HEALTH CARE REFORM: What it Means for Employers April 2010 Tye Andersen Jackson Walker L.L.P. 100 Congress Avenue, Suite 1100 Austin, Texas April 2010

The Bills Patient Protection and Affordable Care Act (PPACA) Passed March 23, 2010 Health Care and Education Reconciliation Act of 2010 Passed one week later

Grandfathered Plans What is it? Adding new employees or dependents is okay Can we modify it some? Probably

Grandfathered Plans, cont. Grandfathered Plans are exempt from the following requirements: –Coverage of preventative cost –Non-discrimination rules for fully-insured plans –Claims procedures –High risk pools –Electronic transaction standards –Cover certain clinical trial treatment –Transparency requirements

Grandfathered Plans, cont. Grandfathered Plans are exempt from the following requirements (cont.) –Require plans to implement various activities such as case management, reduction in hospital readmission and wellness programs and report the status report to Secretary of HHS and participants –Require certain choice of providers for pediatric and ob/gyn care and require in-network coverage for emergency room visits to non-network providers Allow for HHS to annually review premium increases –Restrictions on premium rate differentials by age, geography and tobacco use (insurers only) –Guaranteed issue and renewability (insurers only) –Prohibit discrimination based on health status, including increase in premium reduction for wellness programs (insurers only) –Limit cost sharing

Grandfathered Plans, cont. Grandfathered Plans (pre-March 23, 2010) are required to: –Not have lifetime limits –Not have pre-existing conditions exclusions for dependents under age 19 No pre-existing conditions exclusions for anyone (Jan. 1, 2014) –Restricted annual limits from and eliminate annual limits in 2014 –Prohibition on rescission –Extend coverage to unmarried or married, adult children to age 26 –Use the standard uniform explanation of coverage (once developed) –Give rebates if MLRs do not meet the applicable standards (only for insurers, not self-funded plans) –Not have waiting periods greater than 90 days (Jan. 1, 2014)

Annual and Lifetime Limits No lifetime dollar limit on “essential benefits” Restricted annual dollar limits on “essential benefits” –What does “restricted” mean for ? It’s unclear –In 2014, no annual dollar limits at all Questions – Is there a difference between in-network and out-of- network? Probably not Retiree programs? Probably not allowed Are non-dollar limits okay? Maybe

Essential Benefits Secretary of HHS will issue regulations defining essential benefits However, these general categories are “essential”: –Ambulatory patient services –Emergency services –Hospitalization –Maternity and newborn care –Mental health and substance use disorder services –Prescription drugs –Rehabilitative services and devices –Prevention and wellness services and chronic disease management, and –Pediatric services, including oral and vision care

Dependent Coverage Until Age 26 Meaning of age 26 Definition of dependent Married or unmarried Plan only has to cover the adult child, not spouse or dependents Coverage is not included in income for employee or for adult child “Full time student status” cannot be a requirement COBRA qualifying event and 125 plan event

Over the Counter Drug Prohibition Effective January 1, 2011 End of tax-advantaged treatment of OTC drugs Prohibits reimbursement of OTC drugs from: –FSAs –HRAs –HSAs Prescription drugs and insulin can still be reimbursed

Individual Mandate In 2014, all individuals must obtain health insurance or pay a penalty, which would be the greater of: 2014: 1.0% of AGI or $95/person 2015: 2.0% of AGI or $325/person 2016: 2.5% of AGI or $695/person Indexed after 2016 Family flat dollar amount capped at 300% of individual penalty Hardship Exemption: Individuals below tax filing threshold

The Exchanges Beginning in 2014, states are required to create Health Insurance Exchanges where individuals and employers can purchase health insurance, either through private insurers or a co-op Actuarial value: Bronze (60%), Silver (70%), Gold (80%), Platinum (90%) Exchange open to employers with less than 100 employees States can tinker with this limit or open exchanges to large employers after 2016 Premium subsidiaries and cost-sharing subsidies available for individuals who are below 400 % of the federal poverty level ($43,000 for individual, $88,000 for family of four) Employees, whose employer does not offer coverage, are eligible to obtain coverage from the Exchange Employees, whose employer does offer coverage, are eligible to join an Exchange if their employer coverage is unaffordable (9.5% of AGI) or the employer plan does not have at least a 60% actuarial value (bronze level) Overall, increased administrative burden for employers

Employer Mandate Starting in 2014 If employer does not provide coverage and at least one employee obtains low-income premium subsidy in an Exchange, there is a penalty of $2,000/year x number of full-time employees (30 hours/week) –Not deductible by employer Employer does provide coverage but –Employer plan fails: 60% bronze level test, or 9.5% AGI affordability test; and Employee enrolls in Exchange and receives low-income subsidy –Employer does not have to calculate affordability test, employee discovers eligibility after going to the Exchange –Penalty of $3,000 per employee with subsidy –Maximum of $2,000 times number of full-time employees

Small Employer Tax Credit Employers with less than 25 employees who do offer coverage Employee average wages must be less than $50,000 Eligible for federal tax credit up to 35% of their premiums Effective immediately

