete open enrollment for the stability period associated with each standard lookback measurement period, but any administrative period must overlap with the prior stability period to prevent a gap in coverage. If an employee is determined to be full-time at end of a standard measurement period, he or she keeps such classification during the associated stability period so long as remains he or she employed, regardless of the hours worked during the stability period.

If a new employee is expected to work 30+ hours per week, he or she is classified as full-time from their start date and must be offered coverage by end of the third calendar month after hire. For new variable hour and seasonal employees, the employer must use an initial measurement period of 3-12 months to determine whether each employee worked, on average, 30 or more hours per week. At the end of the measurement period, the employer determines if each employee will be classified as full-time or part-time for the following stability period, which must be the same length as the regular stability period for ongoing employees. However, the stability period for full-time employees can not be shorter than the initial measurement period and cannot be shorter than 6 months. The stability period for non-full-time employees can not be longer than the initial measurement period plus one month and cannot exceed the standard lookback measurement period in which the initial measurement period ends. The employer may use an optional administrative period of up to 90 days to allow it to make the classification calculations and complete open enrollment for the stability period associated with each initial measurement period. Once an employee has been working for an entire standard lookback measurement period, he or she is transitioned into the ongoing employee standard measurement period which the initial measurement period ends. As far as counting hours of service, an employer must count the actual hours of service for hourly employees. For non-hourly employees, the employer may count actual hours or use equivalencies and credit 8 hours for each day worked or credit 40 hours for each week worked. D. Automatic Enrollment

The: ACA requires employers with 200 or more full-time employees to automatically enroll new employees who are eligible for group health plan coverage. Rather than having to affirmatively elect health coverage, the "default" will be for employers to automatically enroll any eligible employee who fails to opt out. Statistics have shown that this type of enrollment process is certain to increase plan participation. Accordingly, it is likely to lead to higher plan subsidy costs for many employers. Implementation of this requirement has also been delayed to give regulators time to issue guidance on the requirement. It is expected that this requirement will also begin applying in 2014 or shortly thereafter, once guidance is issued. If you have at least 200 full-time employees, you will have to begin automatically enrolling new full-time employees in your health plan in the lowest cost option at the employee-only tier. Employees must receive notice of the automatic enrollment and will have to be able to opt out of coverage. E. Nondiscrimination Requirements for Fully-Insured Plans

The ACA added a nondiscrimination requirement for fully-insured plans similar to the one already in effect for self-funded plans, prohibiting most group health plans from discriminating in favor of highly compensated employees. If an employer's fully-insured plan fails to satisfy this requirement, the plan will be subject to significant financial penalties (v. additional taxes imposed on highly compensated employees participating in discriminatory self-funded plans). 9

Implementation of this requirement has been delayed to give regulators time to issue guidance. However, it is expected that this requirement will begin applying in 2014 or shortly thereafter. The rules require that a plan not discriminate in favor of "highly-compensated individuals" with regard to both eligibility and contributions/benefits. For purposes of the self-funded plan nondiscrimination rules, a "highly-compensated individual" is an employee who 1) is one of the 5 highest-paid officers, 2) owns more than 10% of the value of the employer's stock or 3) is among the highest 25% of employees ranked by pay. Accordingly, roughly 25% of employees (including most closely-related domestic affiliates) will be classified as "highly compensated" under this definition, regardless of how much compensation they earn. It is anticipated that the fully-insured nondiscrimination rules will be similar to the self-funded nondiscrimination rules. Having different waiting periods for different classes of employees or contributing different amounts of employer subsidies towards premiums for different classes of employees could cause a plan to fail its annual 105(h) nondiscrimination test. Also, a plan with two or more benefit options that do not have substantially the same benefits could fail nondiscrimination testing if the highly-compensated individuals tend to elect the benefit option with the better benefit and the non-highly-compensated individuals elect the other option. If any of these circumstances apply to a plan, the 105(h) nondiscrimination rules could have a significant impact. F. Summary of Benefits and Coverage

Beginning with the open enrollment period beginning on or after September 23, 2012, employers must distribute a summary of benefits and coverage (SBC) for most of their group health plans. The SBC is a uniform disclosure of the material terms and provisions of a plan, which is intended to allow employees to more easily compare different plan offerings. The content requirements for an SBC are very detailed and require the assistance of an employer's insurance carrier or third-party administrator. HHS issued uniform standards for summaries of benefits and coverage. The summary describes essential information about the health plan in a uniform format that does not exceed four sheets of paper (eight pages) using uniform terminology. In addition, if an employer makes a material modification to the terms or coverage of a health plan that is not reflected in the most recent SBC, enrollees must be given 60 days' advance notice of the change. G. W2 Reporting

Beginning with the 2012 W-2 forms to be distributed by employers in 2013, employers who filed more than 250 Forms -2 for the prior calendar year will be required to report the total cost of any group health plan coverage that was provided to an employee. This cost is not taxable it is simply an informational item on the W-2. Ensuring compliance with this new requirement requires a lot of coordination between an employer's HR and payroll departments.

