Health Care Reform: What Employers Need to Know For 2010 and 2011

Reconciliation Act. On March 30, 2010, President Obama executed the Health Care and Education Reconciliation Act of 2010 (“Reconciliation Act”), which amended the Patient Protection and Affordable Care Act (collectively, with the Reconciliation Act, the “Act”), executed by the President the previous week. The Act contains a number of health coverage reforms that require fully and self-insured health plans to meet certain coverage and reporting requirements. The purpose of this newsletter is to provide a very brief summary of certain provisions of the Act that affect employers and group health plans in 2010 and 2011.

Grandfathered Plans. The impact of the Act on an employer’s group health plan depends, in part, on whether an employer maintains a “grandfathered” plan. A grandfathered plan generally includes any group health plan in existence on March 23, 2010, the date on which the Reconciliation Act was enacted (the “Enactment Date”). A grandfathered plan is exempt from many, but not all, health care reforms under the Act. A group health plan seeking to preserve its grandfathered status is very limited with respect to the changes that may be made to the plan.

Interim Final Regulations relating to grandfathered status were issued on June 14, 2010 (the “Grandfather Regulations”). The Grandfather Regulations generally provide that a group health plan may make limited changes to the plan without jeopardizing its grandfathered status, including extending coverage to newly hired and newly enrolled participants and dependents or changing a plan’s terms to voluntarily comply with the Act. However, eliminating a particular benefit, increasing an individual’s coinsurance, copayment, deductibles or out-of-pocket limits by certain amounts, or decreasing the employer’s contribution rate by more than a certain amount are examples of changes to a group health plan that will cause a plan to lose its grandfathered status. As the Grandfather Regulations provide detail beyond the scope of this Alert, we recommend that an employer wishing to preserve the grandfathered status of its group health plan seek the advice of counsel before making any changes to the plan.

Collectively Bargained Plans. Despite that legally-required changes to group health plans generally have a delayed effective date for collectively bargained plans (to allow the changes to be addressed by the parties during the bargaining negotiations), the Grandfather Regulations do not grant collectively bargained plans a delayed effective date for implementing the Act’s mandates. Rather, the Grandfather Regulations provide that a collectively bargained plan in existence on the Enactment Date generally is treated as a grandfathered plan, regardless of the fact that it is collectively bargained, and is subject to all of the Act’s requirements that apply to a grandfathered plan. However, the Grandfather Regulations set forth a limited exception for insured collectively bargained plans. An insured collectively bargained plan retains its grandfathered status until the underlying collective bargaining agreement terminates even if changes are made to the plan that otherwise would jeopardize a plan’s grandfathered status. Once the collectively bargained agreement terminates, the terms of the insured collectively bargained plan then are compared to the terms of the plan in effect on the Enactment Date to determine if the plan retained or lost its grandfathered status.

Summary of Changes. Following are brief discussions of the more substantive provisions of the Act as they relate to employers and group health plans:

Change Effective January 1, 2010

Small Business Tax Credit. Employers with no more than 25 full-time employees and average annual wages per employee of $50,000 or less are eligible for a small business tax credit of up to 35% (25% if a tax-exempt organization) if they purchase health insurance for their employees. The employer must pay at least 50% of cost of the coverage to be eligible for the credit.

Change Presumptively Effective March 23, 2010

Automatic Enrollment. Employers with more than 200 full-time employees are required to automatically enroll new, full-time employees in the employer’s health plan, if any, and provide them with an opportunity to opt out. The Act did not provide an effective date for this provision, so the apparent effective date is the Enactment Date. However, this provision likely will be effective when regulations are issued.

Change Effective 90 Days After Enactment Dated (June 21, 2010)

Reinsurance for Early Retiree Coverage. Employers can participate in a governmental program that will reimburse group health plans for a portion of the cost of providing health coverage to “early retirees” and their spouses and dependents through December 31, 2013. “Early retirees” include those who are age 55 to age 64, are not active employees, and are not eligible for Medicare. This program is funded at $5 billion and is available on “first-come, first-served” basis.

