President Obama signed the Affordable Care Act into
law on March 23, 2010. Many of its requirements became
effective at various times over the last three years:
health care coverage available to children of plan
participants until they reach age 26.
lifetime limits and annual limits on essential health benefits
(with certain exceptions for grandfathered plans).
claims procedures to comply with new rules.
The effective date for most of these provisions was
the first day of the plan year beginning on or after September 23,
2010 (January 1, 2011 for calendar year plans). If you have
not yet made these required plan amendments you should contact your
employee benefits professional immediately.
Some ACA provisions Are Only Applicable to
care services must be provided without cost sharing
requirements - non-grandfathered status could have some
may select primary care providers, including pediatric care
providers, and OB/GYNs from any such provider who participates
in the plan's network.
care services must be provided without prior authorization and
without regard to whether the emergency health care provider
is a participating provider.
group health plans will be subject to nondiscrimination rules
similar to those currently in effect for self funded
plans. This will be a serious problem for
discriminatory plans - $100 per day penalty for each
individual discriminated against. The IRS has
said this rule will not be effective until final regulations
are issued. Recently, an IRS official stated that they
hope to issue those regulations later this
year. He noted that the IRS is very aware that employers
will need time to comply with these regulations. Our
prediction is that they will not be effective until at least
pocket maximums. These become effective in 2014.
This limit caps the amount a participant must pay by way
of co-pays and cost sharing, and will apply to all
plans. Specific imitations on deductibles will apply only
in the small plan fully insured markets. Depending
on your plan's current provisions, this could be a significant
cost, starting next year.
and external appeals processes must comply with new rules.
After finishing the first stage of PPACA compliance,
employers were faced with a new set of requirements. Among
coordination of HRAs with ordinary group health plans to
ensure compliance with the prohibitions of lifetime and annual
the value of group health care coverage on employees' Forms
and distributing the newly-required Summary of Benefits and
and complying with the new 60-day advanced notice requirement
for any "material modification" in a group health
As previously discussed, the ACA generally
prohibits group health plans from imposing annual and lifetime
dollar limits on essential health benefits. Health Reimbursement
Accounts, or HRAs, are group health plans that typically consist of
an employer's agreement to reimburse medical expenses up to a
certain dollar amount. Thus, it is virtually impossible for
an HRA to comply with PPACA's prohibition on annual or lifetime
The final rules that implement the
prohibition on annual and lifetime dollar limits made a distinction
between HRAs that are "integrated" with other employer
health coverage and
those that "stand-alone." Specifically,
the rules provide that when an HRA is integrated with other
employer health coverage that, by itself complies with the
ACA's annual and lifetime dollar limit prohibitions, the HRA will
not violate PPACA because the combined benefit satisfies the
Although the ACA's prohibition on lifetime
or annual dollar limits has been in effect since 2010, any amounts
credited to an existing HRA before January 1, 2014, may be used
after December 31, 2013, without violating the ACA,
regardless of whether the HRA is integrated. However,
for future years, an HRA will be in violation unless participation
in the HRA is conditioned on participation in another group health
plan which, together with the HRA, meets PPACA's prohibition on
lifetime or annual dollar limits. Your HRA document should be
amended to reflect this provision.
PPACA requires employers to include the aggregate cost
of employer-provided health care coverage on employees' Forms W-2.
Originally, the effective date of this change was for taxable year
2011. However, IRS issued guidance delayed the
effective date of the reporting requirement until the 2012 tax year
(i.e., W-2s that were issued this past January).
IRS has also issued additional guidance that includes
a delay in the W-2 reporting requirements until further guidance is
issued for the following employers:
filing less than 250 W-2s for the previous calendar year;
sponsoring self-funded plans that are not subject to COBRA
(e.g. self funded church plans); and
recognized Indian Tribal Government and Tribally Chartered
Corporations wholly owned by a federally recognized Indian
Reminder: PCORI Fees Due
Under PPACA, certain fees, known as Patient-Centered
Outcomes Research Institute ("PCORI") fees, have been
established for funding medical research and comparing outcomes of
various medical techniques. PCORI fees are assessed against
insurers for fully insured plans and against plan sponsors of
self-insured plans. (See our June 2013 Newsletter for further
The PCORI fees for each plan year are due by July 31
of the calendar year immediately following the last day of the plan
year. Because the fees first became effective October 1,
2012, this means that if an employer sponsors a self-insured plan
with a plan year that ended any time from October 1, 2012 through
December 31, 2012, the first PCORI fees must be paid by July 31,
2013. Other plan sponsors will not be required to pay the
PCORI fees until 2014.
