After the Health Reform Ruling: Employers Need to Plan for Upcoming Requirements


[author: Douglass A. Farnsworth, J.D., M.B.A.]

During the lead-up to the Supreme Court’s ruling on the Patient Protection and Affordable Care Act (“PPACA,” commonly known as the health reform law), many employers were holding off on their compliance efforts. Now that the Supreme Court has upheld PPACA, it is important that employers make sure that they are aware of, and prepared to comply with, several provisions that have yet to take full effect.
Read on for a summary of provisions on the following topics:
  • Proper Handling of MLR Rebates
  • Summary of Benefits and Coverage
  • Comparative Effective Fees
  • Limit on Health FSA Contributions to $2,500
  • Health Coverage Reporting on W-2s
  • Medicare Tax Increase for High Wage Earners
  • Employee Notices About Exchanges
  • Employer Shared Responsibility Penalties
  • Other PPACA Provisions Taking Effect in 2014
Proper Handling of MLR Rebates
(Rebates arriving on or about August 1, 2012)
Insurance companies are required by PPACA to report the percentage of premiums received that they spend on paying claims and certain other clinical activities. That percentage is referred to as the “minimum loss ratio” or “MLR.”  If an insurer’s MLR falls below 85% (in the large group market) for a calendar year (80% in the small group market), the insurer is required to issue rebates of the amount over that required percentage. Employers who receive rebate payments should ensure these payments are handled appropriately, given that a portion of the rebate will in many instances be “plan assets” and subject to ERISA’s trust and fiduciary obligation principles.
Who Will Receive Rebates and When?
You will receive a rebate only if you have medical coverage through an insurer and during the 2011 calendar year that insurer’s MLR was less than the required percentage (i.e., the insurer spent less than 85% of premiums received on claims and allowed clinical activities). The insurer is required to send a notice, either along with the rebate payment or separately, to those individuals whose plans are subject to rebates. Both the notices and rebate payments are due on August 1, 2012. 
Individuals covered by individual policies will receive their notices and rebates directly from the insurer. For group health plans, in most cases the insurer is allowed to send the rebate payment to the employer, leaving it to the employer to distribute the rebate among the employees. The insurer is required to send the notice of the rebate to both the employer and to each employee, however.
What Are the Employer’s Obligations Once it Receives the Rebate?
If employees paid a portion or percentage of the premiums paid to the insurer, then the same portion or percentage of the rebate payment received from the insurer is deemed attributable to the employees (the “Employee Share”). The Employee Share of the rebate payment is considered “plan assets.” Under ERISA, that typically would mean that the Employee Share must be held in trust, and used exclusively for the benefit of the employees and other plan beneficiaries, and/or applied to plan expenses. The Department of Labor has stated that it will allow a limited exception to the trust requirement if the Employee Share is properly used within 3 months of receipt, whether paid as a cash rebate to employees or applied to pay premiums (and reduce employee contributions).

Plan fiduciaries (anyone with authority or control over the plan assets) are responsible for ensuring that the Employee Share is appropriately handled. Decisions on what to do with the Employee Share are subject to fiduciary standards, including the obligation to act prudently, in the interests of participants and beneficiaries, and in accordance with the terms of the plan (although typically plan documents won’t yet have language addressing this situation). Allowable options for the Employee Share include (but are in no way limited to):
  • Paying a cash rebate to each employee who participated in the plan during 2011
  • Applying the Employee Share to reduce employee contributions in 2012-2013
  • Applying the Employee Share to provide richer benefits (i.e., reduce cost-sharing within the plan or add additional benefits)
Rebates attributable to former employees should likewise be handled consistent with ERISA fiduciary standards, including consideration of costs to the plan to locate and send payments to former employees. Questions regarding proper fiduciary handling of the Employee Share should be addressed with ERISA counsel.
