Insight Employer Health Care Reform Responsibilities Through 2013

Effective January 2014, the Patient Protection and Affordable Care Act (the Health Care Law) imposes a penalty on employers with more than 50 employees who fail to provide minimum group health coverage to employees and on individuals who do not obtain health coverage. However, even before 2014, employers must comply with several transitional requirements of the Health Care Law as well as prepare to comply with the mandates that take effect in 2014.

Listed below are the requirements of the Health Care Law that employers must comply with between now and 2014, focusing on potential pitfalls that employers should be especially aware of.

Summaries of Benefits and Coverage

All group health plan participants (including eligible employees and their beneficiaries) must receive a Summary of Benefits and Coverage (SBC) annually during open enrollment, beginning with fall 2012 open enrollment. SBCs must comply with federally mandated format and content requirements to ensure uniformity among all group health plans. In addition, participants must receive 60 days prior notice of any change to benefits described in an SBC.

• Insured Plans. Issuers must prepare SBCs, but employers must ensure delivery to participants.
• Self-Insured Plans. Employers must prepare and distribute SBCs to participants.

SBCs must be distributed to participants in accordance with DOL distribution requirements, including, if applicable, the electronic delivery rules.

FSA Limit

A limit of $2,500 is imposed on the amount employees can defer into a health Flexible Spending Account (FSA), effective as of January 1, 2013 (calendar year plans). Previously there was no limit on FSA contributions, but many employers voluntarily imposed a limit. Although the limit is effective in 2013, FSA plan documents are not required to be amended to reflect the limit until the end of 2014.

Medical Loss Ratio Rebates

Health insurance companies must provide rebates to group health plans if less than 85% of premium payments (80% for the small group market) are used to provide medical care. Generally, employers have 3 months to distribute rebates to participants, use rebates to provide benefits, or place rebates in a trust.

W-2 Reporting of Health Coverage

Beginning with W-2s issued in January 2013 for the 2012 calendar year, employers who filed 250 or more W-2s in 2012 must report the cost of health coverage provided to each employee, including employer-paid and employee-paid coverage. The W-2 reporting requirement is informational only and does not otherwise cause the health coverage to become taxable.

FICA Tax Increase

Beginning January 1, 2013, the FICA Medicare tax rate for employee Medicare withholding increases from 1.45% to 2.35% for wages over $200,000 (or $250,000 for married couples filing jointly). Employers should ensure that their payroll systems are updated to comply with this requirement.

Phase Out of Annual Limits

The Health Care Law phases out annual limits on essential health benefits (i.e., most benefits provided under major medical coverage, including prescription drug coverage and mental health coverage). For 2013, annual limits for essential health benefits cannot be less than $2 million. For 2014, plans may not have annual limits. Employers should confirm with insurers and/or third-party administrators that these annual limit restrictions are complied with.

Notice of Insurance Exchanges

By March 1, 2013 employers must provide a notice to all employees explaining the employee’s right to purchase health coverage on an exchange, the employee’s possible eligibility for government subsidies for coverage purchased on an exchange, and other features of exchanges. We expect federal regulators to provide additional guidance for this notice. It is not clear whether insurance companies will provide assistance in preparing and distributing the notice. Employers should reach out to their brokers and insurers to coordinate compliance.

Loss of Medicare Part D Subsidy Deduction

Employers who provide retiree prescription drug coverage may, in some circumstances, receive a federal subsidy. Currently, employers can deduct all retiree prescription drug expenses without a reduction for the subsidy and the subsidy is not included in the employer’s taxable income. Effective January 1, 2013, employers may no longer deduct expenses covered by the subsidy.

Compensation Deduction Limit for Employees of Health Insurers

Health insurers and, in some cases, companies related to health insurers under IRS rules may not deduct compensation paid to individuals (including employees, executives, directors and independent contractors) in excess of $500,000 annually. The deduction limit generally applies to compensation paid on or after January 1, 2013, including deferred compensation earned in 2009 or later and paid in 2013 or later.

Comparative Effectiveness Research Fee

The Health Care Law imposes a new fee on group health plans to promote research comparing effectiveness and risks of medical treatments. The initial fee is due by July 31, 2013. For insured plans, the insurer is responsible for calculating and paying the fee. For self-insured plans, the plan sponsor is responsible. For the 2013 plan year, the fee is $1 multiplied by the average number of covered lives. For the 2014 plan year, the fee is $2 multiplied by the average number of covered lives. For later years, the fee will increase in accordance with medical inflation. The fee will only apply through the 2019 plan year.

For more information about health care reform or any employee benefit issue, please call 208.344.6000 or email a member of our Health Care group.