Vouchers Starting in 2014, if employer offers health care insurance, then: Employer must offer cash voucher to any employee whose premium is between 8% and 9.5% of the employee’s household income and whose income is below 400% of the FPL Voucher is equal to the greatest employer contribution which employer would have made to its own plan (ex. HMO only, HMO-PPO) Any excess amounts is given to the employees as wages No employer penalty for employees who receive a voucher Voucher amount is deductible by the employer Vouchers are excluded from employee’s income Administrative difficulties anticipated

New Employer Requirements Starting in 2014 automatic enrollment mandatory for large employers with 200+ employees who offer coverage after two notices and opportunities to opt-out Additional reporting and notice requirements –Explanation of Exchange (3/31/2013) –Reporting of insurance coverage to the IRS and the participant (2014) –W-2 reporting of the value of employer-provided group health coverage excludable from employee’s gross income health, dental, vision, employer HSA contributions, and HRA contributions –Cadillac tax calculation and reporting in 2018 Excludes dental and vision costs for calculation

Cadillac Tax 40% tax on value above $11,850/$30,950 for retirees and high-risk industries Indexed at CPI-U+1% for 2019, CPI-U only after 2019 Higher indexing based on age and gender Which benefits count? All medical benefits as well as account- based plans (HSAs, FSAs, HRAs) Excludes dental and vision Tax applies for non-profits, multi-employer and governmental plans Double-dipping allowed Begins in % tax on value above $10,200 individual and $27,500 family

Tax Changes Industry fees –Health Insurers ($60.1 billion over 10 years) –Law exempts some VEBAs –Pharmaceutical Industry ($27 billion over 10 years) –Medical devices (2.3% excise tax on 1 st sale, $20 billion over 10 years) Medicare Hospital Insurance (HI) Tax –Currently 1.45% –Increases tax rate from 1.45% to 2.35% starting in 2013 for high-income earners (income in excess of $250,000 for joint filers; $200,000 for single filers) –3.8% tax on net investment income (income in excess of $250,000 for joint filers; $200,000 for others –Does not include distributions from qualified retirement plans Itemized medical deduction threshold increased from 7.5% of AGI to 10% starting in 2013

Other Issues Medicare Advantage plans –Not as advantageous to employers as in the past CLASS Act Increased HSA penalty for non-medical distributions (was 10%, now 20%) FSA cap of $2,500 starting in 2013 Small employer “Simple” Cafeteria Plans

Immediate Implications Health insurance reforms. These apply to the first plan year beginning after September 23, 2010: –Extension of health plan coverage for adult dependent children up to age 26. –Eliminate pre-existing condition exclusions for children under age 19. –Eliminate lifetime limits and modify annual limits. Changes to medical reimbursement, HSA and HRA plans starting in 2011 regarding OTC reimbursements. Starting in 2011: –These plans may no longer be used to reimburse for over the counter drugs, unless pursuant to a prescription from a doctor –This may impact "grace period" claims from January to March of 2011 on account of 2010 elections –In addition, the excise tax on amounts distributed for nonmedical expenses increases to 20% from 10% Expanded W-2 Reporting. Starting for 2011 (due in January of 2012): –Employers must report the aggregate cost of employer sponsored health insurance coverage. Tax credit for employers with 25 or fewer employees. Effective now –Employers are eligible for a credit based on the employers cost of health insurance –Average wages must be $50,000 or less –Credit is on a sliding scale up to 35% Adoption of Temporary High Risk Pool –May replace the Texas high risk pool –Effective June 2010 –Applies to individuals who do not have insurance.

The Tan Tax 10% tax on amounts paid for indoor tanning services Effective July 1, 2010 Tax on tanning? That should be a deductable business expense!

Jan. 1, 2020 Part D “donut hole” filled Jan. 1, 2018 Cadillac tax is established Jan. 1, 2014 Annual dollar limits prohibited Free choice vouchers for exchange Auto enrollment required for employers with 200+ employees Low income premium subsidy for the exchange Individual & employer mandates effective No waiting periods longer than 90 days Health insurance exchanges established Pre-existing condition exclusions prohibited for everyone Jan. 1, 2013 Medicare (HI) tax Health care FSA contributions capped at $2500 Jan. 1, 2011 Prohibition of lifetime dollar limits Restriction on annual dollar limits Pre-existing condition exclusions for dependents under 19 years of age prohibited Dependent child coverage expanded to age 26 OTC drugs ineligible for FSA, HSA, HRA reimbursements Uniform explanation of coverage (once promulgated) Phase out of Part D “donut hole” begins CLASS Act (long-term care program) Medicare Advantage funding reduced W-2 reporting for 2011 tax year 1 st Qtr, 2010 RDS accounting changes Health Care Reform Summary of Selected Changes Jan. 1, 2012 Tax on comparative effectiveness research Timeline (as of March 30, 2010) * *Timeline indicates calendar year grandfathering plan