Changes Effective for Plan Years Beginning On or After September 23, 2010 (for calendar year plans – January 1, 2011)

Pre-Existing Conditions. A group health plan cannot impose any pre-existing condition exclusions for enrollees under age 19. (This requirement will apply to all enrollees in 2014.)

Coverage of Adult Children. A group health plan must offer coverage to adult children up to age 26, even if they do not meet the dependency requirements for a tax exemption. (For plan years beginning prior to January 1, 2014, grandfathered group health plans do not have to offer this coverage if the adult dependent is eligible to enroll under another employer-sponsored health plan.)

Coverage Rescissions. A group health plan may not cancel or discontinue coverage retroactively except in cases of fraud or the intentional misrepresentation of a material fact.

Lifetime and Annual Limits. A group health plan may not impose a lifetime limit on the dollar value of “essential health benefits.” Before January 1, 2014, a group health plan may impose a “restricted” annual limit on the dollar value of “essential health benefits.” A group health plan can impose lifetime and annual limits on the dollar value of benefits that are not “essential health benefits.” For plan years beginning on and after January 1, 2014, a group health plan cannot impose any annual limit on the dollar value of “essential health benefits.” Interim Final Regulations relating to lifetime and annual limits were issued on June 22, 2010.

Non-Discrimination Rules for Fully-Insured Plans. A fully-insured group health plan is subject to the same requirements as a self-insured group health plan under the Internal Revenue Code relating to the prohibition on discrimination in favor of highly compensated individuals. (Not applicable to a grandfathered plan.)

Appeals Procedures. A group health plan must implement procedures to allow a participant to appeal coverage determinations and claims and a participant’s coverage must continue during the appeals process. Interim Final Regulations relating to appeals procedures were issued on July 23, 2010. (Not applicable to a grandfathered plan.)

Preventative Services. A group health plan must provide coverage, without cost-sharing, for certain preventative health services (e.g., certain evidence-based items or services, immunizations, preventative care and screenings for infants, children, adolescents, and women). Interim Final Regulations relating to preventative services were issued on July 14, 2010. (Not applicable to a grandfathered plan.)

Changes Effective January 1, 2011

W-2 Reporting of Health Coverage. Beginning with the 2011 tax year, an employer must report the total cost of employer-sponsored health coverage on an employee’s Form W-2.

Benefits Summary. A group health plan must provide eligible employees and participants with a uniform summary of benefits and coverage information.

Notice of Changes. A group health plan must provide participants with 60 days prior written notice of any material modification to the plan.

Simple Cafeteria Plan. Employers with no more than 100 employees may adopt a “simple cafeteria plan” that will be treated as meeting the Internal Revenue Code’s nondiscrimination rules so long as the plan meets certain minimum eligibility, participation, and contribution requirements.

Over-the-Counter Medication Exclusion. Over-the-counter medications are not eligible for reimbursement from a health flexible spending account, a health reimbursement arrangement, or a health savings account unless the medication is prescribed by a physician or is insulin.

Excise Tax on Non-Qualified Distributions from a Health Savings Account. The penalty for withdrawals from a health savings account that are used for purposes other than qualified medical expenses will increase from 10% to 20%.

This newsletter highlights only certain health care reform mandates and is not a comprehensive analysis of the Act or the regulations and guidance issued pursuant to the Act. While the Act provides a framework for health care reform, more detail in the form of final regulations and other guidance from governmental agencies is needed to properly interpret and apply the Act’s provisions.

If we can be of assistance in answering any questions relating to your obligations under the Act, please contact one of the attorneys in our Employee Benefits and Executive Compensation Practice Group.

This newsletter is for information purposes only and should not be construed as legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information or an explanation about the matters discussed in this newsletter, please contact any of the following attorneys in our Employee Benefits and Executive Compensation Practice Group.

IRS Circular 230 Disclosure – To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.