Plan sponsors of self-insured plans must remit the
fees to IRS annually using IRS Form 720.
Recently, the IRS has issued a Chief Counsel's
Memorandum stating that PCORI fees are tax deductible. The
IRS said that Code Section 162 allows a taxpayer to deduct all
ordinary and necessary expenses incurred by the taxpayer in
carrying on a trade or business. Because the PCORI fees are
required to be paid by certain issuers or sponsors, the IRS ruled
the fees to be both ordinary and necessary and, therefore,
deductible under Code Section 162.
The Department of Labor has previously stated that,
with the exception of multiemployer plans, PCORI fees may not be
paid out of plan assets because the fees are imposed on the sponsor
of the self-insured plan and not the plan itself.
Summary of Benefits and
The ACA requires group health plans and insurers
to provide a new four-page "summary of benefits and
coverage" or SBC. The material in the summary must use
uniform, understandable language and include items such as cost
sharing, limitations on coverage, examples of common benefit
scenarios and whether the plan provides the minimum essential
health benefits that individuals will need to avoid penalties under
the PPACA. The summary can be no longer than four pages and the
font cannot be smaller than 12 point.
The summary must be provided with or in addition to
the plan's summary plan description. The summary can be
provided as a stand alone document or in combination with other
plan materials if it is intact and prominently displayed at the
beginning of the materials. The summary must be provided in a
"culturally and linguistically appropriate form" and a
translated summary must be provided upon request. The
summary can be provided in paper format, or electronically, if the
disclosure complies with the DOL's rules.
The DOL and HHS have issued sample template summaries
that can be used to fulfill the summary obligations. During
the first year of applicability, no penalties will be imposed on
group health plan sponsors that make a good faith effort to comply
with the SBC requirement. Plan sponsors should document their
efforts in case they need to avail themselves to this good faith
Notice of Modification
Employers that make mid-year material modification in
any terms of the plan or coverage that is not reflected in the SBC
must provide notice of the modification to enrollees no later than
60 days before the date that the modification takes effect.
Providing an updated SBC reflecting the modification no later than
60 days before change takes effect will satisfy the obligation.
A material modification is "any change that
average participants would find important and that would affect
content of Summary of Coverage and Benefits."
Employers are required to comply with the advanced
notice requirement for any mid year changes once the SBC
requirement becomes applicable to their group health plan.
Final Stage of ACA Compliance
The final stage of ACA compliance includes:
benefits - 10 categories of coverage that will be required in
the small group market.
waiting period. Plans may not impose waiting periods of
more than 90 days after an employee or dependent is otherwise
eligible. There is some chance the rules might be
changed to allow initial enrollment no later than the first
day of the calendar month following 90 days of service, but so
far the $100 per day penalties will be triggered if affected
individuals are not enrolled within 90 days.
out of pocket, maximums and deductible limits. Applies
to almost all plans.
enrollments in group health plans. Be prepared for
required administrative changes in response to upcoming agency
Care Exchanges. These will allow individuals to purchase
insurance coverage on their own, without regard to preexisting
health conditions. But if some of your employees receive
subsidies because of their purchase of insurance through an
Exchange, you, the employer, can be subject to penalties.
Mandate. Basically, the tax penalty imposed on individuals
who do not have PPACA-compliant health insurance.
As of 2014, PPACA requires that non-grandfathered
health insurance coverage offered in the individual and small group
markets, both inside and outside of the health insurance exchanges,
offer a standard package of coverage known as "essential
health benefits." PPACA identifies the following ten
broad statutory categories of EHBs:
and newborn care
health and substance abuse disorder services
and habilitative services and devices
and wellness services and chronic disease management, and
services, including oral and vision care.