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H. 1.

Healthcare Flexible Spending Accounts (FSAs) Over-The-Counter Drugs

Pursuant to healthcare reform, expenses for over-the-counter (OTC) drugs may not be reimbursed after December 31, 2010, unless the drug is insulin or is prescribed by a physician. 2. Definition of Dependent

As of January 1, 2011, the definition of dependent for FSA purposes includes a participant's child who is under age 27. 3. Election Limit

Employee contributions to a flexible spending account maintained under a Section 125 cafeteria plan are limited to $2,500 beginning in 2013. Your cafeteria plan must be amended to reflect this change. I. No Lifetime Limit on Benefits Error! Bookmark not defined.

Before healthcare reform, many plans had a maximum lifetime limit on the amount of benefits that would be paid during the life of a covered individual. After healthcare reform, this limit had to be removed for "essential health benefits." Essential health benefits, as defined by Health and Human Services (HHS) are those for ambulatory care, emergency services, hospitalization, maternity and newborn care, mental health and substance use disorder services (including behavioral health treatment), prescription drugs, rehabilitative service and devices, laboratory services, preventive and wellness services, chronic disease management and pediatric services. J. Restricted Annual Limits

Before healthcare reform, many plans imposed annual limits on the amount of benefits that would be paid during a plan year. Beginning in 2011, healthcare reform required that these annual limits be increased as part of a transition to the complete elimination of annual limits. For plan years beginning on and after January 1, 2014, annual limits are generally prohibited. K. Extension of Coverage to Adult Children under Age 26

Healthcare reform requires that health plan coverage be extended to the child of an employee until the child reaches age 26 if the plan provides coverage for dependents, even if those children do not meet the IRS definition of a dependent and even if the children have other jobs, are married or do not reside with the employee. This provision does not include the child of a child.

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L.

Pre-existing Condition Limitations

After healthcare reform, a health plan will no longer be able to apply an exclusion for a preexisting condition to a child age 18 or younger. For health plan years beginning on or after January 1, 2014, pre-existing limitations will not apply to any individual. M. Limitations on Rescinding Coverage

Coverage extended to an individual enrolled in a health plan can only be rescinded due to fraud or intentional misrepresentation of a material fact. If you are going to rescind an enrollee's coverage for one of these reasons, you must give the individual advance notice, as provided under the Public Health Service Act. N. Patient-Centered Outcomes Research Trust

Healthcare reform includes a number of new taxes and fees which are rarely mentioned by the laws supporters. On December 5, 2012, the IRS announced final regulations governing new fees on health insurers and employer sponsors of self-funded health plans, designed to fund the Patient-Centered Outcomes Research Trust. This Trust finances an Institute tasked with advancing the quality and relevance of evidence-based medicine through the synthesis and dissemination of comparative clinical effectiveness research findings. Since insurers must pay the fee with respect to insured plans, the following discussion centers on obligations of self-funded plan sponsors. For calendar-year plans, the first payment is due July 31, 2013. The regulations describe how the new fee is to be calculated and paid by sponsors of self-funded plans for plan years ending on or after October 1, 2012 and before October 1, 2019, when the fee is scheduled to expire. The fee is based on the number of lives covered by the plan, which means the sponsor pays on the basis of participants (including COBRA recipients), as well as covered spouses, dependents and other beneficiaries. For plan years ending before October 1, 2013, the fee is $1 times the average number of lives covered under the plan. For plan years ending on and after October 13, 2013, the fee is $2 per average number of lives, and for years ending after October 13, 2014, the fee will increase based on the projected per capita amount of national health expenditures. Fees are due no later than July 31 of the year following the last day of the plan year. For calendar year plans, that means the first fee is due July 31, 2013. A self-funded health plan is defined as any plan that provides accident or health coverage, if any portion of the coverage is provided other than through an insurance policy. Certain plans fall within an exception to this requirement, including those that provide benefits that are substantially all excepted benefits, employee assistance programs (EAPs), diseasemanagement or wellness programs that do not provide significant benefits in the nature of 12