Summary of Benefits and Coverage
(Required beginning September 23, 2012
PPACA requires insurance companies and employers to provide simple-to-understand summaries of the benefits and coverage (“SBC”) provided under both individual and group health plans. These summaries must be provided for most participants beginning with the first open enrollment period occurring on or after September 23, 2012. For those enrolling outside of an open enrollment period (such as HIPAA special enrollees), the SBC requirements begin to apply on the first day of the first plan year beginning on or after that same date (i.e., January 1, 2013 in the case of a calendar year plan).
Who Must Provide SBCs
Both insurance companies and employers that sponsor group health plans (regardless of employer size or number of participants in the plan) have obligations to provide SBCs. Employers will need to speak with their insurers to discuss how the SBC will be delivered to participants. For group health plans that provide coverage through a policy of insurance, the insurer is only required to provide the SBC to the plan sponsor (the employer), but many employers may look to have the insurer administer the SBC obligations, similar to how they have engaged the insurer to handle COBRA notices. Employers that self-insure their group health plans will be responsible for providing the SBCs, but typically will look to outsource these obligations to their third-party administrators.
Timing and How Provided
SBCs must be provided at any time upon request, within 7 business days.  A group health plan is required to provide an SBC to participants and beneficiaries, generally as part of any written enrollment application materials. For special enrollees, the regulations allow the same time as that used for the distribution of SPDs, which is 90 days after enrollment.
Other times SBCs must be provided vary depending on the situation. For instance, an insurer must provide an SBC to a plan sponsor or an individual upon application for a new policy, and at the time of renewal.
An SBC may be provided as a stand-alone document, or may be incorporated as part of a plan’s summary plan description, so long as it is maintained in its entirety, and printed in the front of the document, immediately following the table of contents. But given that SPDs generally are not updated as frequently as the information on the SBC may be, it is likely that most employers will maintain the SBC as a separate document.
The SBC either may be provided in paper form, or may be provided electronically so long as certain safeguards are met. For participants in group health plans, the plan must comply with the existing DOL regulations for providing documents electronically. For those eligible but not currently enrolled, the plan must: notify of the availability of the document if posted on the Internet, provide the electronic document in a readily-accessible format (such as .pdf), and notify the individual that the document is available in paper free of charge.
Contents of SBCs
The contents of the SBC, as well as the font, type size, form, and format, are precisely specified in the regulations and the accompanying guidance. That guidance includes a template in Microsoft Word format, sample answers to specific “yes” and “no” questions, and a sample template entirely filled-in.
Required information includes descriptions of the coverage, cost-sharing (deductibles, coinsurance/copayments), limitations on coverage, and whether benefits are greater if in-network providers are used. In addition, the SBCs each will include the same two “coverage examples,” which are visually similar to consumer nutrition labels. Both examples (having a baby and managing diabetes) will include calculations based on the typical provider payments and cost-sharing for the plan (which will need to come from the insurer or TPA). By using the same two scenarios for all SBCs, the idea is to allow an individual to compare plans on an apples-to-apples basis. 
An additional content requirement is providing an Internet address or phone number where the uniform glossary may be obtained. The glossary, developed by the agencies, provides simple definitions for standard terms used in the SBCs, so that each plan is using the same terminology to explain its coverage. A plan must provide the glossary within 7 business days of receiving a request from a participant or beneficiary.
Failure To Comply
A failure to comply with the SBC requirements can subject the responsible entity(ies) (the insurer and/or plan sponsor) to a fine of $1,000 per failure.  Each missed SBC for each participant or beneficiary counts as a separate offense, so fines can add up quickly.
Comparative Effective Fees
(Effective for plan years ending on or after October 1, 2012)
In order to fund studies to determine which treatment options provide the best clinical outcomes, both insured and self-insured plans will be required to pay a fee each year during the course of the study (i.e., between 2012 and 2019). In the first year (plan years ending on or after October 1, 2012), the fee is $1 times the number of covered lives (i.e., employees, dependents, COBRA beneficiaries) under the plan. That number goes up to $2 per covered life in the second year, and will be indexed based on medical inflation beginning in 2014.