However, the ACA neither defines the
specific benefits required under each category nor sets a uniform
standard for EHBs. In fact,the ACA requires the
Secretary of HHS to define the specific benefits under each EHB
category. Proposed regulations clarify that EHBs will be
defined on a state-by-state basis using a benchmark
approach. After a state selects its base-benchmark plan, it
will be updated, as needed and used to define EHBs for the
Employer-sponsored self-insured and insured large
group health plans are not required to offer all EHB categories or
comply with EHB benchmarks; only non-grandfathered plans insured in
the small group market must provide EHBs and conform to EHB
Although employer-sponsored self-insured and insured
large group health plans are not obligated to offer EHBs, they
still cannot place lifetime or annual limits on EHBs provided under
the plan. Accordingly, these plan sponsors will be required
to understand the EHB benchmark standards for the state in which
their plan operates in order to review their plan to ensure that it
does not illegally impose lifetime and annual limits on EHBs.
For plan years starting in 2014, the out-of-pocket
maximums, including both insured and self-insured plans of large
and small employers, cannot exceed the self-only and family
out-of-pocket maximums applicable to HSA-qualified high deductible
health plans. These amounts will be indexed annually. The
annual out-of-pocket maximums for qualified high deductible health
plans for 2013 are $6,250 for self-only coverage and $12,500 for
Under PPACA, employers with more than 200 employees
will be required to automatically enroll new full time employees in
one of their group health plans, giving the employees adequate
notice and the opportunity to opt out of the plan.
Unfortunately, the law does not say when this
provision is to be effective. Instead, it requires DOL to set
the effective date through regulations. DOL originally
intended to issue guidance by 2014. However, DOL recently
acknowledged the guidance will not be ready by that time.
According to DOL, employers do not need to comply with auto
enrollment until the regulations are issued. DOL notes
that the auto enrollment regulations will have a prospective
effective date that will allow employers enough time to meet the
This means that many questions remain
unanswered. For instance, under these auto enrollment rules,
will an employer be responsible for enrolling only the employee or
the employee's entire family? If the employer has multiple plan
options, can it choose the option in which the employees will be
enrolled? What time frames will be involved and will coverage have
to be retroactive to the date of hire? So, we will have to
wait for regulatory guidance to get some answers.
Nevertheless, employers should currently be examining
their HRIS and Benefit Systems to see if they are capable of
handling these automatic enrollments, including the provision
allowing an employee to reject the automatic enrollment.
The Affordable Care Act requires each state to set up
its own Exchange for the purchase of providing health insurance
coverage. Exchanges are arrangements through which insurers
offer small employers, and individuals, the ability to purchase
health insurance coverage.
Each Exchange will offer four "metal"
categories of plans plus a catastrophic plan including:
Plan - Essential Health Benefits covering 60 percent of the
costs of the plan, with an out-of-pocket limit equal to the
current maximum annual deductible and other out-of-pocket
expenses for High Deductible Health Plans, which are $6,250
for individuals and $12,500 for families in 2013.
Plan - Essential Health Benefits covering 70 percent of the
plan benefit costs, with High Deductible Health Plans
Plan - Essential Health Benefits covering 80 percent of the
Plan benefit costs, with High Deductible Health Plans
Plan - Essential Health Benefits covering 90 percent of the
Plan benefit costs, with High Deductible Health Plans
Plan - Available to individuals up to age 30, or to those who
are exempt from the mandate to purchase coverage. This
plan provides for catastrophic coverage only, with the coverage
level set at the current High Deductible Health Plan levels
except that the preventive benefits and coverage for three
primary care visits would be exempt from the deductible.
Required Health Care Exchange Notice: Employers must
provide a written notice to each current employee and to each newly
hired employee, that explains:
existence of the state's insurance Exchange including a
description of the services provided by the Exchange, and the
manner in which the employee may contact the Exchange to
the employer's plan pays less than 60 percent of the total
allowed costs of benefits provided under the plan, a statement
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.
the employee purchases a qualified health plan through the
Exchange, a statement that the employee may lose the
contribution to any health plan offered by the employer and
that all or a portion of any employer contribution may be
excludable from income for Federal tax purposes.