medical care or treatment, and plans designed to cover primarily employees who are working or residing outside of the U.S. Excepted benefits are benefits such as accident-only coverage, workers compensation, limited-scope dental or vision care, long-term care, coverage for a specific disease, or plans offering hospital or other fixed indemnity coverage. Two or more arrangements established or maintained by the same plan sponsor that provide for accident and health coverage and have the same plan year, are treated as a single plan. For example, a plan sponsor with separate major medical and prescription drug plans, or who sponsors a health reimbursement arrangement (HRA) coordinated with a major medical plan, sponsors only one plan as long as all have the same plan year. This avoids paying multiple fees for essentially the same coverages. There are three ways to determine the average number of lives under a plan. These are the actual count method, the snapshot method, and the Form 5500 method. Sponsors are required to use the same method for all plans each year, but may switch methods from year to year. Under the actual count method, the sponsor adds up the daily tally of covered lives during the plan year and divides by the total number of days in the plan year. Under the snapshot method, the sponsor adds total lives on one or more days during each of the quarters of the plan year, and divides by the total number of dates on which a count was made. Each date used in quarters 2, 3 and 4 must be within 3 days of the date in the first quarter that corresponds with that date. For example, if the sponsor counted lives on the 15th of each month in the first quarter, it must use a date within 3 days of the 15th in the following months. If this method is used, lives on a particular date can be determined using either a snapshot factor or a snapshot count. The snapshot factor method counts the number of individuals with self-only coverage on a day and multiplies that by 2.35. The snapshot count method uses the actual number of lives on the designated date. The Form 5500 method can be used as long as the 5500 is filed on or before July 31 of the year following the year in question. If the plan is restricted to self-only coverage, the sponsor adds the total participant counts reported on the 5500 at the beginning and at the end of the plan year, and divides by two to determine covered lives. If there are coverages in addition to self-only coverage, total lives equal the sum of the reported beginning and year-end participant counts. There are special rules for health FSAs and HRAs. In the case of an FSA or HRA, the sponsor does not need to count spouses, dependents or other beneficiaries. And, as noted above, if the HRA and/or FSA have the same plan year as the sponsors health plan, it will not be double counted for purposes of paying the fee. Similarly, if a sponsor has both self-funded and insured options under its plan, the sponsor is not required to pay a fee for insured lives. 13

V.

GOING FORWARD

The cost of maintaining a health plan will likely go up. You will have to examine the portion of employee cost that you are paying currently in light of employees' pay to determine whether you will be in compliance with the play or pay mandate and anticipate the additional cost of the automatic enrollment requirement. The cost of compliance with ACA will be reflected in increased administration fees and premiums, as well. Also, you should consider that your employees will have many questions about how all of this impacts them, so you need to be prepared to address those questions. Finally, as previously discussed, keep on the lookout for more guidance as it is released and updated. VI. TIMELINE OF HEALTHCARE REFORM

Reform

Effective Date

Tax credit for small employers and nonprofits offering health insurance High-risk pool coverage for people who cannot obtain current individual coverage due to preexisting conditions Internet portal for health coverage information Extension of tax dependent status of children for health plan coverage to the end of the calendar year in which the child turns 26 Temporary reinsurance program for employer health plans providing coverage for non-Medicare eligible retirees aged 55-64 for 80% of claims between $15,000 and $90,000 10% excise tax on tanning salon services Increase the age of a dependent child for health plan coverage to 26

1/1/10 3/23/10

3/23/10 3/30/10

Program opened 6/1/10, first come first served 7/1/10 First Plan Year beginning on or after 9/23/10 (1/1/11 for calendar year plans) Grandfathered Plans: before Plan Year beginning on and after 1/1/14, only have to enroll older child if

14

they are not eligible to enroll in their own employers plan No lifetime limits on dollar value of health plan coverage First Plan Year beginning on or after 9/23/10 (1/1/11 for calendar year plans) First Plan Year beginning on or after 9/23/10 (1/1/11 for calendar year plans) First Plan Year beginning on or after 9/23/10 (1/1/11 for calendar year plans)

Coverage of preventative services by non-grandfathered plans

No prior authorizations and same cost sharing in and out of network for non-grandfathered plans

Participants may choose any primary care provider, may designate a pediatrician as primary care provider of child and no referral needed for OB/GYN for non-grandfathered plans External claims review process for non-grandfathered plans

First Plan Year beginning on or after 9/23/10 (1/1/11 for calendar year plans) First Plan Year beginning on or after 9/23/10 (1/1/11 for calendar year plans) First Plan Year beginning on or after 9/23/10 (1/1/11 for calendar year plans) First Plan Year beginning on or after 9/23/10 (1/1/11 for calendar year plans) Limits begin to phase out first Plan Year beginning on or after 9/23/10 (1/1/11 for calendar year plans) Plan Years beginning on or after 3/23/10, but rebates begin 1/1/11

Elimination of all pre-existing condition limitations or exclusions for all children under 19 No rescission of coverage unless fraud or intentional misrepresentation of material fact. Advance notice of rescission required.

