On March 23, 2010, President Obama signed into law the “Patient Protection and Affordable Care Act” (H.R. 3590). One week later, on March 30, 2010, the President signed into law the “Health Care and Education Reconciliation Act of 2010” (H.R. 4872), which modified key provisions of H.R. 3590 (collectively referred to as the “Acts”). The Acts will significantly change the nation’s health care system. Many of the Acts’ provisions impose new requirements with respect to group health plans or otherwise pertain to health insurance policies and programs that bear upon employee benefits programs.
This Client Alert provides a summary of the most significant employee benefits related changes of this landmark health care reform legislation. Additional Client Alerts cover other aspects of the Acts and related regulatory guidance. Since the Acts have broad impact to the health care field and are extremely complex, it should be emphasized that these Client Alerts do not attempt to be exhaustive in the topics covered or the details presented.
Provisions Applicable to Group Health Plans
The following provisions apply to employer-sponsored group health plans. Special provisions applicable to grandfathered plans (i.e., plans in effect as of March 23, 2010) are noted.
Provisions Requiring Immediate Attention
The following provisions are effective for group health plans for plan years beginning on or after September 23, 2010, except as otherwise noted:
1. Nondiscriminatory Eligibility
A non-grandfathered group health plan (other than a self-insured plan) may not establish eligibility requirements for full-time employees that are based on the employee’s compensation or any other criteria that would favor higher-paid employees. Thus, currently permissible discrimination in favor of highly compensated employees in insured health plans will not be allowed in non-grandfathered plans.
2. Eligibility of Adult Children1
A group health plan that provides dependent coverage of children must offer coverage to every adult child of a participant until such child turns age 26. (For grandfathered plans, for plan years beginning before January 1, 2014, these provisions only apply if the adult child is not eligible to enroll in another group health plan.) Furthermore, coverage of any child of the participant who has not attained age 27 by the end of the tax year will be tax-free (currently, coverage is taxable to the participant if the child is not a dependent).
3. Coverage of Children with Pre-Existing Conditions
A group health plan may not exclude from coverage a child under age 19 with a pre-existing condition. The Secretary of Health and Human Services (the “Secretary”) has indicated that regulations will clarify that this provision applies to both eligibility for coverage and benefits within the plan (e.g., a plan may not exclude treatments for the pre-existing condition). This provision will extend to all group health plan participants beginning in 2014.
4. No Rescission of Coverage1
A group health plan may not rescind coverage to a participant once the individual becomes a participant, except in the case of participant fraud or intentional misrepresentation of a material fact to the extent prohibited by the plan and, in this case, only upon prior notice to the participant and following certain administrative procedures.
5. No Push to High Risk Pools
Effective June 21, 2010 and expiring January 1, 2014, an issuer or employment-based health plan which encourages an individual to drop existing coverage and move to a high-risk insurance pool will be liable to the pool for the individual’s healthcare expenses. What constitutes “encouraging” an employee or insured individual to drop existing coverage will be described in the regulations. Perhaps it will be similar to the rules preventing employers from encouraging employees to drop employment-based coverage in favor of Medicare coverage. See the Ulmer & Berne Client Alert, entitled 2010 Health Care Reform Legislation – New Health Care Initiatives (“U&B New Health Care Initiatives Alert”) for additional information on high risk insurance pools.
6. Lifetime/Annual Limits1
In general, a group health plan may not establish lifetime limits, or “unreasonable” annual limits, on the dollar value of benefits for any participant or beneficiary. However, a plan that is not required to provide “essential health benefits” may place lifetime or annual per beneficiary limits on specific covered
benefits to the extent such limits do not violate other Federal or State laws. See the U&B New Health Care Initiatives Alert for more information on plans required to provide essential health benefits.
7. Preventive Services1
A non-grandfathered group health plan must provide coverage without cost to a participant for preventive measures, including immunizations, preventive care and health screenings for adults and children, in accordance with current Federal guidelines and recommendations, including the United States Preventive Services Task Force recommendation issued in November 2009 of less frequent breast cancer screening and mammography. As new preventive measures are added to the list, plans will have at least one year to add them to the plan.