The Health Care Exchange Notice was originally
required to be distributed by March 1, 2013, but this requirement
has been delayed until later this summer, in order to coordinate
distribution efforts with the first open enrollment period for the
Exchanges. The DOL has released a model notice for employers
One of the ACA's most basic rules is the requirement
that individuals have minimum essential health care coverage or
face a tax penalty. An individual is considered to have minimum
essential coverage for any month in which he or she is enrolled in
one of the following types of coverage:
sponsored coverage (including COBRA and retiree coverage);
purchased in the individual market; and
sponsored coverage, such as Medicare coverage (including
Medicare Advantage), Medicaid coverage, Children's Health
Insurance Program coverage, veterans coverage or TRICARE; and
other health benefits coverage, such as state health benefits
risk pool, as recognized by the HHS Secretary.
Minimum essential coverage does not include
specialized coverage for only vision care or dental care, workers'
compensation, disability policies, or coverage for a specific
disease or condition.
PPACA provides certain statutory exemptions from the
individual mandate. Individuals who meet the following
criteria are exempt from paying the shared responsibility
of religious organizations that object to coverage on
of health care sharing ministries (i.e., non-profit religious
organizations where members share medical costs);
of federally recognized Indian tribes;
with incomes below the minimum threshold for filing a tax
who have a gap in minimum essential coverage of less than
three consecutive calendar months in a year;
who qualify for a hardship exemption;
who cannot afford coverage because their required contribution
towards minimum essential coverage exceeds 8 percent of their
annual household income;
who are incarcerated; and
not lawfully present in the United States.
U.S. citizens residing in a foreign country are also
generally exempt from the shared responsibility penalty so long as
they meet certain requirements, such as living abroad for the
entire calendar year.
Penalties for Violating
Penalties for noncompliance with the individual mandate
for health coverage are determined by calculating the greater of
either a flat dollar amount or set percentage of income. For
2014, the penalty amount will be the greater of $95 per adult and
$47.50 per child under age 18 (maximum of $285 per family) or 1
percent of income over the tax-filing threshold. For 2015, the
penalty amount will increase to the greater of $325 or 2 percent of
income over the filing threshold. And for 2016, the penalty
amount will again increase to the greater of $695 or 2.5 percent of
income over the tax filing threshold. After 2016, the
flat-dollar penalty amount will be indexed for inflation.
The 2014 shared responsibility penalties are payable
when individuals file their 2014 federal income tax returns in
2015. If the penalty applies for less than a full calendar
year, the penalty is prorated to 1/12 of the annual penalty per
month without coverage.
Employer Mandate Postponed One
Often called the "play-or-pay"
provision, the employer mandate is basically the penalty
employers will pay for non-compliance.
Beginning in 2014, the ACA's employer shared
responsibility provisions were to require employers with
50 or more full time equivalent employees to provide affordable
health care coverage that offers a minimum level of coverage or pay
a penalty. The
Obama Administration recently announced that this requirement will
be postponed to 2015.
When the requirement becomes effective, employers will
determine whether they reach the 50 full time equivalent threshold
and are subject to the mandate by averaging the number of full time
employee equivalents from the calendar months of the previous
An employer will determine its monthly full time
equivalent employees count by adding: (i) each employee who works
more than 30 hours per week (i.e., full-time), plus (i) the total
number of hours worked during a month by employees who are not
full-time divided by 120. Monthly counts are then totaled and
divided by 12. If the resulting number is 50 or more, the
employer is subject to the mandate.
All employees of all members of the employer's
controlled group (or affiliated service group) must be counted when
determining whether an employer is subject to the mandate.
However, penalties imposed under the mandate will be done on an
individual member basis. In other words, a member of a
controlled group of corporations that provides health coverage to
its full-time employees and dependents will not be subject to the
penalty because another member of the controlled group does
not. If a member of a controlled group is assessed a
penalty under the mandate, the calculation of the penalty will be
based on the number of full time employees employed by that
member and not by the total number of full time employees
within the controlled group.
In general, only work performed in the U.S. will be
required to be counted by employers when determining hours of
service for purposes of counting full time employee
equivalents. Thus, if a foreign employer has a large
workforce worldwide but less than 50 employee equivalents in the
U.S., that employer would not be subject to the mandate.
Employers can also exclude workers that are exclusively employed
outside of the U.S., regardless of whether the workers are U.S.