For insured plans, the insurance company is responsible (and liable) for paying the fee. In the case of a self-insured group health plan, the employer is responsible both for reporting the number of covered lives and paying the fee. These fees will be due by July 31 of each year, for all plan years ending during the preceding calendar year, and will be reported using IRS Form 720.
Limit on Health FSA Contributions to $2,500
(Effective for Plan Years Beginning January 1, 2013)
Effective for plan years beginning on or after January 1, 2013, employees will be limited to contributing no more than $2,500 to their health flexible spending accounts (FSAs) per year.  Contributions available from the prior plan year due to the grace period do not count toward the limit. Nor do cafeteria plan flex credits (i.e., employer contributions), unless the employee has the option to receive those flex credits as cash compensation.
Section 125 (also called cafeteria plan) documents will need to be amended to reflect the change, as will health FSA plan documents and summary plan descriptions. The agencies have provided transition relief, allowing these amendments to be made as late as December 31, 2014, but the plan must be operated in compliance as of January 2013. And it will be very important that this change be communicated to participants during the enrollment period when participants are going to be making elections for the 2013 plan year.
Health Coverage Reporting on W-2s
(Required beginning with 2012 W-2s issued in 2013)
In an effort to increase employee awareness of the true cost of the health plan coverage provided to them, PPACA requires that the value of group health plan coverage be reported on their Form W-2, along with other compensation-related information. This requirement begins with coverage provided during tax year 2012, which will be reported on W-2s in January 2013. Importantly, including the information of the W-2s does not make the coverage taxable.
Which Employers Must Report?
The  reporting  requirement applies to nearly every employer who sponsors a group health plan, with very few exceptions. Included in those who must report are sponsors of church and government plans. The only exemptions are:
  • Employers that were required to file fewer than 250 Forms W-2 for the prior year (i.e., those that had fewer than 250 employees in 2011) 
  • Indian tribal governments 
  • U.S. government coverage for military and their families
Which Plans Must Be Reported?
Most employer-provided group health plan coverage that is provided to employees on a pre-tax basis will need to be reported on an employee’s W-2.  Types of coverage that do not need to be included in the reporting are:
  • Stand-alone dental or vision coverage (i.e. coverage that is provided under a separate plan or policy, not integrated with medical coverage)
  • Health flexible spending accounts (FSAs)
  • Health reimbursement arrangements (HRAs)
  • Health savings accounts
  • Archer MSAs
  • Employee assistance programs (EAPs), wellness programs, and onsite medical clinics provided by the employer, if the employer does not charge a premium
What Amount is Reported on the W-2?
Employers are generally allowed to select one of two methods for calculating the costs of applicable group health plan coverage: (1) the amount of the premium charged by the insurer, or (2) using the COBRA-equivalent amount charged for that coverage. For the premium method, the employer essentially utilizes the same amount charged by the insurer for the level of coverage elected by the employee (i.e., employee-only, employee plus family, etc.). Under the COBRA equivalent method, the employer uses the same good-faith interpretation of the COBRA regulations it currently is using to charge individuals electing COBRA continuation, less the 2% administrative amount.
Medicare Tax Increase for High Wage Earners
(Effective as of January 1, 2013)

Currently, all wages are subject to a 2.9% tax, which is collected by the employer and paid to the Medicare Hospital Insurance Trust Fund (the fund that pays Medicare Part A hospital bills). This tax is split, and is paid 1.45% each by the employer and employee (Self-employed individuals pay 2.9%).
Beginning in January, single employees will be taxed an additional 0.9% on amounts in excess of $200,000. Employers will be responsible to collect and remit this tax along with the regular Medicare taxes. Married couples will be responsible for paying the additional 0.9% on amounts in excess of $250,000. But employers will not be held responsible for knowing the total combined income of couples, so in some instances those couples will need to remit those taxes with their income tax returns.
Employee Notices About Exchanges
Original Statutory Deadline March 1, 2013)
Employers will be required to provide notice to employees about the existence of the health care insurance exchanges (which will begin in 2014 for individuals and small businesses), and how to contact the exchange in their state. The original deadline under PPACA for these notices to be issued was March 1, 2013. There has not yet been any regulatory guidance, and no model notices have been provided. It remains to be seen if the agencies alter the compliance deadline when they are able to issue guidance and model notices.