8. Expanded Claims Procedures1
A non-grandfathered group health plan must include in its claims procedures the following minimum requirements: (i) the plan must have an internal claims process; (ii) participants must be allowed to receive continued coverage pending the outcome of the appeals process; (iii) the plan must have an external review process that meets certain minimum guidelines and is binding on the plan; and (iv) participants must be made aware of available internal and external claims procedures and the availability of assistance for the appeals process (e.g., through a State’s consumer assistance program or an ombudsman). See the U&B New Health Care Initiatives Alert for information on the new consumer information and assistance program.
9. Administrative Simplification
Effective March 23, 2010, a group health plan will be subject to “administrative simplification” requirements under HIPAA. The Acts modify the HIPAA rules intended to create uniform electronic medical data processing to expand the scope of those rules. A particular focus will be an attempt to adopt operating rules to enable determination of an individual’s eligibility and financial responsibility for specific services prior to or at the point of care. The Acts specifically state that these operating rules “may allow for the use of a machine readable identification card.” Not later than December 31, 2013, each group health plan will be required to file with the Secretary a statement that the plan is in compliance with certain key operating standards. A statement of compliance with other standards will be required by December 31, 2015. Documentation of compliance will be required including evidence of comprehensive system testing. The Secretary may contract with independent outside entities to certify compliance. The Secretary is to conduct periodic plan audits. There are penalties for non-compliance. The amount of the penalty is based on the number of individuals covered under the plan (and is doubled in cases of “knowing” non-compliance).
10. Increased Regulation of MEWAs
Effective March 23, 2010, it is a crime for a person to knowingly make false statements and representations in the marketing of a multiple employer welfare arrangement (“MEWA”). In addition, the Department of Labor (“DOL”) is authorized to adopt regulations or issue orders imposing the laws of the States regulating insurance upon MEWAs, regardless of whether such laws would otherwise have been preempted by the Employee Retirement Income Security Act (“ERISA”). The DOL also is authorized to issue cease and desist or summary seizure orders against a MEWA if it appears to be engaged in conduct which is fraudulent or presents an immediate danger to public safety or welfare. Finally, the DOL is to issue regulations by which MEWAs that are not group health plans, but which provide medical care benefits, are required to register with the DOL before operating in a state and may be required to file annual reports.
Provisions with Later Effective Dates
The following provisions are effective for group health plans as of the dates indicated below:
11. Uniform Explanations/Standardized Definitions1
By March 23, 2011, the Secretary is directed to develop uniform standards for describing benefits and defining terms under the plan and any summary of plan provisions. Thereafter, a group health plan (including a self-insured plan) will be required to provide participants and eligible employees with summaries in compliance with these standards. The penalty for noncompliance with the standards is up to $1,000 for each failure, for each participant.
12. Reporting on Quality Care1
By March 23, 2012, the Secretary is directed to develop new reporting requirements for non-grandfathered group health plans. Thereafter, such a plan generally must annually submit to the Secretary and participants a report on whether the benefits under the plan include structures that: (i)improve health outcomes (e.g., through effective case management and care coordination); (ii) prevent hospital readmissions (e.g., through patient education and comprehensive hospital discharge planning); (iii) improve patient safety and reduce medical errors (e.g., through appropriate use of best practices); and (iv) implement wellness and health promotion activities. The Secretary may develop exceptions for group health plans that substantially meet the above-referenced requirements.
13. Automatic Enrollment by Large Employers
An employer with more than 200 full-time employees that offers employees enrollment in one or more health benefits plans is required to automatically enroll new full-time employees in one of the plans offered (subject to any permissible waiting period) and to continue enrollment of current employees in such health benefits plan subject to adequate notice and the ability for an employee to opt out of any such coverage. The effective date of this provision is not reflected in the Acts; presumably, this matter will be clarified in regulations or a technical correction.
14. Waiting Periods1
Effective for plan years beginning on or after January 1, 2014, a group health plan may not impose any waiting period for enrollment exceeding 90 days.