Penalties for Violating
Beginning in 2015, employers with 50 or more full time
employees are subject to penalties if: (i) they fail to
offer group health coverage to "substantially all" of its
full-time employees; and (ii) a low-income, full-time employee
receives a premium tax credit through an Exchange. In those
situations, the employer must pay an annual penalty of $2,000
multiplied by: the number of full-time employees, minus 30.
An employer is considered to have offered health care
coverage to "substantially all" of its employees if the
offer is made to at least 95 percent of the full-time
employees. Therefore, an employer that offers health coverage
to 97 percent of its full-time employees is not subject to the
$2,000 penalty but may be subject to the $3,000 penalty which will
be discussed shortly.
For purposes of determining penalty amounts, only
actual full-time employees are counted. Generally, a
full-time employee is an employee who is employed an average of at
least 30 hours per week. Hours of service include not only
hours when work is performed but also hours for which an employee
is paid or entitled to payment, even when no work is performed,
such as vacation, sick leave, and holidays.
Premium Tax Credit
And what are premium tax credits? Beginning in
2014, individuals who are enrolled in group health plan coverage
purchased through a health care Exchange may be eligible for a
premium tax credit or cost-sharing subsidy.
The premium tax credit is available to individuals
with incomes up to 400 percent of the Federal Poverty Level,
excluding illegal immigrants and individuals eligible for
employer-sponsored coverage, Medicare, Medicaid, CHIP, TRICARE or
coverage through Veterans Affairs. The amount of the premium
tax credit is equal to the lesser of:
total monthly premium for the taxpayer and any covered
amount by which the adjusted monthly premium for the second
lowest "Silver" plan purchased
through the health insurance exchange exceeds a defined
percentage of household income.
Penalties for Insufficient
Under a second penalty provision, employers that offer
coverage may still be subject to a penalty starting in 2015 if all
three of the following conditions apply:
plan either: (a) has a value that is less than a minimum value
of 60 percent; or (b) a full-time employee's contribution for
employee-only coverage exceeds 9.5 percent of the employee's
employee's household income is less than 400 percent of the
federal poverty level; and
employee waives the employer's coverage and purchases coverage
on an Exchange with premium tax credits
Under PPACA, an employer-sponsored health plan fails to
provide minimum value to its participants and beneficiaries if its
share of total allowed costs of benefits is less than 60 percent of
the costs. The IRS has issued proposed regulations which
offer three approved methods for measuring whether a plan provides
minimum value calculator, which will be made available by HHS
and IRS for use by employer-sponsored self-insured group
safe harbor approach approved by HHS and IRS; and
of minimum value by an actuary where the minimum value
calculator and safe harbor approaches are not appropriate.
The penalty will be calculated separately for each
month in which these conditions apply. The amount of the
penalty for a given month equals the number of the employer's full-time
employees who receive a premium tax credit for that month
multiplied by 1/12 of $3,000. However, this penalty is capped
at $2,000 multiplied by: the number of full-time employees minus
For purposes of this second penalty, coverage is
"unaffordable" if the employee's share of the premium
costs more than 9.5 percent of his or her annual household
income. However, employers generally do not know their
employees' household incomes. To address this uncertainty,
the IRS has issued guidance which provides the following
affordability safe harbors that employers may rely on to ensure
that their coverage is affordable:
safe harbor. If the employee's contribution for single
coverage under the employer's lowest cost medical option does
not exceed 9.5 percent of the employee's Box 1, W-2 pay for
that year, the affordability test is satisfied.
of pay safe harbor. If the employee's monthly
contribution for single coverage under the employer's lowest
cost medical option does not exceed 9.5 percent of the
employee's monthly wage amount, the affordability test is
Poverty Line safe harbor. If the employees contribution
for single coverage under the employer's lowest cost medical
option does not exceed 9.5 percent of the federal poverty line
for a single individual, the affordability test is satisfied.
Action Steps for Employers
As 2014 nears, employers must continue their
implementation of the PPACA's various reforms and coverage
although they will not be subject to the pay-or-play mandate
until 2015, there are many other rules that are
already applicable and many more that are becoming law with which
employers must comply.
The Wagner Law Group offers a PPACA "audit" to
ensure that you are compliant with ERISA and the Affordable Care
Act, as well as other laws, such as HIPAA and COBRA, among others.
Please contact us if you'd like us to perform this necessary review
of your documents and status.