Employer Shared Responsibility Penalties
(Effective January 1, 2014)

Employers will not be required to offer or provide coverage to their employees at any time, as is the case under current law. However, beginning in 2014, large employers who do not offer at least minimal essential coverage, or who offer coverage, but that coverage does not meet minimum affordability standards, will be subject to penalty (the so-called “play or pay penalty”). For this purpose, a “large employer” will be one who had an average of at least 50 full-time employees during the preceding calendar year.
Failing To Provide Minimum Essential Coverage
The play or pay penalty, for large employers who do not offer minimum essential coverage at all, will be $2,000 per full-time employee, but subtracting out the first 30 full time employees. (So for instance, an employer with 100 full-time employees would pay the penalty based on 70 employees.) Full-time employees are those working 30 hours or more per week. This penalty will apply if 1 or more full-time employees qualifies (and enrolls for) coverage and a premium tax credit through an exchange. Those eligible for tax credits generally would be individuals with income between 138% and 400% of the federal poverty level. If no full-time employees qualify for premium tax credits, then no penalty will apply.
Minimum essential coverage coincides with the individual mandate requirement that individuals carry minimum essential coverage, or pay the penalty. What constitutes “minimum essential coverage” is to be established by regulations to be issued by the agencies responsible for administering PPACA, including the Departments of Labor and Health and Human Services. 
Providing Coverage That is Not "Affordable"
For those large employers that do offer coverage, a $3,000 per full-time employee penalty could be imposed if it does not meet certain affordability thresholds, and at least 1 full-time employee enrolls in an exchange and receives premium tax credits. This penalty applies in more limited circumstances than the $2,000 penalty, however.
Employees with employer coverage available only may obtain premium tax credits for coverage under the exchange if:
  • the employee meets the tax credit requirements (income 138% - 400% of the federal poverty level),
  • the employee is not enrolled in the employer’s coverage, and
  • either: (a) the required employee contribution amount exceeds 9.5% of the employee’s income (based on W-2 wages), or (b) the plan pays, on average, less than 60% of covered health care expense.
Note that the Medicaid expansion under PPACA would expand eligibility for Medicaid to those up to 138% of the federal poverty level (FPL). In those states that choose not to adopt the expansion, the employees with income between 100% -138% of the FPL could also qualify for tax credits through the exchanges, subjecting additional employers to the shared responsibility penalties. Employers will need to be aware of which of the states where they have employees make use of the available Medicaid expansion, as the downstream effect on employers will vary based on those decisions.

Other PPACA Provisions Taking Effect in 2014 
An additional group of PPACA provisions affecting group health plans offered by employers take effect in 2014.  Those provisions will be:
  • Prohibition on exclusions for pre-existing conditions for anyone (previously limited to those 18 and under) 
  • Waiting periods limited to no more than 90 days 
  • Grandfathered plans will no longer be able to deny coverage of dependent children up to the age of 26, regardless of other coverage available (removing the special exception for grandfathered plans where other coverage is available)
  • Annual dollar limits no longer allowed  on essential health benefits (note that lifetime limits already prohibited on essential health benefits)
  • Wellness plans allowed to use rebates or other incentives up to 30% of COBRA rate
  • Plan cost-sharing limited: (1) deductibles limited to $2,000 individual/$4,000 family coverage;
    (2) out-of-pocket maximums limited to posted maximum for high deductible plan offered in connection with HSAs (grandfathered plans exempt)
  • Routine patient costs in conjunction with clinical trials must be covered (grandfathered plans exempt)
  • Auto-enrollment of full-time employees required for employers with at least 200 employees (note that DOL guidance indicates the effective date of this requirement may be pushed back from the original January 2014 deadline)
We recognize that many of these provisions are very complicated and therefore suggest that you contact a member of the Trenam Kemker employee benefits group if you have questions regarding any of this information, or would like assistance with complying with these requirements.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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