15. Prohibitions on Pre-Existing Condition Exclusions and Discrimination Based on Health Status1
Effective for plan years beginning on and after January 1, 2014, a group health plan may not impose any pre-existing condition exclusion with respect to such plan or coverage. Specifically, the plan may not establish rules for eligibility (including continued eligibility) of any individual to enroll based on any of the
following health status-related factors in relation to the individual or a dependent of the individual: (i) health status; (ii) medical condition (including both physical and mental illness); (iii) claims experience; (iv) receipt of health care; (v) medical history; (vi) genetic information; (vii) evidence of insurability; (viii) disability; or (ix) any other health status-related factor determined by the Secretary.
16. Nondiscriminatory Eligibility/Benefits in Plans Receiving Federal Funding1
Effective for plan years beginning on or after January 1, 2014, group health plans may not exclude individuals from participation, deny them benefits or otherwise subject them to discrimination if such health plan or activity is receiving Federal financial assistance, including credits, subsidies or contracts of insurance.
17. Nondiscrimination Against Health Care Providers1
Effective for plan years beginning on or after January 1, 2014, a non-grandfathered group health plan may not discriminate with respect to participation or coverage against any health care provider who is acting within the scope of the provider’s license or certification. However, reimbursement rates may vary based upon established quality or performance measures. The Acts do not require application of the “any willing provider” rule; thus, the group health plan need not contract with any health care provider willing to abide by the terms and conditions for participation established by the plan or issuer.
18. Wellness Program Requirements1
Effective for plan years beginning on or after January 1, 2014, a non-grandfathered wellness program that conditions discounts, rebates or other rewards for participation on a standard related to a health status factor generally must satisfy the following requirements: (i) the reward, together with all other wellness program rewards, may not exceed 30% of the total cost of employee-only coverage (up to 50% if the Secretary so directs); (ii) the program must be reasonably designed to promote health or prevent disease; (iii) the program must allow participants to try to qualify for the reward at least once per year; (iv) the full reward must be made available to all similarly situated individuals; and (v) materials describing the program must disclose the availability of a reasonable alternative standard or possibility of waiver of the standard.
The following programs are not required to meet the requirements, provided the programs are made available to all similarly situated individuals: (a) a program that reimburses all or part of the cost of membership to a fitness center; (b) a diagnostic testing program that provides a reward for participation but does not base any part of the reward on outcomes; (c) a program that encourages preventive care related to a health condition through waiver of the co-payment or deductible requirements in the employer’s group health plan for certain items or services related to the health condition (e.g., prenatal care); (d) a program that reimburses individuals for the cost of smoking cessation programs without regard to whether the individual stops smoking; and (e) a program that provides a reward to individuals for attending periodic health education seminars.
19. Excise Tax on High-Cost Health Coverage
Generally effective for taxable years beginning after December 31, 2017, if an employer-sponsored health plan provides an excess benefit, such excess shall be subject to a 40% excise tax. In general, “excess benefit” means the excess of the aggregate coverage over the applicable dollar limit ($10,200 for self-only coverage and $27,500 for other than self-only coverage) (indexed for COLA increases), determined on a monthly basis. Transition rules will apply to the 17 states with the highest coverage costs.
Provisions Applicable to Cafeteria Plans, Including Health FSAs
The following provisions, which relate to employer-sponsored cafeteria plans, are effective for taxable years beginning on or after December 31, 2010:
1. Covered Health Expenses in Health FSAs
A health flexible spending account (“FSA”) may not reimburse over-the-counter medicines, other than insulin and doctor-prescribed medicine.
2. Deferral Limits on Health FSAs
A health FSA shall not qualify under a cafeteria plan unless the plan provides that a Participant may not elect to make salary deferral contributions in excess of $2,500 (indexed for COLA increases after 2013) for a taxable year. It appears that an employer could contribute additional monies to an employee’s health FSA without negatively affecting the income tax treatment of the benefit. There appears to be some disagreement as to the effective date of this provision. Although it seems apparent that the effective date for implementing the limit was intended to be moved back to 2013, the Acts arguably only delay the effective date of the COLA increases to that date.