Prohibition of certain annual limits

Minimum medical loss ratios limited to 85% for large plans and 80% for plans with less than 100 employees or rebates required Increase in tax on distributions from a Health Savings Account if not used for qualified medical expenses to 20% (from 10%). Prohibition of over-the-counter drugs as an eligible expense in HSAs, HRAs and FSAs unless prescribed or 15

1/1/11

1/1/11

insulin Grants awarded to small employers (less than 100 employees who work 25+ hours/week) to provide access to wellness initiatives if no wellness program in place on 3/23/10. Medical Loss Ratio Rebates to be paid by insurers. Employers may need procedures in place governing how such amounts will be treated and allocated. New standardized benefits summary/explanation of coverage. 60-day advance notice of any material change. W2 inclusion of cost of employer-sponsored health coverage for employers who filed more than 250 Forms W2 in prior year. Extension of Waiver of Annual Limits: Plans wanting to extend their waiver of the restrictions on annual limits must reapply by deadline. Group plans must report annually to HHS and plan participants about plan benefits designed to improve the quality of care Automatic enrollment for large employer plans (more than 200 F/T employees). Employers must provide notice of auto enrollment and opportunity to opt out. Nondiscrimination rules of 105(h) apply to fully-insured non-grandfathered plans Elimination of employer deduction for subsidy under Medicare Part D (immediate impact on employers liability and income statements) Health FSA max election of ee salary deferrals limited to $2,500 Additional .9% Medicare tax on wages and selfemployment income for individuals earning more than $200,000 ($250,000 MFJ). New 3.8% Medicare tax on the lesser of 1) net investment income or 2) the portion of MAGI exceeding $200,000 ($250,000 MFJ) 16

1/1/11

8/1/12

Open enrollment periods beginning on or after 9/23/12

2012 Forms W2, due 1/31/13

12/31/12

Upon issuance of regulations

Upon issuance of regulations

Upon issuance of regulations

ER Tax Years beginning after 12/31/12

1/1/13

1/1/13

Threshold for the itemized deduction for unreimbursed medical expenses increased from 7.5% of AGI to 10% of AGI for regular tax purposes (waived for individuals age 65 and older for tax years 2013 through 2016) Employer notice of availability of Exchanges and if employer contribution is <60% of cost, availability of premium assistance and fact that employee will lose employer contribution to coverage in Exchange National health insurance Exchanges begin, to be administered by a new federal Agency, the "Health Choices Administration. The categories of people and businesses qualified to purchase coverage through the Exchange would be phased in over three years' time to up to 100 employees and the commissioner has the authority to expand the exchange to larger groups Health Insurance Premium Assistance Credit and/or cost sharing reduction for households with income 100-400% of poverty line Individuals must have minimum essential health insurance coverage for themselves and their dependents Employer reporting to IRS whether health coverage offered to F/T employees Essential health benefits must be offered by small, nongrandfathered fully-insured plans, including mandated benefits, cost-sharing requirements, out-of-pocket limits and a minimum actuarial value Play or Pay: Employers must offer coverage or, if they employ at least 50 full-time equivalent (based on 120 hours/month or 30 hours/week) employees, they must pay a fine. Coverage must meet the essential benefits requirements and maximum employee contribution to be compliant No waiting periods longer than 90 days No annual limits on benefits allowed

1/1/13

3/1/13

2014-2016

1/1/14

1/1/14

1/1/14

1/1/14

1/1/2014, or for plans qualified for transition relief, the first Plan Year beginning on or after 1/1/2014

1/1/14 Plan Years beginning on and after 1/1/14 Plan Years beginning on and after 17

Elimination of all pre-existing condition limitations or exclusions on all participants Wellness incentives increased from 20% to 30% of the cost of employee-only coverage Cadillac plan tax: 40% on coverage in excess of $10,200 for single coverage or $27,500 for family coverage. Paid by employer if self-insured and by carrier if fully-insured.

1/1/14

1/1/14

1/1/18

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