3. Simple Cafeteria Plans for Small Employers
A small employer maintaining a simple cafeteria plan will be treated as meeting any applicable nondiscrimination requirement for the year. A “simple cafeteria plan” must (i) be established by an eligible employer; (ii) provide for an employer contribution, regardless of whether an employee makes salary reduction contributions, of either a uniform percentage (not less than 2%) of each covered employee’s compensation or an amount that is not less than the lower of 6% of each covered employee’s compensation or twice the amount of each covered employee’s salary reduction contributions; (iii) not provide higher benefits to highly compensated or key employees; and (iv) generally provide that all employees who had at least 1,000 hours of service for the preceding year are eligible to participate and to elect any benefit available under the plan. In general, an employer is an “eligible employer” if it employed an average of 100 or fewer employees during either of the two preceding years; certain new and growing employers may also be considered eligible.
Provisions Applicable to Retiree Medical Plans
1. Retiree Medical Reimbursement
By June 23, 2010, the Secretary is to establish a temporary reinsurance program to reimburse participating employment-based retiree medical plans (including self-funded plans) for a portion of the cost of providing coverage to early retirees (and any eligible spouse, surviving spouse or dependent). Early retirees are retirees age 55 or older but not yet eligible for Medicare. In order to benefit from the program, a plan must meet certain design requirements and make a claim to the Department of Health and Human Services for reimbursement. Amounts eligible to be claimed for reimbursement include the actual costs of items and services provided to a retiree or other covered individual under the plan (i.e., reflecting provider discounts, as well as costs paid by the covered individuals such as deductibles and co-payments). Reimbursement will be at a rate of 80%; claims may not be less than $15,000 and may not exceed $90,000 (each indexed for COLA increases). Reimbursement payments may be used to lower costs for the plan (e.g., reduce employer premiums) or to subsidize participant costs (e.g., reduce retiree premiums or co-payments). Reimbursement payments will not be subject to income taxation to the plan sponsor. NOTE: This program is scheduled to expire January 1, 2014; however, the Secretary may stop accepting claims prior to that date if the funds appropriated to the program are depleted.
2. Phase-Out of Retiree Drug Coverage Gap
Effective beginning January 1, 2011, the Medicare Part D coverage gap will be phased out by 2020 through increasing coverage and discounts for prescribed medicines to affected retirees. For 2010, a $250 rebate will be available to affected retirees. The coverage gap is created because Medicare Part D
currently provides coverage up to a certain limit each year ($2,830 for 2010) and then provides additional coverage only once drug costs reach a catastrophic level ($6,440 for 2010), thus leaving a gap in drug coverage for which the retiree is completely responsible.
3. Elimination of Retiree Drug Subsidy Deduction
Effective for taxable years beginning after December 31, 2012, employers will not be allowed to take a tax deduction for their Medicare Part D drug subsidy payments.
Provisions Applicable to Employers
1. No Retaliatory Discrimination or Discharge by Employers
No employer may discharge or in any manner discriminate against any employee with respect to compensation, terms, conditions, or other privileges of employment in retaliation for the employee receiving a tax credit or subsidy or otherwise reporting, or participating in proceedings pertaining to, any violation by the employer of its responsibilities under the law. The effective date of this provision is not reflected in the Acts; presumably, this matter will be clarified in regulations or a technical correction.
2. Obligation to Inform Employees of Coverage Options
Effective March 1, 2013, an employer subject to the Acts shall provide, in accordance with regulations issued by the Secretary, to each employee at the time of hiring (or not later than March 1, 2013, for current employees), written notice: (i) informing of the existence of an American Health Benefit Exchange (“Exchange”) and information as to its services and contact information; (ii) if the employer plan’s share of total allowed costs of benefits provided under the plan is less than 60% of such costs, that the employee may be eligible for a premium tax credit and a cost sharing reduction if the employee purchases a qualified health plan through the Exchange; and (iii) if the employee purchases
such plan through the Exchange, the employee will lose the employer contribution (if any) to any health benefits plan offered by the employer which contribution may be excludable from income for Federal income tax purposes. See the UB New Health Care Initiatives Alert for additional information on Health Benefit Exchanges and free choice vouchers.